LAD US Equity☆

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 one of the largest automotive retailers in the United States and were ranked #231 on the Fortune 500 in 2021. As of February 18, 2022, we offered 40 brands of new vehicles and all brands of used vehicles in 278 stores in North America and online at over 300 websites. We offer a wide range of products and services including new and used vehicles, finance and insurance products and automotive repair and maintenance.

REGIONAL REACH & DENSITY MAP

During the year ended December 31, 2021, we had net income of $1.1 billion, or $36.54 per diluted share, compared to net income of $470.3 million, or $19.53 per diluted share, during 2020. We experienced growth of revenue and gross profit in all major business lines in 2021 compared to 2020, primarily driven by increases in

volume related to acquisitions, complimented by organic growth in used vehicles, finance and insurance and service, body and parts sales. On a same store basis, new vehicle revenues and gross profits experienced growth primarily driven by increases in average selling price per retail unit. New vehicle unit sales have successfully recovered from the prior year, returning to levels experienced in 2019 in spite of nationwide new inventory shortages.

For the year ended December 31, 2021, new vehicle sales accounted for approximately 49% of our revenue and approximately 29% of our gross profit. Used vehicle retail sales accounted for approximately 32% of our revenue and approximately 19% of our gross profit. Our parts and service and finance and insurance operations accounted for approximately 14% of our revenue and contributed approximately 51% of our gross profit.

As of December 31, 2021, we had available liquidity of $1.5 billion, which was comprised of $174.8 million in cash and $1.3 billion availability on our credit facilities and unfloored new vehicle inventory. In addition, our unfinanced real estate could provide additional liquidity of approximately $1.0 billion. For further discussion of our liquidity, please refer to “Liquidity and Capital Resources” below.

Results of Operations

For the year ended December 31, 2021, we reported net income of $1.1 billion, or $36.54 per diluted share. For the years ended December 31, 2020 and 2019, we reported net income of $470.3 million, or $19.53 per diluted share, and $271.5 million, or $11.6 per diluted share, respectively.

Year Ended December 31,

($ in millions, except per vehicle data) 2021 2020 Change % 2019 Change %

Revenues

Gross profit

Gross profit margins

Retail units sold

Average selling price per retail unit

Average gross profit per retail unit

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 2020 would be included in same store operating data beginning in December 2021, 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.

Year Ended December 31,

Revenues

Gross profit

Gross profit margins

Retail units sold

Average selling price per retail unit

Average gross profit per retail unit

New Vehicles

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

During 2021, new vehicle revenues and gross profit grew 65.3% and 164.3%, respectively, compared to 2020. This improvement resulted from our accelerated growth through strategic acquisitions and strong recovery from the impact of the COVID-19 pandemic, driving new vehicle unit sales up 52.3% compared to 2020. New vehicle unit sales experienced strong headwinds in 2020, declining 5.2% over the prior year. Despite increasing average sales prices, new vehicle revenues remained relatively flat in 2020 compared to 2019.

While market demand remained high throughout 2021, there continues to be a shortage of available new vehicles for sale driven largely by certain component shortages in the manufacturers’ supply chains. This imbalance has resulted in higher than normal average selling prices and gross profits per unit. The reduced levels of new vehicle availability are expected to continue into 2022. Throughout 2020, the impact of the COVID-19 pandemic on each of our markets varied. We experienced initial declines in new vehicle unit sales in the first half of the year and then saw continued incremental improvement each month following, with fourth quarter 2020 same store new vehicle unit sales nearing 2019 levels.

Same store new vehicle revenue was driven by an increase in unit volume of 3.8% and an increase in average selling prices of 9.7%. As the national new vehicle market plateaus, our stores focus on improving gross profit per new vehicle sold. On a same store basis, gross profit per new vehicle increased 74.5% during 2021 compared to 2020. Our recently acquired stores are also focused on improving gross profit per new vehicle as total company gross profit per unit increased 73.5% during 2021 compared to 2020. Pent-up demand and reduced inventory levels related to short-term production closures combined with increased manufacturer partner incentives contributed to these improvements in gross profit per unit. We believe these increases in gross profit per unit will return to normalized levels in 2022.

The same store new vehicle sales decrease in 2020 over 2019 of 9.3% included a decrease in unit sales of 14.1%, offset by an increase of 5.6% in average selling prices.

Used Vehicles

Used vehicle retail sales are a strategic focus for organic growth. We offer three categories of used vehicles: manufacturer certified pre-owned (CPO) vehicles; core vehicles, which are late-model vehicles with lower mileage; and value autos, which are vehicles with over 80,000 miles. We have established a company-wide target of achieving a per store average of 100 used retail units per month. Strategies to achieve this target include reducing wholesale sales and selling the full spectrum of used units, from late model CPO models to vehicles over ten years old. During 2021, our stores sold an average of 92 used vehicles per store per month. This compares to 78 used vehicles per store per month in 2020 and 77 in 2019.

Used vehicle demand remains high, due in part to the lower levels of new vehicle inventory available for sale. This demand is resulting in higher than normal average selling prices and gross profits per unit in 2021.

Used vehicle revenues increased 81.5% during 2021 compared to 2020 and 13.4% in 2020 compared to 2019. These increases are due to a combination of increased volume from acquisitions and organic growth in all categories of used vehicle sales at our seasoned stores. Excluding the impact of acquisitions, on a same store basis, used vehicle revenues increased 40.0% during 2021 and included a 16.1% increase in unit volume and a 20.6% increase in average selling price per retail unit compared to 2020. The revenue increase in 2021 was driven by an increase in our core vehicles of 46.2% and supported by increases in value auto and CPO vehicle categories of 47.3% and 22.4%, respectively. The increase in our core vehicle category includes a 21.5% increase in volume, complimented by a 20.3% increase in average selling price per vehicle.

Used vehicle gross profits increased 85.4% during 2021 compared to 2020 and 21.4% in 2020 compared to 2019. On a same store basis, used vehicle gross profit increased 46.5% in 2021 compared to 2020, led by the performance in our core vehicles of 44.3% and supported by increases in value auto and CPO vehicle categories of 46.3% and 52.8%, respectively. The increase in our core vehicle category was driven by both an increase in volume an increase in gross profit per unit. Gross profit per unit in our core vehicle category, which accounted for 60.0% of

our used vehicle unit sales in 2021, increased 18.8%, from $2,501 in 2020 to $2,970 in 2021. The increase in same store gross profit in our value auto category was driven by a 22.9% increase in gross profit per unit from $2,498 in 2020 to $3,071 in 2021. Our CPO category experienced a decrease in volume, with unit sales decreasing 0.4% in 2021 compared to 2020, but saw an increase in gross profit per unit of 53.5%, from $2,360 in 2020 to $3,621 in 2021.

Similar to new vehicles, used vehicle sales volumes were impacted by the COVID-19 pandemic during 2020. Initial declines were similar to new vehicles in the beginning of the year; however, we experienced significant improvements during the rest of 2020.

Used vehicle revenues increased 6.3% in 2020 compared to 2019 on a same store basis due to increases in unit volume and average selling prices of 1.3% and 4.9%, respectively. Same store used vehicle gross profit also increased 13.9% in 2020 compared to 2019.

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

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.

The increases in finance and insurance revenue in 2021 compared to 2020 and in 2020 compared to 2019, were primarily due to increased volume related to acquisitions, combined with expanded product offerings and increasing penetration rates. Third party extended warranty and insurance contracts yield higher profit margins than vehicle sales and contribute significantly to our profitability. During 2021, finance and insurance sales accounted for 4.6% of total revenues and 24.7% of total gross profits. On a same store basis, finance and insurance sales accounted for 4.6% of total revenues and 24.2% of total gross profits in 2021. Same store finance and insurance revenues increased 28.6% during 2021 compared to 2020 and 1.0% during 2020 compared to 2019. These increases were driven by increases in finance and insurance revenues per retail unit, combined with increases in used vehicle unit volume. On a same store basis, our finance and insurance revenues per retail unit increased $276 per unit to $1,923 in 2021 compared to 2020 and $123 per unit to $1,614 in 2020 compared to 2019. The increase in 2021 compared to 2020 was primarily due to increases in volume and increases in service contract and financing penetration rates of 40 basis points and 120 basis points, respectively, from 48.8% to 49.2% and from 74.4% to 75.6%, respectively.

Service, body and parts

We provide service, body and parts for the new vehicle brands sold by our stores, as well as service and repairs for most other makes and models. Our parts and service operations are an integral part of our customer retention and the largest contributor to our overall profitability. Earnings from service, body and parts have historically been more resilient during economic downturns, when owners have tended to repair their existing vehicles rather than buy new vehicles.

Our service, body and parts revenue grew in all areas in 2021 compared to 2020 and grew in customer pay and warranty work in 2020 compared to 2019, primarily due to acquisitions. With more late-model units in operation, continued increase of vehicles in operation from 2015 to 2019, and a plateauing new vehicle market, we believe the increased number of units in operation will continue to benefit our service, body and parts revenue in the coming years as more late-model vehicles age, necessitating repairs and maintenance. We focus on retaining customers by offering competitively-priced routine maintenance and through our marketing efforts.

On a same store basis, service, body and parts revenue increased 11.4% during 2021, primarily driven by an increase in customer pay of 18.4%. Performance in parts wholesale and body shop also saw increases of 19.8% and 0.5%, respectively, compared to the same period of 2020.

Same store service, body and parts gross profit increased 13.1% during 2021 compared to 2020 and decreased 2.2% during 2020 compared to 2019, primarily as a result of shelter in place policies in effect during the first half of

2020. Our gross margins continue to increase as our mix has shifted towards customer pay, which has higher margins than other service work.

Segments

Certain financial information by segment is as follows:

Year Ended December 31,

Revenues:

NM - Not meaningful

Year Ended December 31,

Segment income*:

*Segment income for each of the segments is a Non-GAAP measure defined as Income from operations before income taxes, depreciation and amortization, other interest expense and other income, net.

Reconciliation of total segment income for reportable segments to our consolidated income before income taxes:

Year Ended December 31,

NM - Not meaningful

Year Ended December 31,

Retail new vehicle retail unit sales:

Domestic

A summary of financial information for our Domestic segment follows:

Year Ended December 31,

Revenue:

Total Revenue in our Domestic segment increased 54.9% in 2021 compared to 2020, driven by increases in all business lines. New vehicle unit sales increased 32.7%, driven by our acquisition activity. Same store units declined 2.7% in 2021 compared to 2020, primarily due to decreases in Chrysler and Ford. However, Domestic segment revenues benefited from improved used vehicle retail sales due to a 38.8% increase in volume and a 21.3% increase in average selling price per vehicle in 2021 compared to 2020. Finance and insurance revenue also contributed to the overall increase in Domestic segment revenue, driven by the increased used vehicle retail volume, combined with a 8.9% increase in finance and insurance income per retail unit sold to $1,923 per unit.

Strong performance in used vehicle retail and finance and insurance revenues in 2020 contributed to the 2.8% increase in revenue over 2019.

Our Domestic segment income increased 102.8% in 2021 compared to 2020 due to gross profit growth of 60.0%, with a decrease in floor plan interest expense of 19.9%, offset by an increase in SG&A of 45.2%. As a percentage of gross profit, SG&A decreased 610 basis points in 2021 compared to 2020.

Our Domestic segment income increased 86.4% in 2020 compared to 2019 due to gross profit growth of 12.1% with declines in SG&A and floor plan interest expense of 0.4% and 42.3%, respectively. As a percentage of gross profit, SG&A decreased 820 basis points in 2020 compared to 2019.

Import

A summary of financial information for our Import segment follows:

Year Ended December 31,

Revenue:

Total Revenue in our Import segment increased 77.9% in 2021 compared to 2020, driven by increases in all business lines. New vehicle unit sales in our Import segment increased 57.0%, driven by our acquisition activity and a 5.7% increase on a same store basis. Import segment revenues benefited from improved used vehicle retail sales due to a 51.2% increase in volume and 19.7% increase in average selling price. Finance and insurance revenue also contributed to the overall increase in Import segment revenue, driven by the increased volume combined with a 28.9% increase in finance and insurance income per retail unit sold to $2,010 per unit.

The increase in our Import segment revenue in 2020 compared to 2019 was driven by increases in used vehicle retail, finance and insurance, and service, body and parts. New vehicle unit sales in our Import segment decreased 5.3%. However, Import segment revenues benefited from improved used vehicle retail revenue due to a 6.3% increase in volume, increases in finance and insurance revenues as a result of increased volume combined with a 13.8% increase in finance and insurance income per retail unit sold to $1,559 per unit, and improved service, body and parts revenues in 2020 compared to 2019.

Our Import segment income increased 225.6% in 2021 compared to 2020 due to gross profit growth of 106.7% with a decrease in floor plan interest expense of 4.1%, offset by an increase in SG&A expense of 68.8%. As a percentage of gross profit, SG&A decreased 1300 basis points in 2021 compared to 2020.

Our Import segment income increased 62.3% in 2020 compared to 2019 due to gross profit growth of 15.2% with only a minimal increase in SG&A expense of 7.0% and a decrease in floor plan interest expense of 28.3%. As a percentage of gross profit, SG&A decreased 550 basis points in 2020 compared to 2019.

Luxury

A summary of financial information for our Luxury segment follows:

Year Ended December 31,

Revenue:

The increase in our Luxury segment revenue in 2021 compared to 2020 resulted from increases in all business lines. New vehicle unit sales increased 68.6%, driven by our acquisition activity and an 8.4% increase on a same store basis. Our Luxury segment revenues also benefited from a 72.0% increase in used vehicle unit sales, a 27.5% increase in finance and insurance revenues per retail unit to $1,964 per unit and growth in service, body and parts during 2021 compared to 2020.

Our Luxury segment revenue increased in 2020 compared to 2019 across all major business lines. New vehicle unit sales increased 2.9% over the prior year. Our Luxury segment revenues also benefited from a 9.3% increase in used vehicle unit sales, a 15.9% increase in finance and insurance revenues per retail unit to $1,541 per unit and growth in service, body and parts during 2020 compared to 2019.

Our Luxury segment income increased 290.5% in 2021 compared to 2020. This increase was due to gross profit growth of 115.1% and decreased floor plan interest expense of 2.2%, offset by an increase in SG&A of 74.9%. As a percentage of gross profit, SG&A decreased 1410 basis points in 2021 compared to 2020.

Our Luxury segment income increased 72.5% in 2020 compared to 2019. This increase was due to gross profit growth of 14.2% and decreased floor plan interest expense of 26.6%, offset by an increase in SG&A of 8.0%. As a percentage of gross profit, SG&A decreased 430 basis points in 2020 compared to 2019.

Corporate and Other

Revenue attributable to Corporate and other includes the results of operations of our stand-alone collision centers, offset by certain unallocated reserve and elimination adjustments.

Year Ended December 31,

NM - not meaningful

The increase in Corporate and other revenues in 2021 compared to 2020 and decrease in 2020 compared to 2019 was primarily affected by our reserve for revenue reversals associated with unwound vehicle sales.

Internal corporate expense allocations are also used to increase comparability of our dealerships and reflect the capital burden a stand-alone dealership would experience. Examples of these internal allocations include internal rent expense, internal floor plan financing charges, and internal fees charged to offset employees within our corporate headquarters who perform certain dealership functions.

The decrease in Corporate and other income in 2021 compared to 2020 was primarily due to unrealized investment losses. The increase in Corporate and other segment income in 2020 compared to 2019 was primarily due increased gains on the divestiture of stores.

See Note 17 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Form 10-K for additional information.

Asset Impairments

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

Year Ended December 31,

Franchise value $ 1.9 $ 4.4 $ 0.4

Long-lived assets — — 0.5

Total asset impairments $ 1.9 $ 7.9 $ 2.6

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

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

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

In the first quarter of 2019, we recorded an asset impairment of $0.5 million associated with certain real properties. The long-lived assets were tested for recoverability and were determined to have a carrying value exceeding their fair value. The impaired long-lived asset was subsequently sold in the second quarter of 2019.

As a result of our 2019 annual impairment testing, we identified certain reporting units where it was more likely than not the fair value was less than the carrying amount, and recorded non-cash impairment charges of $0.4 million and $1.7 million for franchise value and goodwill, respectively. These locations were subsequently sold in 2020.

See Note 1, Note 4, Note 5, and Note 13 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Selling, General and Administrative (SG&A)

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

Year Ended December 31,

Year Ended December 31,

SG&A increased 72.4%, or $1.0 billion in 2021 compared to 2020. Overall increases in SG&A were primarily due to increased personnel costs resulting from our growth through acquisitions. Other expenses in 2021 included acquisition expenses of $20.2 million, compared to $3.0 million in 2020 and $5.8 million of storm related insurance charges, compared to $6.1 million in 2020. Gain on the sale of stores was $16.6 million in 2020 with no net gain or loss recognized in 2021.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 42.5% in 2021 compared to 64.6% in 2020, which included decreases across all categories.

SG&A increased 4.0%, or $54.5 million, in 2020 compared to 2019. Overall increases in SG&A were primarily due to increased personnel costs which resulted from our growth through acquisitions, offset by decreases in advertising spend and gains on sales of assets. Other expenses in 2020 included acquisition expenses of $3.0 million, compared to $2.5 million in 2019 and $6.1 million of storm related insurance charges, compared to $9.5 million in 2019. Gains on the sale of stores were $16.6 million and $9.7 million in 2020 and 2019, respectively.

On a same store basis and excluding non-core charges, adjusted SG&A as a percentage of gross profit was 64.5% in 2020 compared to 70.2% in 2019, which included decreases seen across all categories.

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

Year Ended December 31,

Adjusted loss (gain) on sale of assets (2.3) (1.6) (0.7) 43.8 0.0 (1.6) NM

Year Ended December 31,

Adjusted loss (gain) on sale of assets (0.1) (0.1) — 0.0 (10)

See “Non-GAAP Reconciliations” for more details.

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 tradenames.

Year Ended December 31,

Acquisition activity contributed to the increases in depreciation and amortization in 2021 compared to 2020 and in 2020 compared to 2019. We acquired approximately $559.8 million and $241 million of depreciable property as part of our 2021 and 2020 acquisitions, respectively. Capital expenditures totaled $260.4 million and $167.8 million, respectively, in 2021 and 2020. 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:

Year Ended December 31,

Operating margin 7.3 % 5.3 % 3.9 %

Operating margin adjusted for non-core charges(1) 7.4 5.3 3.9

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

In 2021, our operating margin increased 200 basis points compared to 2020. In 2021, the increase in our operating margin was driven by a decrease in SG&A as a percentage of gross profit and increased total gross margin. Adjusting for non-core charges, including storm related insurance charges and acquisition expenses, our operating margin increased 210 basis points in 2021 compared to 2020.

In 2020, our operating margin increased 140 basis points compared to 2019. In 2020, the increase in our operating margin was driven by a decrease in SG&A as a percentage of gross profit and increased total gross margin.

Floor Plan Interest Expense and Floor Plan Assistance

Floor plan interest expense decreased $12.1 million in 2021 compared to 2020, primarily due to new vehicle inventory shortages and increasing consumer demand. Floor plan interest expense decreased 52.2% for pre-existing locations, offset by a 7.6% increase related to acquisition volume and a 9.4% increase related to increased interest rates.

Floor plan interest expense decreased $38.4 million in 2020 compared to 2019, primarily due to our ability to pay off our higher interest rate floor plan notes payable with the surplus liquidity generated from our senior note and equity offerings in 2020.

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

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

Year Ended December 31,

Other Interest Expense

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

Year Ended December 31,

The increase in other interest expense in 2021 compared to 2020 was due to the issuances of $800 million in aggregate principal amount of 3.875% senior notes due 2029 in May 2021 and $550 million in aggregate principal amount of 4.375% senior notes due 2031 in October 2020. These increases were offset by the payoff of our $300 million in aggregate principal amount of 5.250% senior notes in August 2021. See also Note 6 of Notes to Consolidated Financial Statements for additional information.

The increase in other interest expense in 2020 compared to 2019 was due to the issuances of $400 million in aggregate principal amount of 4.625% senior notes due 2027 in December 2019 and $550 million in aggregate principal amount of 4.375% senior notes due 2031 in October 2020, offset by decreases in our average borrowings on our credit facilities.

Other Income (Expense), Net

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

Year Ended December 31,

The decrease in other income (expense), net in 2021 compared to 2020 was primarily due to a $66.4 million unrealized loss related to our investment in Shift Technologies, Inc. compared to a $43.8 million unrealized investment gain in 2020 for the same investment. We also recognized a $10.3 million loss in 2021 on the early redemption of our $300 million principal amount 5.250% senior notes originally due 2025. The increase in other income (expense), net in 2020 compared to 2019 was also due to the same unrealized investment gain in 2020 related to our investment in Shift Technologies, Inc.

Income Tax Provision

Our effective income tax rate was as follows:

Year Ended December 31,

Effective income tax rate 28.4 % 27.5 % 27.7 %

Effective income tax rate excluding non-core items(1) 26.8 27.6 27.6

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

Our effective income tax rate was 28.4% for 2021 compared to 27.5% for 2020. Our 2021 effective income tax rate was negatively affected by a valuation allowance established for certain deferred tax assets not expected to be realized. The increase in tax rate was offset by stock awards vesting in the current period and a reduction in the current and deferred state tax rate due to legislative updates and changing state mix.

Excluding the valuation allowance established during 2021, our effective income tax rate excluding non-core items for 2021 would have been 26.8%, a decrease of 80 basis points compared to the rate for 2020.

Our effective income tax rate in 2020 was positively affected by an increase in pre-tax income, excess tax benefits on stock awards vesting in the current period, and a reduction in non-deductible expenses. Our current state effective tax rate was negatively impacted by the enactment of the Oregon Corporate Activity Tax beginning January 1, 2020, which was partially offset by favorable changes in our state rate due to acquisitions.

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 facility and in communications with our Board of Directors 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 (in millions, except per share amounts):

Asset impairment $ 1.9 $ (1.9) $ — $ — $ — $ — $ —

Net income attributable to non-controlling interest (1.7) — — — — — (1.7)

Diluted share count 29.0

Asset impairment $ 7.9 $ — $ (7.9) $ — $ — $ — $ — $ —

Other income (expense), net 58.9 — — (43.8) — — — 15.1

Diluted share count 24.1

Asset impairment $ 2.6 $ — $ (2.6) $ — $ — $ —

Diluted share count 23.4

Liquidity and Capital Resources

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

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:

As of December 31,

Cash, restricted cash, and cash equivalents $ 174.8 $ 162.4 $ 12.4 7.6 %

Unfinanced new vehicles — 113.4 (113.4) NM

NM - Not meaningful

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

Year Ended December 31,

Net cash provided by operating activities $ 1,797.2 $ 544.6 $ 524.5

Net cash provided by (used in) financing activities 1,106.7 1,139.8 (9.1)

Operating Activities

Cash provided by operating activities increased $1.3 billion in 2021 compared to 2020, primarily as a result of improved profitability, lower inventory turns compared to the prior year and growth in our business through acquisitions.

Borrowings from and repayments to our syndicated credit facility related to our new vehicle inventory floor plan financing are presented as financing activities. Additionally, the cash paid for inventory purchased as part of an

acquisition is presented as an investing activity, while the subsequent flooring of the inventory is included in floor plan notes payable cash activities.

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

Year Ended December 31,

Inventories are the most significant component of our cash flow from operations. As of December 31, 2021, our new vehicle days’ supply was 24 days, or 26 days lower than our days’ supply as of December 31, 2020. Our days’ supply of used vehicles was 61 days, which was four days lower than our days’ supply as of December 31, 2020. We calculate days’ supply of inventory based on current inventory levels, including in-transit vehicles, and a 30-day historical cost of sales level. We have continued to focus on managing our unit mix and maintaining an appropriate level of new and used vehicle inventory.

Investing Activities

Net cash used in investing activities totaled $2.9 billion and $1.6 billion, respectively, for 2021 and 2020. 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:

Year Ended December 31,

Cash paid for other investments (10.2) (11.2) 1.0 (7.2) (4.0)

Capital Expenditures

Below is a summary of our capital expenditure activities:

Year Ended December 31,

Post-acquisition capital improvements $ 37.2 $ 32.5 $ 33.9

Facilities for open points 14.1 — 5.4

Purchase of facilities for existing operations 21.9 29.6 3.1

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 facility. 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, as well as certain other acquisition-related information is presented below:

Year Ended December 31,

Number of stores acquired 77 30 9

Number of stores opened 1 — —

Number of franchises added — — 1

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

Financing Activities

Net cash provided by financing activities, adjusted for borrowing on floor plan facilities: non-trade was as follows:

Year Ended December 31,

Add: Net repayments on floor plan notes payable: non-trade 685.3 20.6 54.6

Cash provided by financing activities, as adjusted $ 1,792.0 $ 1,160.4 $ 45.5

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

Year Ended December 31,

Payment of debt issuance costs (14.7) (10.8) (3.9) (5.8) (5.0)

Borrowing and Repayment Activity

During 2021, we raised net proceeds of $1.2 billion through the issuance of debt, including the issuance of $800.0 million in aggregate principal amount of 3.875% senior notes due 2029 and $344.4 million through non-recourse notes payable secured by a portion of our Driveway Finance auto loan receivable portfolio. Using these proceeds we repaid $325.4 million, net, on our lines of credit and redeemed our $300 million in aggregate principal amount of 5.250% senior notes at a redemption price equal to 102.625% of the principal amount of the notes plus accrued and unpaid interest thereon. These funds were primarily used for acquisitions, share repurchases and capital expenditures.

Our debt to total capital ratio, excluding floor plan notes payable, was 42.4% at December 31, 2021 compared to 44.5% at December 31, 2020.

Equity Transactions

In May 2021, we completed the public offering of 3,571,428 shares of our Common stock, no par value per share, which included the exercise in full by the underwriters of their option to purchase up to 465,838 additional shares of our Common stock, at the public offering price of $322.00 per share. We received $1.11 billion from the offering, net of the underwriting discount and before deducting the offering expenses of $0.6 million.

In November 2021, our Board of Directors authorized the repurchase of up to $750 million of our Common stock. This new authorization is in addition to the amount previously authorized by the Board for repurchase. As of December 31, 2021, we had $722.8 million available for repurchase under the program. The authority to repurchase does not have an expiration date.

During 2021, we paid dividends on our Common Stock as follows:

Dividend paid: Dividend amount per share Total amount of dividend (in millions)

We evaluate performance and make a recommendation to the Board of Directors 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:

Floor plan notes payable: non-trade $ 835.9 $ — (1)

Floor plan notes payable 354.2 —

Used and service loaner vehicle inventory financing commitments 500.0 267.4 (2)

Real estate mortgages 592.9 —

Finance lease obligations 53.6 —

Non-recourse notes payable 317.6 —

Other debt 1.9 —

Unamortized debt issuance costs (26.5) — (4)

(1)As of December 31, 2021, we had a $2.2 billion new vehicle floor plan commitment as part of our credit facility.

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

(3)Available credit is based on the borrowing base amount effective as of November 30, 2021. This amount is reduced by $33.5 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 6 of Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report.

Credit Facility

On April 29, 2021, we amended our existing syndicated credit facility (credit facility), comprised of 20 financial institutions, including eight manufacturer-affiliated finance companies, extending the maturity date to April 2026.

This credit facility provides for a total financing commitment of $3.75 billion, which may be further expanded, subject to lender approval and the satisfaction of other conditions, up to a total of $4.25 billion. The initial allocation of the financing commitment is for up to $750 million in used vehicle inventory floorplan financing, up to $750 million in revolving financing for general corporate purposes, including acquisitions and working capital, up to $2.15 billion in new vehicle inventory floorplan financing, and up to $100 million in service loaner vehicle floorplan financing. We have the option to reallocate the commitments under this credit facility, provided that each of the used vehicle floor plan commitment and the aggregate revolving loan commitment may not be more than the 20% of the amount of the aggregate commitment, and the aggregate service loaner vehicle floorplan commitment may not be more than the 3% of the amount of the aggregate commitment. All borrowings from, and repayments to, our lending group are presented in the Consolidated Statements of Cash Flows as financing activities.

Our obligations under our credit facility are secured by a substantial amount of our assets, including our inventory (including new and used vehicles, parts and accessories), equipment, accounts receivable (and other rights to payment) and our equity interests in certain of our subsidiaries. Under our credit facility, our obligations relating to new vehicle floor plan loans are secured only by collateral owned by borrowers of new vehicle floor plan loans under the credit facility.

The interest rate on the credit facility varies based on the type of debt, with the rate of one-month LIBOR plus 1.10% for new vehicle floor plan financing, one-month LIBOR plus 1.40% for used vehicle floor plan financing, 1.20% for service loaner floor plan financing and a variable interest rate on the revolving financing ranging from the one-month LIBOR plus 1.00% to 2.00% depending on our leverage ratio. The annual interest rates associated with our floor plan commitments are as follows:

Commitment Annual Interest Rate at December 31, 2021

New vehicle floor plan 1.20%

Used vehicle floor plan 1.50%

Service loaner floor plan 1.30%

Revolving line of credit 1.10%

Under the terms of our credit facility we are subject to financial covenants and restrictive covenants that limit or restrict our incurring additional indebtedness, making investments, selling or acquiring assets and granting security interests in our assets.

Under our credit facility, we are required to maintain the ratios detailed in the following table:

Debt Covenant Ratio Requirement As of December 31, 2021

Current ratio Not less than 1.10 to 1 1.82 to 1

Fixed charge coverage ratio Not less than 1.20 to 1 5.53 to 1

Leverage ratio Not more than 5.75 to 1 1.48 to 1

As of December 31, 2021, we were in compliance with all covenants. We expect to remain in compliance with the financial and restrictive covenants in our credit facility and other debt agreements. However, no assurances can be provided that we will continue to remain in compliance with the financial and restrictive covenants.

If we do not meet the financial and restrictive covenants and are unable to remediate or cure the condition or obtain a waiver from our lenders, a breach would give rise to remedies under the agreement, the most severe of which are the termination of the agreement, acceleration of the amounts owed and the seizure and sale of our assets comprising the collateral for the loans. A breach would also trigger cross-defaults under other debt agreements.

Although we refer to the lenders’ obligations to make loans as “commitments,” each lender’s obligations to make any loan or other credit accommodations under the credit facility is subject to the satisfaction of the conditions precedent specified in the credit agreement including, for example, that our representations and warranties in the agreement are true and correct in all material respects as of the date of each credit extension. If we are unable to satisfy the applicable conditions precedent, we may not be able to request new loans or other credit accommodations under our credit facility.

Floor Plan Notes Payable

We have floor plan agreements with manufacturer-affiliated finance companies for certain new vehicles and vehicles that are designated for use as service loaners. The interest rates on these floor plan notes payable commitments vary by manufacturer and are variable rates. As of December 31, 2021, $354.2 million was outstanding on these agreements. Borrowings from, and repayments to, manufacturer-affiliated finance companies are classified as operating activities in the Consolidated Statements of Cash Flows.

Other Lines of Credit

Our other lines of credit include commitments of up to $20 million, secured by certain assets from select Chrysler locations, a commitment of $60 million with Ford Motor Credit Company, secured by certain assets from all Ford locations, and $39 million secured by assets at our Canadian stores. These other lines of credit mature in 2022 and have interest rates up to 5.65%. As of December 31, 2021, no amounts were outstanding on these other lines of credit.

On July 14, 2020, we entered into a five-year real estate backed facility with eight financial institutions, including two manufacturer affiliated finance companies, maturing in July 2025. The real-estate backed credit facility currently provides a total financing commitment of up to $238.8 million in working capital financing for general corporate purposes, including acquisitions and working capital, collateralized by real estate and certain other assets owned by us. The interest rate on this credit facility uses one-month LIBOR plus a margin ranging from 2.00%-2.50% based on our leverage ratio, or a base rate of 0.75% plus a margin. The facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties by us. Financial covenants include requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, consistent with those under our existing syndicated credit facility with U.S. Bank National Association as administrative agent. As of December 31, 2021, no amounts were outstanding on the real estate backed facility.

On July 31, 2020, we entered into a securitization facility which provides initial commitments for borrowings of up to $300 million and matures in July 2022. As of December 31, 2021, we had $90 million drawn on the securitization facility, which is included as part of “Revolving lines of credit” in the “Summary of Outstanding Balances on Credit Facilities and Long-Term Debt” table above.

On April 12, 2021, we entered into a credit agreement with Ally Bank (Ally Capital in Hawaii, Mississippi, Montana and New Jersey), as lender. The credit agreement matures in April 2023 and provides for a revolving line of credit facility (Ally credit facility) of up to $300.0 million and is secured by real estate owned by us. The Ally credit facility will bear interest at a rate per annum equal to the greater of 3.00% or the prime rate designated by Ally Bank, minus 25 basis points. The Ally credit facility includes financial and restrictive covenants typical of such agreements, lending conditions, and representations and warranties. Financial covenants, including the requirements to maintain minimum current and fixed charge coverage ratios, and a maximum leverage ratio, are the same as the requirements under our existing syndicated credit facility with U.S. Bank National Association. The covenants restrict us from disposing of assets and granting additional security interests. As of December 31, 2021, no amounts were outstanding on the Ally credit facility.

On August 30, 2021, we entered into a credit agreement with The Bank of Nova Scotia. The credit agreement makes available three primary lines of credit including a working capital revolving credit facility of up to $50 million CAD, up to $300 million CAD floor plan financing for new and used vehicles; and $350 million CAD to provide wholesale lease financing. The credit facilities accrue interest at rates equal to the Lender’s prime lending rate or the Canadian Dollar Offered Rate plus, in each case, a spread, with the spreads ranging from 0.25% per annum to 1.50% per annum. The credit agreement includes various financial and other covenants typical of such agreements. All indebtedness under this agreement is due on demand.

Non-Recourse Notes Payable

Driveway Finance Corporation auto loans receivable are primarily funded through our warehouse facilities and asset-backed term funding transactions. These non-recourse funding vehicles are structured to legally isolate the auto loans receivable, and we would not expect to be able to access the assets of our non-recourse funding vehicles, even in insolvency, receivership or conservatorship proceedings. Similarly, the investors in the non-recourse notes payable have no recourse to our assets beyond the related receivables, the amounts on deposit in reserve accounts and the restricted cash from collections on auto loans receivable. We do, however, continue to have the rights associated with the interest we retain in these non-recourse funding vehicles.

In November 2021, we issued $344.4 million in non-recourse notes payable related to the asset-backed term funding transaction.

3.875% Senior Notes due 2029

On May 27, 2021, we issued $800 million in aggregate principal amount of 3.875% notes due 2029 to eligible purchasers in a private placement under Rule 144A and Regulation S of the Securities Act of 1933. Interest accrues on the notes from May 27, 2021 and is payable semiannually on June 1 and December 1. We may redeem the notes in whole or in part, on or after June 1, 2024, at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any, to, but, excluding, the redemption date. Prior to June 1, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes with funds in an aggregate amount up to the net cash proceeds of certain equity offerings at a redemption price equal to 103.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. In addition, at any time prior to June 1, 2024, we may redeem some or all of the notes at a price equal to 100% of the principal amount, plus a “make-whole” premium, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

Below is a summary of outstanding senior notes issued:

Description Maturity Date Interest Payment Dates Principal Amount

On August 1, 2021, we redeemed in full the aggregate $300 million principal amount of our 5.250% senior notes due 2025 at a redemption price equal to 102.625% of the principal amount of the notes plus accrued and unpaid interest thereon.

Real Estate Mortgages, Finance Lease Obligations, and Other Debt

We have mortgages associated with our owned real estate. Interest rates related to this debt ranged from 1.8% to 5.3% at December 31, 2021. The mortgages are payable in various installments through June 1, 2038. As of December 31, 2021, we had fixed interest rates on 71.2% of our outstanding mortgage debt.

We have finance lease obligations with some of our leased real estate. Interest rates related to this debt ranged from 1.9% to 8.5% at December 31, 2021. The leases have terms extending through August 2037.

Our other debt includes sellers’ notes. The interest rates associated with our other debt ranged from 5.0% to 10.0% at December 31, 2021. This debt, which totaled $1.9 million at December 31, 2021, is due in various installments through April 2027.

Contractual Obligations

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

Debt Obligations and Interest Payments

Refer to Note 6, 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 7, 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 11, Leases, of the notes to the consolidated financial statements for further information of our obligations and the timing of expected payments.

LIBOR Transition

We are working closely and cooperatively with our lending partners to update LIBOR-based agreements. We expect to transition all of our LIBOR-based agreements to appropriate replacement rates well before the June 30, 2023 LIBOR cessation. We do not anticipate this transition to have any material impact to our financials.

Critical Accounting Policies and Estimates

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

Our most critical accounting estimates include those related to goodwill and franchise value, and acquisitions. We also have other key accounting policies for valuation of accounts receivable and expense accruals. However, these policies either do not meet the definition of critical accounting estimates described above or 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, or more frequently if conditions indicate that an impairment may have occurred. Goodwill is tested for impairment at the reporting unit level. Our reporting units are individual retail automotive stores as this is the level at which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance.

We have the option to qualitatively or quantitatively assess goodwill for impairment and, in 2021, 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, 2021, we had $977.3 million of goodwill on our balance sheet associated with 201 reporting units. No reporting unit accounted for more than 2.2% of our total goodwill as of December 31, 2021. The annual goodwill impairment analysis, which we perform as of October 1 of each year, resulted in no indications of impairment in 2021 or 2020. In 2019, our annual analyses resulted in an impairment charge of $1.7 million. During the third quarter of 2021, there was an indication of a triggering event at a certain reporting unit. We tested the goodwill for this location, which resulted in no goodwill impairment charges recorded. During the second quarter of 2020, there was an indication of a triggering event at certain reporting units. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $3.5 million.

We have determined the appropriate unit of accounting for testing franchise rights for impairment is on an individual store basis. We have the option to qualitatively or quantitatively assess indefinite-lived intangible assets for impairment. In 2021, we evaluated our indefinite-lived intangible assets using a qualitative assessment process. If the qualitative factors determine that it is more likely than not that the fair value of the individual store’s franchise value exceeds the carrying amount, the franchise value is not impaired, and the second step is not necessary. If the qualitative assessment determines it is more likely than not that the fair value is less than the carrying amount, then a quantitative valuation of our franchise value is performed. An impairment charge is recorded to the extent the fair value is less than the carrying value.

As of December 31, 2021, we had $799.1 million of franchise value on our balance sheet associated with 201 stores. No individual store accounted for more than 8.4% of our total franchise value as of December 31, 2021. The annual franchise value impairment analysis, which we perform as of October 1 each year, resulted in no indications of impairment in 2021 or 2020. In 2019, our annual analysis resulted in an impairment charge of $0.4 million. During the third quarter of 2021, there were indications of impairment at a certain reporting unit. We tested the franchise value for this location, which resulted in an impairment charge of $1.9 million. During the second quarter of 2020, there was an indication of a triggering event at certain reporting units. As a result, we identified certain reporting units where it was more likely than not the fair values were less than the carrying amounts, and we recorded a non-cash impairment charge of $4.4 million.

We are subject to financial statement risk to the extent that our goodwill or franchise rights become impaired due to decreases in the fair value. A future decline in performance, decreases in projected growth rates or margin assumptions or changes in discount rates could result in a potential impairment, which could have a material adverse impact on our financial position and results of operations. Furthermore, if a manufacturer becomes insolvent, we may be required to record a partial or total impairment on the franchise value and/or goodwill related to that manufacturer. No individual manufacturer accounted for more than 4.6% of our total franchise value and goodwill as of December 31, 2021.

See Note 1 and Note 5 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Acquisitions

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

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

See Note 1 and Note 15 of Notes to Consolidated Financial Statements included in Part II, Item 8. Financial Statements and Supplementary Financial Data of this Annual Report.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risks relating to market fluctuations in interest rates and equity values. We do not acquire our market risk sensitive instruments for trading purposes.

Variable Rate Debt

Our syndicated credit facility, other floor plan notes payable and certain real estate mortgages are structured as variable rate debt. The interest rates on our variable rate debt are tied to either the one-month LIBOR, 3-month LIBOR, or the prime rate. These debt obligations, therefore, expose us to variability in interest payments due to changes in these rates. Certain floor plan debt is based on open-ended lines of credit tied to each individual store from the various manufacturer finance companies.

Our variable-rate floor plan notes payable, variable rate mortgage notes payable and other credit line borrowings subject us to market risk exposure. As of December 31, 2021, we had $2.1 billion outstanding under such agreements at a weighted average interest rate of 1.43% per annum. A 10% increase in interest rates, or 14.3 basis points, would increase annual interest expense by approximately $2.2 million, net of tax, based on amounts outstanding as of December 31, 2021.

As of December 31, 2020, we had $2.0 billion outstanding under such agreements at a weighted average interest rate of 1.46% per annum. A 10% increase in interest rates, or 14.6 basis points, would increase annual interest expense by approximately $2.1 million, net of tax, based on amounts outstanding as of December 31, 2020.

Fixed Rate Debt

The fair value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair value of fixed interest rate debt will increase as interest rates fall because we would expect to be able to refinance for a lower rate. Conversely, the fair value of fixed interest rate debt will decrease as interest rates rise. The interest rate changes affect the fair value but do not impact earnings or cash flows.

As of December 31, 2021, we had $2.5 billion of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between April 1, 2022 and July 1, 2038. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $2.6 billion as of December 31, 2021.

As of December 31, 2020, we had $2.0 billion of long-term fixed interest rate debt outstanding and recorded on the balance sheet, with maturity dates between January 1, 2020 and August 31, 2038. Based on discounted cash flows using current interest rates for comparable debt, we have determined that the fair value of this long-term fixed interest rate debt was approximately $2.0 billion as of December 31, 2020.

Foreign Currency Exchange Risk

The functional currency of our Canadian subsidiaries is the CAD. Our exposure to fluctuating exchange rates relates to the effects of translating financial statements of those subsidiaries into our reporting currency, which we do not hedge against based on our investment strategy in these foreign operations. A 10% devaluation in average exchange rates for the CAD to the USD would have resulted in a $32.3 million or 0.1% decrease to our revenues for the year ended December 31, 2021.

We had no subsidiaries with foreign currency for the year ended December 31, 2020.

Equity Price Risk

We are subject to equity price risk with respect to our equity investment in Shift Technologies, Inc. (Shift), which has a readily determinable fair value following Shift going public in a reverse-merger deal with Insurance Acquisition, a special purpose acquisition company, in the fourth quarter of 2020. During the period that we hold this equity investment, unrealized gains and losses will be recorded as the fair market value of this security changes over time. The fair value of this equity security was $40.9 million at December 31, 2021. A hypothetical 10% change in the equity price of this security would result in an approximate change to unrealized gain or loss of $4 million. The selected 10% hypothetical change in the equity price 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.

The fair value of this equity security was $107.3 million at December 31, 2020. A hypothetical 10% change in the equity price of this security would result in an approximate change to unrealized gain or loss of $11 million.

Risk Management Policies

We assess interest rate cash flow risk by identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. Our policy is to manage this risk through monitoring our mix of fixed rate and variable rate debt. We currently utilize bank debt, mortgage financing, high-yield debt and internally generated cash flows for growth and investment. We monitor our credit ratings and evaluate the benefit and cost of various debt types to manage, and minimize as best as possible, our interest cost.

We maintain risk management controls to monitor interest rate cash flow attributable to both our outstanding and forecasted debt obligations, as well as our offsetting hedge positions. The risk management controls include assessing the impact to future cash flows of changes in interest rates.

Item 8. Financial Statements and Supplementary Financial Data

The financial statements and notes thereto required by this item begin on page F-1 as listed in Item 15. Exhibits and Financial Statement Schedules of Part IV of this document.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal controls over financial reporting during the year of the acquisition while integrating the acquired operations. Management’s evaluation of internal control over financial reporting excludes the operations of the seventy-seven stores acquired in 2021, which represented 20% of consolidated total assets as of December 31, 2021 and 18% of consolidated revenues for the year ended December 31, 2021.

Based on our assessment, our management concluded that, as of December 31, 2021, our internal control over financial reporting was effective.

KPMG LLP, our Independent Registered Public Accounting Firm, has issued an attestation report on our internal control over financial reporting as of December 31, 2021, which is included in Item 8. Financial Statements and Supplementary Financial Data of this Form 10-K.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information required by this item will be included in our Proxy Statement for our 2022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.

Item 11. Executive Compensation

Information required by this item will be included in our Proxy Statement for our 2022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

The following table summarizes equity securities authorized for issuance as of December 31, 2021.

Equity compensation plans approved by shareholders 466,860 $ — (1) 2,292,788

Equity compensation plans not approved by shareholders — — —

(1)There is no exercise price associated with our restricted stock units.

(2)Includes 983,435 shares available pursuant to our 2013 Amended and Restated Stock Incentive Plan and 1,309,353 shares available pursuant to our Employee Stock Purchase Plan.

The additional information required by this item will be included in our Proxy Statement for our 2022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information required by this item will be included in our Proxy Statement for our 2022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services

Our independent registered public accounting firm is KPMG LLP, Portland, OR, Auditor Firm ID: 185.

Information required by this item will be included in our Proxy Statement for our 2022 Annual Meeting of Shareholders and, upon filing with the SEC within 120 days of December 31, 2021, is incorporated herein by reference.

PART IV

Item 15. Exhibits and Financial Statement Schedules

Financial Statements and Schedules

The Consolidated Financial Statements, together with the reports thereon of KPMG LLP, Independent Registered Public Accounting Firm, are included on the pages indicated below:

Page

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheets as of December 31, 2021 and 2020 F-5

Notes to Consolidated Financial Statements F-11

There are no schedules required to be filed herewith.

Exhibit Index

The following exhibits are filed herewith. An asterisk (*) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement.

Exhibit Description

Exhibit Description

Exhibit Description

21 Subsidiaries of Lithia Motors, Inc.

23 Consent of KPMG LLP, Independent Registered Public Accounting Firm

101.SCH Inline XBRL Taxonomy Extension Schema Document.

101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document.

101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document.

104 Cover page formatted as Inline XBRL and contained in Exhibit 101.

(1)Substantially similar agreements exist between Lithia Motors, Inc. and each of Michael Cavanaugh, Marguerite Celeste, John Criddle, Tom Dobry, Gary Glandon, Scott Hillier, George Hines, Christopher S. Holzshu, Edward Impert, Charles Lietz, Tina Miller, Thomas Naso, Bryan Osterhout, Kelly Porter, Jodi Rasor, Ross Sherman, and David Stork. The “Cash Change in Control Benefits” under the agreements with Michael Cavanaugh, John Criddle, Gary Glandon, Edward Impert, Charles Lietz, Kelly Porter, Jodi Rasor, and Ross Sherman provide for 12 months of base salary rather than 24 months.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 18, 2022 LITHIA MOTORS, INC.

Registrant

By: /s/ Bryan B. DeBoer

Bryan B. DeBoer

Chief Executive Officer, President, Director, and Principal Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on February 18, 2022:

/s/ Bryan B. DeBoer /s/ Tina Miller

Bryan B. DeBoer Tina Miller

/s/ Sidney B. DeBoer /s/ Susan O. Cain

Sidney B. DeBoer Susan O. Cain

Chairman of the Board and Director Director

/s/ Shauna McIntyre /s/ Louis P. Miramontes

Shauna McIntyre Louis P. Miramontes

Director Director

/s/ Kenneth E. Roberts /s/ David J. Robino

Kenneth E. Roberts David J. Robino

Director Director

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Lithia Motors, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Lithia Motors, Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity and redeemable non-controlling interest, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 18, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Assessment of the Company’s impairment tests over goodwill and franchise value

As disclosed in Note 1 and Note 5 to the consolidated financial statements, the Company had goodwill and indefinite-lived franchise value intangible assets with a book value of $977.3 million and $799.1 million, respectively, at December 31, 2021. As described in Note 1 to the consolidated financial statements, the Company tested its goodwill and franchise value intangibles assets for impairment using a qualitative assessment as of October 1, 2021. During the third quarter of 2021, the Company identified indications of a triggering event at a certain store. Management tested the goodwill and franchise value for this store and recorded non-cash impairment charges of $0 million and $1.9 million, which were equal to the difference between the fair value and the carrying value for goodwill and franchise value, respectively. The impairment charge for franchise value reduced the carrying value to zero at this store. The qualitative annual

AUDITOR’S REPORT F-1

assessment was performed at each individual store level as of October 1, 2021 and the Company determined that no additional impairment existed in 2021.

We identified the assessment of the Company’s qualitative impairment tests over goodwill and franchise value for stores whose current operating results indicate a higher risk of potential impairment as a critical audit matter. The tests included the evaluation of qualitative factors such as future revenue growth and profitability as well as comparable dealership sales, that required especially subjective auditor judgment.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill and franchise value impairment assessment processes, including controls related to the identification and development of relevant qualitative factors. We compared key financial metrics across stores with similar demographics, including historical and future dealership level revenue growth and profitability, and evaluated differences for potential indicators of impairments. We evaluated the Company’s intent and ability to carry out a particular course of action by evaluating the Company’s past history of carrying out its stated intentions. Additionally, we evaluated information about recent comparable dealership sales to identify potential indicators of impairment.

/s/ KPMG LLP

We have served as the Company’s auditor since 1993.

Portland, Oregon

February 18, 2022

AUDITOR’S REPORT F-2

Report of Independent Registered Public Accounting Firm

To the Stockholders and Board of Directors

Lithia Motors, Inc.:

Opinion on Internal Control Over Financial Reporting

We have audited Lithia Motors, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, equity and redeemable non-controlling interest, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements), and our report dated February 18, 2022 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired seventy-seven stores during 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021, all of these acquired stores’ internal control over financial reporting. The total assets of these seventy-seven stores represented approximately 20% of consolidated total assets as of December 31, 2021 and approximately 18% of consolidated revenues for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of these seventy-seven stores.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

AUDITOR’S REPORT F-3

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Portland, Oregon

February 18, 2022

AUDITOR’S REPORT F-4

CONSOLIDATED BALANCE SHEETS

December 31,

Assets

Current assets:

Cash, restricted cash, and cash equivalents $ 174.8 $ 162.5

Operating lease right-of-use assets 395.9 264.0

Liabilities and equity

Current liabilities:

Floor plan notes payable: non-trade 835.9 1,563.0

Current maturities of long-term debt 223.7 66.0

Long-term debt, less current maturities 3,185.7 2,064.7

Non-current operating lease liabilities 361.7 246.7

Redeemable non-controlling interest 34.0 —

Equity:

Preferred stock - no par value; authorized 15.0 shares; none outstanding — —

Additional paid-in capital 58.3 41.4

Accumulated other comprehensive loss (3.0) (6.3)

Total stockholders’ equity - Lithia Motors, Inc. 4,626.4 2,661.5

Non-controlling interest 2.8 —

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-5

CONSOLIDATED STATEMENTS OF OPERATIONS

Year Ended December 31,

Revenues:

Cost of sales:

Floor plan interest expense (22.3) (34.4) (72.8)

Net income attributable to non-controlling interests (1.7) — —

Net income attributable to redeemable non-controlling interest (0.9) — —

Net income attributable to Lithia Motors, Inc. $ 1,060.1 $ 470.3 $ 271.5

Shares used in basic per share calculations 28.8 23.8 23.2

Shares used in diluted per share calculations 29.0 24.1 23.4

Cash dividends paid per share $ 1.36 $ 1.22 $ 1.19

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-6

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Year Ended December 31,

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustment (1.1) — —

Total other comprehensive income (loss), net of tax 3.3 (5.6) (0.7)

Comprehensive income attributable to non-controlling interest (1.7) — —

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-7

CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NON-CONTROLLING INTEREST

Year Ended December 31,

Common stock1, beginning balances 788.2 20.5 —

Issuance of stock in connection with employee stock plans 25.9 13.3 11.0

Class B common stock converted to class A common stock — 0.1 —

Repurchase of class A common stock (230.7) (34.4) (3.2)

Equity issuances, net of issuance costs 1,110.4 777.1 —

Class B common stock1, beginning balances — 0.1 0.1

Class B common stock converted to class A common stock — (0.1) —

Class B common stock1, ending balances — — 0.1

Additional paid-in capital, beginning balances 41.4 46.0 35.0

Option premiums received — — 7.5

Repurchase of class A common stock — (16.2) —

Additional paid-in capital, ending balances 58.3 41.4 46.0

Accumulated other comprehensive loss, beginning balances (6.3) (0.7) —

Foreign currency translation adjustment (1.1) — —

Accumulated other comprehensive loss, ending balances (3.0) (6.3) (0.7)

Net income attributable to Lithia Motors, Inc. 1,060.1 470.3 271.5

Option premiums paid — — (5.1)

Non-controlling interest, beginning balances — — —

Issuance related to business combinations 1.1 — —

Net income attributable to non-controlling interest 1.7 — —

Non-controlling interest, ending balances 2.8 — —

Redeemable non-controlling interest, beginning balances $ — $ — $ —

Acquired redeemable non-controlling interest 33.1 — —

Net income attributable to redeemable non-controlling interest 0.9 — —

Redeemable non-controlling interest, ending balances $ 34.0 $ — $ —

1Prior to June 7, 2021, common stock was classified as Class A common stock. The Class A common stock reclassification as common stock occurred in connection with the elimination of our classified common stock structure following the conversion of all Class B common stock to Class A common stock.

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-8

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended December 31,

Cash flows from operating activities:

Loss on redemption of senior notes 10.3 — —

Gain on disposal of other assets (2.5) (1.7) (0.1)

Gain from disposal activities — (16.6) (9.7)

Unrealized investment loss (gain) 66.4 (43.4) —

Amortization of operating lease right-of-use assets 39.0 28.9 31.6

(Increase) decrease (net of acquisitions and dispositions):

Increase (decrease) (net of acquisitions and dispositions):

Other long-term liabilities and deferred revenue 39.1 15.1 (11.3)

Cash flows from investing activities:

Notes receivable issued — (12.5) (12.5)

Principal payments received on notes receivable — 25.0 —

Proceeds from sales of assets 3.3 6.5 1.5

Cash paid for other investments (10.3) (11.2) (7.2)

Cash paid for acquisitions, net of cash acquired (2,699.3) (1,503.3) (366.6)

Cash flows from financing activities:

Repayments on floor plan notes payable: non-trade, net (685.3) (20.6) (54.6)

Payment of debt issuance costs (14.7) (10.8) (5.8)

Repurchase of common stock (230.7) (50.6) (3.2)

Payments of contingent consideration related to acquisitions (1.4) (0.3) —

Other financing activities — — 2.4

Net cash provided by (used in) financing activities 1,106.7 1,139.8 (9.1)

Increase in cash, restricted cash, and cash equivalents 16.0 78.6 52.4

Cash, restricted cash, and cash equivalents at beginning of year 162.5 84.0 31.6

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-9

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION

Year Ended December 31,

Restricted cash from collections on auto loans receivable 21.8 2.3 —

Cash, restricted cash, and cash equivalents $ 174.8 $ 162.5 $ 84.0

Supplemental cash flow information:

Cash paid during the period for interest $ 130.1 $ 107.7 $ 135.8

Cash paid during the period for income taxes, net 369.1 135.0 38.4

Floor plan debt paid in connection with store disposals 8.7 38.4 18.6

Non-cash activities:

Debt issued in connection with acquisitions $ 355.6 $ — $ 26.4

Contingent consideration in connection with acquisitions 0.9 14.3 —

Debt assumed in connection with acquisitions 4.0 — —

Right-of-use assets obtained in exchange for lease liabilities1 171.8 55.4 260.3

1Amounts for the twelve months ended December 31, 2019 include the transition adjustment for the adoption of Topic 842.

See accompanying notes to consolidated financial statements.

FINANCIAL STATEMENTS F-10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Organization and Business

We are one of the largest automotive retailers in the United States and are among the fastest growing companies in the Fortune 500 (#231-2021) with 278 stores representing 40 brands in two countries, across 25 U.S. states and three Canadian provinces. We offer vehicles online and through our nationwide retail network. Our “Growth Powered by People” strategy drives us to innovate and continuously improve the customer experience.

Basis of Presentation

The accompanying Consolidated Financial Statements reflect the results of operations, the financial position and the cash flows for Lithia Motors, Inc. and its directly and indirectly wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Cash, Restricted Cash, and Cash Equivalents

Cash and cash equivalents are defined as cash on hand and cash in bank accounts without restrictions. Restricted cash consisted of collections of principal, interest and fee payments on auto loans receivable that are restricted for repayment on borrowings on our securitization facility before being unrestricted.

Accounts Receivable

Accounts receivable classifications include the following:

•Contracts in transit are receivables from various lenders for the financing of vehicles that we have arranged on behalf of the customer and are typically received within five to 10 days of selling a vehicle.

•Trade receivables are comprised of amounts due from customers, lenders for the commissions earned on financing and others for commissions earned on service contracts and insurance products.

•Vehicle receivables represent receivables for the portion of the vehicle sales price paid directly by the customer.

•Manufacturer receivables represent amounts due from manufacturers, including holdbacks, rebates, incentives and warranty claims.

•Auto loan receivables include amounts due from customers related to retail sales of vehicles and certain finance and insurance products.

Interest income on auto loan receivables is recognized based on the contractual terms of each loan and is accrued until repayment, reaching non-accrual status, charge-off, or repossession. Direct costs associated with loan originations are capitalized and expensed as an offset to interest income when recognized on the loans. All other receivables are recorded at invoice and do not bear interest until they are 60 days past due.

The balance of auto loan receivables is made up primarily of loans secured by the related vehicle. More than 95% of the portfolio is aged less than 60 days past due with less than 5% on non-accrual status. As of December 31, 2021, the allowance for credit losses related to auto loan and lease receivables was $25.0 million and was included in allowance for doubtful accounts and other non-current assets. In accordance with Topic 326, the allowance for loan losses is estimated based on our historical write-off experience, current conditions and forecasts as well as the value of any underlying assets securing these loans and is reviewed monthly. Consideration is given to recent delinquency trends and recovery rates. Account balances are charged against the allowance upon reaching 120 days past due status. The annual activity for charges and subsequent recoveries is immaterial. The remainder of our receivables are due primarily from manufacturer partners and various third-party lenders. The historical losses related to these balances are immaterial.

The long-term portion of accounts receivable was included as a component of other non-current assets in the Consolidated Balance Sheets. See Note 2.

Inventories

Inventories are valued at the lower of net realizable value or cost, using the specific identification method for new vehicles, pooled approach for used vehicles, and the lower of cost (first-in, first-out) or market method for parts. The cost of new and used vehicle inventories includes the cost of any equipment added, reconditioning and

NOTES TO FINANCIAL STATEMENTS F-11

transportation. Certain acquired inventories are valued using the last-in first-out (LIFO) method. The LIFO reserve associated with this inventory as of December 31, 2021 and 2020 was immaterial.

Manufacturers reimburse us for holdbacks, floor plan interest assistance and advertising assistance, which are reflected as a reduction in the carrying value of each vehicle purchased. We recognize advertising assistance, floor plan interest assistance, holdbacks, cash incentives and other rebates received from manufacturers that are tied to specific vehicles as a reduction to cost of sales as the related vehicles are sold.

Parts purchase discounts that we receive from the manufacturer are reflected as a reduction in the carrying value of the parts purchased from the manufacturer and are recognized as a reduction to cost of goods sold as the related inventory is sold. See Note 3.

Property and Equipment

Property and equipment are stated at cost and depreciated over their estimated useful lives on the straight-line basis. Leasehold improvements made at the inception of the lease or during the term of the lease are amortized on a straight-line basis over the shorter of the life of the improvement or the remaining term of the lease.

The range of estimated useful lives is as follows:

Buildings and improvements 5 to 40 years

Service equipment 5 to 15 years

Furniture, office equipment, signs and fixtures 3 to 10 years

The cost for maintenance, repairs and minor renewals is expensed as incurred, while significant remodels and betterments are capitalized. In addition, interest on borrowings for major capital projects, significant remodels, and betterments is capitalized. Capitalized interest becomes a part of the cost of the depreciable asset and is depreciated according to the estimated useful lives as previously stated. For the years ended December 31, 2021, 2020 and 2019, we recorded capitalized interest of $2.0 million, $1.6 million and $2.3 million, respectively.

When an asset is retired, or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is credited or charged to income from operations.

Leased property meeting certain criteria are recorded as finance leases. We have finance leases for certain locations, expiring at various dates through August 1, 2037. Our finance lease right-of-use assets are included in property and equipment on our Consolidated Balance Sheets. Amortization of finance lease right-of-use assets is computed on a straight-line basis over the term of the lease, unless the lease transfers title or it contains a bargain purchase option, in which case, it is amortized over the asset’s useful life and is included in depreciation expense. Finance lease liabilities are recorded as the lesser of the estimated fair market value of the leased property or the net present value of the aggregated future minimum payments and are included in current maturities of long-term debt and long-term debt on our Consolidated Balance Sheets. Interest associated with these obligations is included in other interest expense in the Consolidated Statements of Operations. See Note 7 and Note 11.

Long-lived assets held and used by us are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. We consider several factors when evaluating whether there are indications of potential impairment related to our long-lived assets, including store profitability, overall macroeconomic factors and the impact of our strategic management decisions. If recoverability testing is performed, we evaluate assets to be held and used by comparing the carrying amount of an asset to future net undiscounted cash flows associated with the asset, including its disposition. If such assets are considered to be impaired, the amount by which the carrying amount of the assets exceeds the fair value of the assets is recognized as a charge to income from operations. See Note 4.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets acquired which is not allocable to separately identifiable intangible assets. Other identifiable intangible assets, such as franchise rights, are separately recognized if the intangible asset is obtained through contractual or other legal right or if the intangible asset can be sold, transferred, licensed or exchanged.

NOTES TO FINANCIAL STATEMENTS F-12

Goodwill is not amortized but tested for impairment at least annually, and more frequently if events or circumstances indicate the carrying amount of the reporting unit more likely than not exceeds fair value. We have the option to qualitatively or quantitatively assess goodwill for impairment, and we evaluated our goodwill using a qualitative assessment process. Goodwill is tested for impairment at the reporting unit level. Our reporting units are individual stores as this is the level at which discrete financial information is available and for which operating results are regularly reviewed by our chief operating decision maker to allocate resources and assess performance.

We test our goodwill for impairment on October 1 of each year. In 2021, 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. See Note 5 and Note 13.

Franchise Value

We enter into agreements (Franchise Agreements) with our manufacturers. Franchise value represents a right received under Franchise Agreements with manufacturers and is identified on an individual store basis.

We evaluated the useful lives of our Franchise Agreements based on the following factors:

•certain of our Franchise Agreements continue indefinitely by their terms;

•certain of our Franchise Agreements have limited terms, but are routinely renewed without substantial cost to us;