XNYS:PAG Penske Automotive Group Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

XNYS:PAG Fair Value Estimate
Premium
XNYS:PAG Consider Buying
Premium
XNYS:PAG Consider Selling
Premium
XNYS:PAG Fair Value Uncertainty
Premium
XNYS:PAG Economic Moat
Premium
XNYS:PAG Stewardship
Premium
 
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to             

Commission file number 1-12297

 

 

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   22-3086739
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
2555 Telegraph Road,  
Bloomfield Hills, Michigan   48302-0954
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(248) 648-2500

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of July 22, 2012, there were 90,266,664 shares of voting common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Condensed Balance Sheets as of June 30, 2012 and December 31, 2011

     3   

Consolidated Condensed Statements of Income for the three and six months ended June 30, 2012 and 2011

     4   

Consolidated Condensed Statements of Comprehensive Income for the three and six months ended June  30, 2012 and 2011

     5   

Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2012 and 2011

     6   

Consolidated Condensed Statement of Equity for the six months ended June 30, 2012

     7   

Notes to Consolidated Condensed Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 3. Quantitative & Qualitative Disclosures About Market Risk

     42   

Item 4. Controls and Procedures

     43   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     43   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 6. Exhibits

     44   

 

2


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

     June 30,
2012
    December 31,
2011
 
    

(Unaudited)

(In thousands, except
per share amounts)

 

ASSETS

    

Cash and cash equivalents

   $ 37,219      $ 28,676   

Accounts receivable, net of allowance for doubtful accounts of $2,227 and $2,159

     464,424        438,769   

Inventories

     1,830,841        1,572,568   

Other current assets

     91,963        80,179   

Assets held for sale

     39,059        81,122   
  

 

 

   

 

 

 

Total current assets

     2,463,506        2,201,314   

Property and equipment, net

     925,054        856,674   

Goodwill

     940,596        903,721   

Franchise value

     252,813        228,460   

Equity method investments

     296,627        298,640   

Other long-term assets

     14,269        13,490   
  

 

 

   

 

 

 

Total assets

   $ 4,892,865      $ 4,502,299   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Floor plan notes payable

   $ 1,158,252      $ 977,548   

Floor plan notes payable — non-trade

     724,687        691,888   

Accounts payable

     310,686        220,538   

Accrued expenses

     258,726        201,179   

Current portion of long-term debt

     13,139        3,414   

Liabilities held for sale

     34,149        55,820   
  

 

 

   

 

 

 

Total current liabilities

     2,499,639        2,150,387   

Long-term debt

     793,603        846,777   

Deferred tax liabilities

     223,485        217,902   

Other long-term liabilities

     164,893        146,820   
  

 

 

   

 

 

 

Total liabilities

     3,681,620        3,361,886   

Commitments and contingent liabilities

    

Equity

    

Penske Automotive Group stockholders’ equity:

    

Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding

     —          —     

Common Stock, $0.0001 par value, 240,000 shares authorized; 90,267 shares issued and outstanding at June 30, 2012; 90,277 shares issued and outstanding at December 31, 2011

     9        9   

Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding

     —          —     

Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding

     —          —     

Additional paid-in-capital

     696,694        702,335   

Retained earnings

     536,367        459,375   

Accumulated other comprehensive loss

     (25,929     (25,734
  

 

 

   

 

 

 

Total Penske Automotive Group stockholders’ equity

     1,207,141        1,135,985   

Non-controlling interest

     4,104        4,428   
  

 

 

   

 

 

 

Total equity

     1,211,245        1,140,413   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,892,865      $ 4,502,299   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

3


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  
     (Unaudited)  
     (In thousands, except per share amounts)  

Revenue:

        

New vehicle

   $ 1,729,167      $ 1,399,456      $ 3,303,367      $ 2,778,015   

Used vehicle

     964,511        855,598        1,931,147        1,643,604   

Finance and insurance, net

     82,682        69,004        162,486        135,349   

Service and parts

     368,797        339,636        737,090        679,688   

Fleet and wholesale vehicle

     227,322        166,292        471,132        331,463   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     3,372,479        2,829,986        6,605,222        5,568,119   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost of sales:

        

New vehicle

     1,590,303        1,280,297        3,032,731        2,549,647   

Used vehicle

     890,411        784,366        1,778,942        1,507,605   

Service and parts

     152,846        145,038        308,678        290,963   

Fleet and wholesale

     225,515        164,325        466,293        326,483   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of sales

     2,859,075        2,374,026        5,586,644        4,674,698   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     513,404        455,960        1,018,578        893,421   

Selling, general and administrative expenses

     409,452        374,325        806,799        728,349   

Depreciation

     13,651        11,926        26,976        23,705   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     90,301        69,709        184,803        141,367   

Floor plan interest expense

     (9,971     (6,921     (19,620     (13,780

Other interest expense

     (11,575     (10,451     (23,785     (21,736

Debt discount amortization

     —          —          —          (1,718

Equity in earnings of affiliates

     8,168        7,882        12,578        7,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     76,923        60,219        153,976        112,037   

Income taxes

     (26,854     (20,505     (53,744     (36,043
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     50,069        39,714        100,232        75,994   

Income (Loss) from discontinued operations, net of tax

     (457     345        (3,614     (1,938
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     49,612        40,059        96,618        74,056   

Less: Income attributable to non-controlling interests

     520        499        708        569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to
Penske Automotive Group common stockholders

   $ 49,092      $ 39,560      $ 95,910      $ 73,487   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per share attributable to
Penske Automotive Group common stockholders:

        

Continuing operations

   $ 0.55      $ 0.42      $ 1.10      $ 0.82   

Discontinued operations

     (0.01     0.00        (0.04     (0.02

Net income attributable to
Penske Automotive Group common stockholders

   $ 0.54      $ 0.43      $ 1.06      $ 0.79   

Shares used in determining basic earnings per share

     90,305        92,514        90,363        92,444   

Diluted earnings per share attributable to
Penske Automotive Group common stockholders:

        

Continuing operations

   $ 0.55      $ 0.42      $ 1.10      $ 0.82   

Discontinued operations

     (0.01     0.00        (0.04     (0.02

Net income attributable to
Penske Automotive Group common stockholders

   $ 0.54      $ 0.43      $ 1.06      $ 0.79   

Shares used in determining diluted earnings per share

     90,337        92,570        90,395        92,514   

Amounts attributable to
Penske Automotive Group common stockholders:

        

Income from continuing operations

   $ 50,069      $ 39,714      $ 100,232      $ 75,994   

Less: Income attributable to non-controlling interests

     520        499        708        569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, net of tax

     49,549        39,215        99,524        75,425   

Income (Loss) from discontinued operations, net of tax

     (457     345        (3,614     (1,938
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to
Penske Automotive Group common stockholders

   $ 49,092      $ 39,560      $ 95,910      $ 73,487   

See Notes to Consolidated Condensed Financial Statements

 

4


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  
     (Unaudited)              
     (In thousands, except per share amounts)              

Net Income

   $ 49,612      $ 40,059      $ 96,618      $ 74,056   

Other Comprehensive Income:

        

Foreign currency translation adjustment

     (11,415     2,882        (1,489     19,734   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain (loss) on interest rate swaps:

        

Unrealized gain(loss) arising during the period, net of tax benefit(provision) of $701, $2,614, $1,524, and $2,476, respectively

     (1,072     (3,996     (2,329     (3,784

Reclassification adjustment for loss included in floor plan interest expense, net of tax provision of $692, $0, $1,361, and $46, respectively

     1,057        —          2,080        70   
  

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gain (loss) on interest rate swaps, net of tax

     (15     (3,996     (249     (3,714
  

 

 

   

 

 

   

 

 

   

 

 

 

Other adjustments to Comprehensive Income, net

     534        (363     1,543        (975
  

 

 

   

 

 

   

 

 

   

 

 

 

Other Comprehensive Income (loss), Net of Taxes

     (10,896     (1,477     (195     15,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive Income

     38,716        38,582        96,423        89,101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Net income attributable to non-controlling interest

     520        499        708        569   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 38,196      $ 38,083      $ 95,715      $ 88,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

5


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

     Six Months Ended  
     June 30,  
     2012     2011  
     (Unaudited)  
     (In thousands)  

Operating Activities:

    

Net income

   $ 96,618      $ 74,056   

Adjustments to reconcile net income to net cash from continuing operating activities:

    

Depreciation

     26,976        23,705   

Debt discount amortization

     —          1,718   

Earnings of equity method investments

     (12,578     (7,904

Loss from discontinued operations, net of tax

     3,614        1,938   

Deferred income taxes

     7,793        12,888   

Changes in operating assets and liabilities:

    

Accounts receivable

     (8,893     20,147   

Inventories

     (178,269     10,196   

Floor plan notes payable

     180,651        (73,075

Accounts payable and accrued expenses

     96,256        (10,209

Other

     (7,982     (11,799
  

 

 

   

 

 

 

Net cash from continuing operating activities

     204,186        41,661   
  

 

 

   

 

 

 

Investing Activities:

    

Purchase of equipment and improvements

     (57,092     (51,435

Dealership acquisitions net, including repayment of sellers’ floor plan notes payable of $37,779 and $5,862, respectively

     (111,522     (14,011

Other

     (3,653     2,865   
  

 

 

   

 

 

 

Net cash from continuing investing activities

     (172,267     (62,581
  

 

 

   

 

 

 

Financing Activities:

    

Proceeds from borrowings under U.S. credit agreement revolving credit line

     396,800        156,000   

Repayments under U.S. credit agreement revolving credit line

     (414,800     (156,000

Repurchase of 3.5% senior subordinated convertible notes

     (37,778     (87,278

Net borrowings of other long-term debt

     11,573        13,602   

Net borrowings of floor plan notes payable — non-trade

     32,799        70,084   

Repurchases of common stock

     (9,829     (12,413

Dividends

     (18,918     (6,493

Proceeds from exercises of options, including excess tax benefit

     —          2,698   
  

 

 

   

 

 

 

Net cash from continuing financing activities

     (40,153     (19,800
  

 

 

   

 

 

 

Discontinued operations:

    

Net cash from discontinued operating activities

     (5,750     (25,008

Net cash from discontinued investing activities

     34,726        47,327   

Net cash from discontinued financing activities

     (12,199     5,877   
  

 

 

   

 

 

 

Net cash from discontinued operations

     16,777        28,196   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     8,543        (12,524

Cash and cash equivalents, beginning of period

     28,676        19,904   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 37,219      $ 7,380   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for:

    

Interest

   $ 48,984      $ 37,752   

Income taxes

     19,180        23,442   

Seller financed/assumed debt

     —          4,865   

See Notes to Consolidated Condensed Financial Statements

 

6


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

 

     Common Stock     Additional          

Accumulated

Other

   

Total

Penske Automotive

             
     Issued
Shares
    Amount     Paid-in
Capital
    Retained
Earnings
    Comprehensive
Income (Loss)
    Group Stockholders’
Equity
    Non-controlling
Interest
    Total
Equity
 
    (Unaudited)  
    (Dollars in thousands)  

Balance, January 1, 2012

    90,277,356      $ 9      $ 702,335      $ 459,375      $ (25,734   $ 1,135,985      $ 4,428      $ 1,140,413   

Equity compensation

    394,939        —          3,307        —          —          3,307        —          3,307   

Distributions to non-controlling interests

    —          —          —          —          —          —          (1,154     (1,154

Sale of subsidiary shares to non-controlling interest

    —          —          317        —          —          317        122        439   

Foreign currency translation

    —          —          —          —          (1,489     (1,489     —          (1,489

Repurchase of common stock

    (405,631       (9,829       —          (9,829     —          (9,829

Dividends

    —          —          —          (18,918     —          (18,918     —          (18,918

Convertible debt redemption

    —          —          564        —            564        —          564   

Other

            1,294        1,294          1,294   

Net income

    —          —          —          95,910        —          95,910        708        96,618   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

    90,266,664      $ 9      $ 696,694      $ 536,367      $ (25,929   $ 1,207,141      $ 4,104      $ 1,211,245   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

7


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

1. Interim Financial Statements

Business Overview

Penske Automotive Group, Inc. (the “Company”) is the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of June 30, 2012, the Company operated 338 retail franchises, of which 170 franchises are located in the U.S. and 168 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. Each of the Company’s dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, the Company generates higher-margin revenue at each of its dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products. The Company also holds a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading transportation services provider.

During the six months ended June 30, 2012, the Company acquired the Agnew Group in the United Kingdom, representing fourteen franchises, and two other franchises. The Company also was awarded seven franchises representing seven different brands, including Mini of Marin (California) and Nissan and Infiniti San Francisco. The Company disposed of six franchises representing six different brands, including Jaguar and Land Rover in Gatwick (U.K.) and Scottsdale Lexus.

In the second quarter of 2012, the Company acquired a 7% interest in NPA Holdco, LLC, an auctioneer of powersport vehicles, for $3,000. During the second quarter of 2012, Transportation Resource Partners, a related party, acquired a controlling interest in this company on the same financial terms as our investment.

Basis of Presentation

The following unaudited consolidated condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of June 30, 2012 and December 31, 2011 and for the three and six month periods ended June 30, 2012 and 2011 is unaudited, but includes all adjustments which the management of the Company believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for prior periods have been revised for entities which have been treated as discontinued operations through June 30, 2012, and the results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011, which are included as part of the Company’s Annual Report on Form 10-K.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. The Company adopted the standard on January 1, 2012. Adoption of ASU No. 2011-04 did not affect the Company’s consolidated financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income”, which requires the presentation of components of other comprehensive income with the components of net income. The Company adopted the standard on January 1, 2012. Adoption of ASU No. 2011-05 did not affect the Company’s consolidated financial position, results of operations, or cash flows.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 will require disclosure of the effect or potential effect of offsetting arrangements on the Company’s financial position as well as enhanced disclosure of the rights of setoff associated with the Company’s recognized assets and recognized liabilities. ASU No. 2011-11 is effective for periods beginning on or after January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption will not affect the Company’s consolidated financial position, results of operations, or cash flows.

 

8


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Discontinued Operations

The Company accounts for dispositions in its retail operations as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations.

In evaluating whether the cash flows of a dealership in its Retail reportable segment will be eliminated from ongoing operations, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at other dealerships it operates in the market and their proximity to the disposed dealership. When the Company disposes of franchises, it typically does not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of Company owned dealerships, the Company does not treat the disposition as a discontinued operation if it believes that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

Combined financial information regarding entities accounted for as discontinued operations follows:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012     2011      2012     2011  

Revenues

   $ 43,542      $ 132,377       $ 99,029      $ 274,742   

Pre-tax income (loss)

     (760     19         (12,188     (4,795

Gain on disposal

     —          695         10,160        1,765   

 

     June 30,      December 31,  
     2012      2011  

Inventories

   $ 27,053       $ 48,203   

Other assets

     12,006         32,919   
  

 

 

    

 

 

 

Total assets

   $ 39,059       $ 81,122   
  

 

 

    

 

 

 

Floor plan notes payable (including non-trade)

   $ 27,294       $ 44,869   

Other liabilities

     6,855         10,951   
  

 

 

    

 

 

 

Total liabilities

   $ 34,149       $ 55,820   
  

 

 

    

 

 

 

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets and certain reserves.

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, floor plan notes payable, and interest rate swaps used to hedge future cash flows. Other than our subordinated notes, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting. The Company’s 7.75% senior subordinated notes due in 2016 had a carrying value of $375,000 and a fair value of $388,125 as of June 30, 2012. The calculation of the senior subordinated notes fair value was based on quoted, level one market data.

 

9


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

2. Inventories

Inventories consisted of the following:

 

     June 30,      December 31,  
     2012      2011  

New vehicles

   $ 1,234,036       $ 1,051,120   

Used vehicles

     513,331         441,655   

Parts, accessories and other

     83,474         79,793   
  

 

 

    

 

 

 

Total inventories

   $ 1,830,841       $ 1,572,568   
  

 

 

    

 

 

 

The Company receives credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $15,326 and $14,474 during the six months ended June 30, 2012 and 2011, respectively.

3. Business Combinations

The Company acquired sixteen and three franchises during the six months ended June 30, 2012 and 2011, respectively, in its retail operations. The Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in the Company’s consolidated condensed financial statements, and may be subject to adjustment pending completion of final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the six months ended June 30, 2012 and 2011 follows:

 

     June 30,  
     2012     2011  

Accounts receivable

   $ 17,025      $ 953   

Inventory

     80,766        7,923   

Property and equipment

     32,599        1,671   

Goodwill

     33,884        7,038   

Franchise Value

     23,426        —     

Other assets

     —          628   

Current liabilities

     (49,362     (2,491

Non-current liabilities

     (26,816     —     
  

 

 

   

 

 

 

Total consideration

     111,522        15,722   

Seller financed/assumed debt

     —          (1,711
  

 

 

   

 

 

 

Cash used in dealership acquisitions

   $ 111,522      $ 14,011   
  

 

 

   

 

 

 

The following unaudited consolidated pro forma results of operations of the Company for the three and six months ended June 30, 2012 and 2011 give effect to acquisitions consummated during 2012 and 2011 as if they had occurred on January 1, 2011:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
     2012      2011      2012      2011  
     (amounts in millions except per share data)  

Revenues

   $ 3,373       $ 2,984       $ 6,621       $ 5,879   

Income from continuing operations

     50         41         100         80   

Net income

     49         41         96         78   

Income from continuing operations per diluted common share

   $ 0.55       $ 0.44       $ 1.10       $ 0.86   

Net income per diluted common share

   $ 0.54       $ 0.44       $ 1.06       $ 0.84   

 

10


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

4. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the six months ended June 30, 2012:

 

     Goodwill      Franchise
Value
 

Balance, January 1, 2012

   $ 903,721       $ 228,460   

Additions

     33,854         23,426   

Foreign currency translation

     3,021         927   
  

 

 

    

 

 

 

Balance, June 30, 2012

   $ 940,596       $ 252,813   
  

 

 

    

 

 

 

5. Floor Plan Notes Payable — Trade and Non-trade

The Company finances substantially all of its new and a portion of its used vehicle inventories under revolving floor plan arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. In the U.S., substantially all of our floor plan arrangements are due on demand; however, the Company has not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. The Company typically makes monthly interest payments on the amount financed. Outside of the U.S., substantially all of the floor plan arrangements are payable on demand or have an original maturity of 90 days or less and the Company is generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.

The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries, and in the U.S. are guaranteed by the Company. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Bank Rate, or the Euro Interbank Offer Rate. The Company classifies floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable — non-trade on its consolidated condensed balance sheets and classifies related cash flows as a financing activity on its consolidated condensed statements of cash flows.

6. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, adjusted for any dilutive effects. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2012 and 2011 follows:

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Weighted average number of common shares outstanding

     90,305         92,514         90,363         92,444   

Effect of non-participatory equity compensation

     32         56         32         70   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding, including effect of dilutive securities

     90,337         92,570         90,395         92,514   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

7. Long-Term Debt

Long-term debt consisted of the following:

 

     June 30,     December 31,  
     2012     2011  

U.S. credit agreement — revolving credit line

   $ 114,000      $ 132,000   

U.S. credit agreement — term loan

     127,000        127,000   

U.K. credit agreement — revolving credit line

     42,401        59,060   

U.K. credit agreement — term loan

     42,401        —     

U.K. credit agreement — overdraft line of credit

     —          13,333   

7.75% senior subordinated notes due 2016

     375,000        375,000   

3.5% senior subordinated convertible notes due 2026, net of debt discount

     25,546        63,324   

Mortgage facilities

     74,131        75,684   

Other

     6,263        4,790   
  

 

 

   

 

 

 

Total long-term debt

     806,742        850,191   

Less: current portion

     (13,139     (3,414
  

 

 

   

 

 

 

Net long-term debt

   $ 793,603      $ 846,777   
  

 

 

   

 

 

 

U.S. Credit Agreement

The Company is party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up to $375,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $127,000, and for an additional $10,000 of availability for letters of credit, through September 2014. The revolving loans bear interest at a defined LIBOR plus 2.50%, subject to an incremental 1.00% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be re-borrowed.

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. The Company is also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of June 30, 2012, the Company was in compliance with all covenants under the U.S. Credit Agreement.

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to the Company’s other material indebtedness. Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of June 30, 2012, $127,000 of term loans, $500 of letters of credit and $114,000 of revolver borrowings were outstanding under the U.S. Credit Agreement.

U.K. Credit Agreement

The Company’s subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a £100,000 revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10,000 demand overdraft line of credit with RBS (collectively, the “U.K. credit agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of June 30, 2012, outstanding loans under the U.K. credit agreement amounted to £27,000 ($42,401).

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of any amounts owed. As of June 30, 2012, the Company’s U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement.

 

12


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of the Company’s U.K. subsidiaries’ assets are subject to security interests granted to lenders under the U.K. credit agreement.

In January 2012, the Company’s U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30,000 term loan which was used for working capital and an acquisition. The term loan is repayable in £1,500 quarterly installments through 2015 with a final payment of £7,500 due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries’ ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of June 30, 2012, the amount outstanding under the U.K. term loan was £27,000 ($42,401).

7.75% Senior Subordinated Notes

In December 2006, the Company issued $375,000 aggregate principal amount of 7.75% senior subordinated notes (the “7.75% Notes”) due 2016. The 7.75% Notes are unsecured senior subordinated notes and are subordinate to all existing and future senior debt, including debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The 7.75% Notes are guaranteed by substantially all of the Company’s wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. The Company can redeem all or some of the 7.75% Notes at its option at specified redemption prices (currently 103.875% of the principal amount of the notes). Upon certain sales of assets or specific kinds of changes of control the Company is required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of June 30, 2012, the Company was in compliance with all negative covenants and there were no events of default.

Senior Subordinated Convertible Notes

On May 25, 2012, the Company provided notice to holders of the Notes that the Company was exercising the Company’s right to redeem the Notes at a price of 100% of the principal amount outstanding plus accrued and unpaid interest to, but excluding June 25, 2012. In lieu of surrendering the notes for redemption, Note holders could elect to convert the Notes at any time prior to the close of business on June 21, 2012 based on a conversion rate of 42.7796 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share).

Upon conversion of the Convertible Notes, for each $1,000 Note, a holder was entitled to receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture covering the Convertible Notes. To the extent the conversion value exceeded $1,000, the Company was required to also deliver, cash, common stock or a combination of cash and common stock with respect to the value in excess of $1,000.

Holders of $25,546 outstanding principal amount of Convertible Notes elected to convert their Notes. The Company settled the principal and interest due on the remaining $37,778 on June 25, 2012. In July, the Company paid the converting holders the conversion balance due of $24,909 in cash. Following this payment, the Company had fulfilled all of its obligations under the Convertible Notes.

Mortgage Facilities

The Company is party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to the Company’s other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of June 30, 2012, the Company owed $74,131 of principal under our mortgage facilities.

 

13


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

8. Interest Rate Swaps

The Company periodically uses interest rate swaps to manage interest rate risk associated with the Company’s variable rate floor plan debt. The Company is party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt is fixed at 2.135% and $100,000 of the Company’s floating rate floor plan debt is fixed at a rate of 1.55%. The Company may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

Through January 2011, the Company was party to interest rate swap agreements pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt was fixed at 3.67%.

The Company used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of June 30, 2012 and December 31, 2011, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $16,346 and $15,952, respectively.

During the three and six months ended June 30, 2012 and 2011, there was no hedge ineffectiveness recorded on the Company’s income statement. During the three and six months ended June 30, 2012, the swaps increased the weighted average interest rate on the Company’s floor plan borrowings by approximately 39 and 40 basis points, respectively. The impact of the swaps on the weighted average interest rate of the Company’s floor plan borrowings during the three and six months ended June 30, 2011, was insignificant.

9. Commitments and Contingent Liabilities

The Company is involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of June 30, 2012, the Company is not party to any legal proceedings, including class action lawsuits, that individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

The Company has historically structured its operations so as to minimize ownership of real property. As a result, the Company leases or subleases substantially all of its facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at the Company’s election. Pursuant to the leases for some of the Company’s larger facilities, the Company is required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require the Company to post collateral in the form of a letter of credit. A breach of the other lease covenants gives rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of June 30, 2012, the Company was in compliance with all covenants under these leases.

The Company has sold a number of dealerships to third parties and, as a condition to certain of those sales, remains liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. The Company is also party to lease agreements on properties that it no longer uses in its retail operations that it has sublet to third parties. The Company relies on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, the Company may not be able to recover amounts owed to it and the Company could be required to fulfill these obligations.

The Company holds a 9.0% limited partnership interest in PTL. During 2012, PTL has refinanced a significant amount of its indebtedness. As part of that refinancing, the Company and the other PTL partners created a new company (“Holdings”), which, together with General Electric Capital Corporation (“GECC”), co-issued $700,000 of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700,000 derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700,000 of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.

Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, the Company has agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $950 for acting as co-obligor. The maximum amount of the Company’s potential obligations to GECC under this agreement are 9% of the required principal repayment due in 2019 (which is expected to be $63,100) and 9% of interest payments under the Holdings Bonds, plus fees and default interest, if any.

 

14


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

The Company has $18,997 of letters of credit outstanding as of June 30, 2012, and has posted $13,699 of surety bonds in the ordinary course of business.

10. Equity

Share Repurchase

During the six months ended June 30, 2012, the Company repurchased 350,000 shares of its outstanding common stock for $8,522, or an average of $24.35 per share, under a program approved by the Company’s Board of Directors. During the second quarter of 2012, the Company acquired an additional 55,631 shares of its common stock for $1,307, or an average of $23.49 per share, from employees in connection with vesting of employee restricted stock awards.

11. Segment Information

The Company’s operations are organized by management into operating segments by line of business and geography. The Company has determined it has two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of the Company’s automotive retail operations and (ii) PAG Investments, consisting of the Company’s investments in businesses other than automotive retail operations. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and the retail automotive joint ventures. The individual dealership operations included in the Retail reportable segment have been grouped into four geographic operating segments, which have been aggregated into one reportable segment as their operations (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions).

Three Months Ended June 30

 

     Retail      PAG
Investments
     Total  

Revenues

        

2012

   $ 3,372,479       $ —         $ 3,372,479   

2011

     2,829,986         —           2,829,986   

Segment income

        

2012

     69,722         7,201         76,923   

2011

     53,951         6,268         60,219   

Six Months Ended June 30

 

     Retail      PAG
Investments
     Total  

Revenues

        

2012

   $ 6,605,222       $ —         $ 6,605,222   

2011

     5,568,119         —           5,568,119   

Segment income

        

2012

     142,941         11,035         153,976   

2011

     104,645         7,392         112,037   

 

15


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

12. Consolidating Condensed Financial Information

The following tables include condensed consolidating financial information as of June 30, 2012 and December 31, 2011 and for the three and six month periods ended June 30, 2012 and 2011 for Penske Automotive Group, Inc. (as the issuer of the 7.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis.

CONDENSED CONSOLIDATING BALANCE SHEET

June 30, 2012

 

     Total
Company
     Eliminations     Penske
Automotive
Group
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
 
     (In thousands)  

Cash and cash equivalents

   $ 37,219       $ —        $ —         $ 18,029       $ 19,190   

Accounts receivable, net

     464,424         (324,158     324,158         261,705         202,719   

Inventories

     1,830,841         —          —           1,063,722         767,119   

Other current assets

     91,963         —          4,248         41,075         46,640   

Assets held for sale

     39,059         —          —           12,966         26,093   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current assets

     2,463,506         (324,158     328,406         1,397,497         1,061,761   

Property and equipment, net

     925,054         —          4,843         576,715         343,496   

Intangible assets

     1,193,409         —          —           705,851         487,558   

Equity method investments

     296,627         —          247,401         —           49,226   

Other long-term assets

     14,269         (1,384,066     1,394,431         2,205         1,699   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,892,865       $ (1,708,224   $ 1,975,081       $ 2,682,268       $ 1,943,740   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Floor plan notes payable

   $ 1,158,252       $ —        $ —         $ 664,954       $ 493,298   

Floor plan notes payable — non-trade

     724,687         —          119,600         355,127         249,960   

Accounts payable

     310,686         —          2,224         105,852         202,610   

Accrued expenses

     258,726         (324,158     466         154,353         428,065   

Current portion of long-term debt

     13,139         —          —           3,717         9,422   

Liabilities held for sale

     34,149         —          —           9,551         24,598   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current liabilities

     2,499,639         (324,158     122,290         1,293,554         1,407,953   

Long-term debt

     793,603         (40,683     641,546         75,791         116,949   

Deferred tax liabilities

     223,485         —          —           196,834         26,651   

Other long-term liabilities

     164,893         —          —           94,720         70,173   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

     3,681,620         (364,841     763,836         1,660,899         1,621,726   

Total equity

     1,211,245         (1,343,383     1,211,245         1,021,369         322,014   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 4,892,865       $ (1,708,224   $ 1,975,081       $ 2,682,268       $ 1,943,740   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

16


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

 

     Total
Company
     Eliminations     Penske
Automotive
Group
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
 
     (In thousands)  

Cash and cash equivalents

   $ 28,676       $ —        $ —         $ 27,249       $ 1,427   

Accounts receivable, net

     438,769         (297,782     305,386         281,689         149,476   

Inventories

     1,572,568         —          —           894,246         678,322   

Other current assets

     80,179         —          2,306         40,321         37,552   

Assets held for sale

     81,122         —          —           36,642         44,480   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current assets

     2,201,314         (297,782     307,692         1,280,147         911,257   

Property and equipment, net

     856,674         —          6,730         547,731         302,213   

Intangible assets

     1,132,181         —          —           699,453         432,728   

Equity method investments

     298,640         —          246,658         —           51,982   

Other long-term assets

     13,490         (1,360,808     1,369,182         3,381         1,735   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,502,299       $ (1,658,590   $ 1,930,262       $ 2,530,712       $ 1,699,915   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Floor plan notes payable

   $ 977,548       $ —        $ —         $ 560,999       $ 416,549   

Floor plan notes payable — non-trade

     691,888         —          90,892         335,621         265,375   

Accounts payable

     220,538         —          1,633         112,805         106,100   

Accrued expenses

     201,179         (297,782     —           99,092         399,869   

Current portion of long-term debt

     3,414         —          —           3,414         —     

Liabilities held for sale

     55,820         —          —           17,818         38,002   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current liabilities

     2,150,387         (297,782     92,525         1,129,749         1,225,895   

Long-term debt

     846,777         (38,073     697,324         77,060         110,466   

Deferred tax liabilities

     217,902         —          —           198,348         19,554   

Other long-term liabilities

     146,820         —          —           92,613         54,207   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

     3,361,886         (335,855     789,849         1,497,770         1,410,122   

Total equity

     1,140,413         (1,322,735     1,140,413         1,032,942         289,793   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 4,502,299       $ (1,658,590   $ 1,930,262       $ 2,530,712       $ 1,699,915   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2012

 

     Total
Company
    Eliminations     Penske
Automotive
Group
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
     (In thousands)  

Revenues

   $ 3,372,479      $ —        $ —        $ 2,011,105      $ 1,361,374   

Cost of sales

     2,859,075        —          —          1,689,639        1,169,436   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     513,404        —          —          321,466        191,938   

Selling, general and administrative expenses

     409,452        —          4,740        248,711        156,001   

Depreciation

     13,651        —          246        7,475        5,930   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     90,301        —          (4,986     65,280        30,007   

Floor plan interest expense

     (9,971     —          (2,254     (4,199     (3,518

Other interest expense

     (11,575     —          (7,079     (603     (3,893

Equity in earnings of affiliates

     8,168          6,994        (40     1,214   

Equity in earnings of subsidiaries

     —          (83,728     83,728        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     76,923        (83,728     76,403        60,438        23,810   

Income taxes

     (26,854     29,429        (26,854     (23,231     (6,198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     50,069        (54,299     49,549        37,207        17,612   

(Loss) income from discontinued operations, net of tax

     (457     457        (457     (392     (65
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     49,612        (53,842     49,092        36,815        17,547   

Less: Income attributable to the non-controlling interests

     520        —          —          —          520   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Penske Automotive Group common stockholders

     49,092        (53,842     49,092        36,815        17,027   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (10,896     —          534        (15     (11,415
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 38,196      $ (53,842   $ 49,626      $ 36,800      $ 5,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended June 30, 2011

 

     Total
Company
    Eliminations     Penske
Automotive
Group
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
     (In thousands)  

Revenues

   $ 2,829,986      $ —        $ —        $ 1,645,845      $ 1,184,141   

Cost of sales

     2,374,026        —          —          1,359,571        1,014,455   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     455,960        —          —          286,274        169,686   

Selling, general and administrative expenses

     374,325        —          4,790        232,576        136,959   

Depreciation

     11,926        —          257        6,572        5,097   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     69,709        —          (5,047     47,126        27,630   

Floor plan interest expense

     (6,921     —          (329     (3,348     (3,244

Other interest expense

     (10,451     —          (5,818     (598     (4,035

Equity in earnings (losses) of affiliates

     7,882        —          6,121        —          1,761   

Equity in earnings of subsidiaries

     —          (64,793     64,793        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     60,219        (64,793     59,720        43,180        22,112   

Income taxes

     (20,505     22,247        (20,505     (15,851     (6,396
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     39,714        (42,546     39,215        27,329        15,716   

(Loss) income from discontinued operations, net of tax

     345        (345     345        380        (35
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     40,059        (42,891     39,560        27,709        15,681   

Less: Income attributable to the non-controlling interests

     499        —          —          —          499   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Penske Automotive Group common stockholders

     39,560        (42,891     39,560        27,709        15,182   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (1,477     —          (318     (3,996     2,837   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 38,083      $ (42,891   $ 39,242      $ 23,713      $ 18,019   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2012

 

     Total
Company
    Eliminations     Penske
Automotive
Group
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
     (In thousands)  

Revenues

   $ 6,605,222      $ —        $ —        $ 3,844,225      $ 2,760,997   

Cost of sales

     5,586,644        —          —          3,226,744        2,359,900   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     1,018,578        —          —          617,481        401,097   

Selling, general and administrative expenses

     806,799        —          9,335        487,120        310,344   

Depreciation

     26,976        —          608        14,597        11,771   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     184,803        —          (9,943     115,764        78,982   

Floor plan interest expense

     (19,620     —          (4,452     (7,989     (7,179

Other interest expense

     (23,785     —          (14,642     (1,513     (7,630

Equity in earnings (losses) of affiliates

     12,578        —          10,754        (40     1,864   

Equity in earnings of subsidiaries

     —          (171,551     171,551        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     153,976        (171,551     153,268        106,222        66,037   

Income taxes

     (53,744     60,155        (53,744     (43,778     (16,377
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     100,232        (111,396     99,524        62,444        49,660   

(Loss) income from discontinued operations, net of tax

     (3,614     3,614        (3,614     (1,997     (1,617
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     96,618        (107,782     95,910        60,447        48,043   

Less: Income attributable to the non-controlling interests

     708        —          —          —          708   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Penske Automotive Group common stockholders

     95,910        (107,782     95,910        60,447        47,335   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (195     —          1,543        (249     (1,489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 95,715      $ (107,782   $ 97,453      $ 60,198      $ 45,846   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Six Months Ended June 30, 2011

 

     Total
Company
    Eliminations     Penske
Automotive
Group
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
     (In thousands)  

Revenues

   $ 5,568,119      $ —        $ —        $ 3,197,904      $ 2,370,215   

Cost of sales

     4,674,698        —          —          2,653,800        2,020,898   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     893,421        —          —          544,104        349,317   

Selling, general and administrative expenses

     728,349        —          9,739        445,788        272,822   

Depreciation

     23,705        —          542        12,795        10,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     141,367        —          (10,281     85,521        66,127   

Floor plan interest expense

     (13,780     —          (462     (7,220     (6,098

Other interest expense

     (21,736     —          (12,234     (1,249     (8,253

Debt discount amortization

     (1,718     —          (1,718     —          —     

Equity in earnings (losses) of affiliates

     7,904        —          7,352        —          552   

Equity in earnings of subsidiaries

     —          (128,811     128,811        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     112,037        (128,811     111,468        77,052        52,328   

Income taxes

     (36,043     41,651        (36,043     (26,785     (14,866
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     75,994        (87,160     75,425        50,267        37,462   

(Loss) income from discontinued operations, net of tax

     (1,938     1,938        (1,938     (1,597     (341
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     74,056        (85,222     73,487        48,670        37,121   

Less: Income attributable to the non-controlling interests

     569        —          —          —          569   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Penske Automotive Group common stockholders

     73,487        (85,222     73,487        48,670        36,552   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     15,045        —          (981     (3,714     19,740   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 88,532      $ (85,222   $ 72,506      $ 44,956      $ 56,292   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2012

 

     Total
Company
    Penske
Automotive
Group
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
     (In thousands)  

Net cash from continuing operating activities

   $ 204,186      $ 56,571      $ 8,658      $ 138,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Purchase of equipment and improvements

     (57,092     (754     (44,410     (11,928

Dealership acquisitions, net

     (111,522       (3,416     (108,106

Other

     (3,653     —          (970     (2,683
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing investing activities

     (172,267     (754     (48,796     (122,717
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Repurchase of 3.5% senior subordinated convertible notes

     (37,778     (37,778    

Net borrowings (repayments) of other long-term debt

     (6,427     (18,000     (967     12,540   

Net borrowings (repayments) of floor plan notes payable — non-trade

     32,799        28,708        19,506        (15,415

Repurchase of common stock

     (9,829     (9,829     —          —     

Dividends

     (18,918     (18,918     —          —     

Distributions from (to) parent

     —          —          585        (585
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing financing activities

     (40,153     (55,817     19,124        (3,460

Net cash from discontinued operations

     16,777        —          11,794        4,983   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     8,543        —          (9,220     17,763   

Cash and cash equivalents, beginning of period

     28,676        —          27,249        1,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 37,219      $ —        $ 18,029      $ 19,190   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Six Months Ended June 30, 2011

 

          

Penske

Automotive

             
     Total       Guarantor     Non-Guarantor  
     Company     Group     Subsidiaries     Subsidiaries  
     (In thousands)  

Net cash from continuing operating activities

   $ 41,661      $ 84,594      $ 1,030      $ (43,963
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Purchase of equipment and improvements

     (51,435     (1,308     (27,786     (22,341

Dealership acquisitions, net

     (14,011     —          (12,331     (1,680

Other

     2,865        —          —          2,865   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing investing activities

     (62,581     (1,308     (40,117     (21,156
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Repurchase of 3.5% senior subordinated convertible notes

     (87,278     (87,278     —          —     

Net borrowings (repayments) of other long-term debt

     13,602        —          23,541        (9,939

Net borrowings (repayments) of floor plan notes payable — non-trade

     70,084        20,200        (23,492     73,376   

Proceeds from exercises of options, including excess tax benefit

     2,698        2,698        —          —     

Repurchase of common stock

     (12,413     (12,413     —          —     

Dividends

     (6,493     (6,493     —          —     

Distributions from (to) parent

     —          —          4,245        (4,245
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing financing activities

     (19,800     (83,286     4,294        59,192   

Net cash from discontinued operations

     28,196        —          20,011        8,185   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     (12,524     —          (14,782     2,258   

Cash and cash equivalents, beginning of period

     19,904        —          16,238        3,666   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,380      $ —        $ 1,456      $ 5,924   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

23


Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in “Forward Looking Statements.” We have acquired and initiated a number of businesses during the periods presented and addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements include the results of operations of those businesses from the date acquired or when they commenced operations. This Management’s Discussion and Analysis of Financial Condition and Results of Operations has also been updated to reflect the revision of our financial statements for entities which have been treated as discontinued operations through June 30, 2012.

Overview

We are the second largest automotive retailer headquartered in the U.S. as measured by the $11.6 billion in total revenue we generated in 2011. As of June 30, 2012, we operated 338 retail automotive franchises, of which 170 franchises are located in the U.S. and 168 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. During the six months ended June 30, 2012, we retailed and wholesaled more than 207,000 vehicles. We are diversified geographically, with 62% of our total revenues during the six months ended June 30, 2012, generated in the U.S. and Puerto Rico and 38% generated outside the U.S. We offer approximately 40 brands with 96% of our total retail revenue during the six months ended June 30, 2012, generated from brands of non-U.S. based manufacturers, and 68% generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

We also hold a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading transportation services provider. PTL leases, rents or maintains more than 200,000 vehicles and serves customers in North America, South America, Europe and Asia and is one of the largest purchasers of commercial trucks in North America through its approximately 1,000 corporate and 1,900 agent locations. Product lines include full-service leasing, contract maintenance, commercial and consumer truck rentals, used truck sales, transportation and warehousing management and supply chain management solutions. The general partner of PTL is Penske Truck Leasing Corporation, a wholly-owned subsidiary of Penske Corporation, which, together with other wholly-owned subsidiaries of Penske Corporation, owns 41.1% of PTL. The remaining 49.9% of PTL is owned by General Electric Capital Corporation.

Outlook

The level of new automotive unit sales in our markets affects our results. The new vehicle market and the amount of customer traffic visiting our dealerships have improved during the past few years, and there are market expectations for continued improvement in the automotive market in the U.S. over the next several years. During the six months ended June 30, 2012, 7.3 million cars and light trucks were sold in the U.S., representing a 14.8% improvement over the 6.3 million cars and light trucks sold during the same period last year. We believe the U.S. automotive market will continue to recover based upon industry forecasts from companies such as JD Power, coupled with demand in the marketplace, an aging vehicle population, lower cost of credit for consumers, and the planned introduction of new models by many different vehicle brands.

Vehicle registrations in the U.K were 1.1 million during the six months ended June 30, 2012, compared to 1.0 million during the same period of 2011, representing an increase of 2.7%. Based on industry forecasts from entities such as the Society of Motor Manufacturers and Traders (www.smmt.co.uk), we believe despite domestic and international economic concerns, U.K. motorists are responding positively to new products and the latest fuel-efficient technology. We also expect continued resiliency in premium brand sales in the U.K. See “Forward-Looking Statements.”

Operating Overview

New and used vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties and the sales of certain other products. Service and parts revenues include fees paid for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories.

 

24


Table of Contents

Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts transactions. Our gross profit varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues resulting in higher gross profit margins. Factors such as inventory and vehicle availability, customer demand, consumer confidence, unemployment, general economic conditions, seasonality, weather, credit availability, fuel prices and manufacturers’ advertising and incentives also impact the mix of our revenues, and therefore influence our gross profit margin. Aggregate gross profit increased $57.4 million, or 12.6%, and $125.2 million, or 14.0%, during the three and six months ended June 30, 2012, compared to the same periods in prior year. The increase in gross profit is largely attributable to same-store increases in new and used unit sales and service and parts revenues. Our retail gross margin percentage declined from 17.0% during the three and six months ended June 30, 2011 to 16.3% and 16.5% during the three and six months ended June 30, 2012, respectively, due primarily to lower gross margin on new and used vehicle retail sales during the six months ended June 30, 2012, as well as an increase in the percentage of our revenues generated by vehicle sales, which carry a lower gross margin than other parts of our business.

Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities, and other expenses. As the majority of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, we believe our expenses can be adjusted over time to reflect economic trends.

Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing. The cost of our variable rate indebtedness is based on the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Bank of England Base Rate, the Finance House Base Rate, or the Euro Interbank Offered Rate. Our floor plan interest expense has increased during the three and six months ended June 30, 2012, as a result of higher applicable interest rates due to the impact of interest rate swap transactions, as well as an increase in the amounts outstanding under floor plan arrangements. Our other interest expense has increased during the three and six months ended June 30, 2012, due to the increase in borrowings under our revolving credit agreements in the U.S. and U.K. following acquisitions in 2011 and during the six months ended June 30, 2012.

Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTL. It is our expectation that operating conditions as outlined above in the Outlook section will similarly impact these businesses throughout 2012. However, because PTL is engaged in different businesses than we are, its operating performance may vary significantly from ours.

The future success of our business is dependent upon, among other things, general economic and industry conditions, our ability to consummate and integrate acquisitions, the level of vehicle sales in the markets where we operate, our ability to increase sales of higher margin products, especially service and parts services, our ability to realize returns on our significant capital investment in new and upgraded dealership facilities, and the return realized from our investments in various joint ventures and other non-consolidated investments. See “Forward-Looking Statements.”

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.

The following are the accounting policies applied in the preparation of our financial statements that management believes are most dependent upon the use of estimates and assumptions.

Revenue Recognition

Vehicle, Parts and Service Sales

We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is completed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general and administrative expenses. The amounts received under certain manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received, or upon attainment of the particular program goals if not associated with individual vehicles. During the six months ended June 30, 2012 and 2011, we earned $226.1 million and $178.4 million, respectively, of rebates, incentives and reimbursements from manufacturers, of which $220.3 million and $174.0 million was recorded as a reduction of cost of sales.

 

25


Table of Contents

Finance and Insurance Sales

Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various third-party insurance products to customers, including credit and life insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract.

Impairment Testing

Franchise value impairment is assessed as of October 1 every year and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. An indicator of impairment exists if the carrying value of a franchise exceeds its estimated fair value and an impairment loss may be recognized up to that excess. The fair value of franchise value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, franchise profit margins, and our cost of capital. We also evaluate our franchise agreements in connection with the annual impairment testing to determine whether events and circumstances continue to support our assessment that the franchise agreements have an indefinite life.

Goodwill impairment is assessed at the reporting unit level as of October 1 every year and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined we have two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of our automotive retail operations and (ii) PAG Investments, consisting of our investments in businesses other than automotive retail operations. We have determined that the dealerships in each of our operating segments within the Retail reportable segment are components that are aggregated into four geographical reporting units for the purpose of goodwill impairment testing, as they (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). There is no goodwill recorded in our PAG Investments reportable segment.

We prepare a qualitative assessment of the carrying value of goodwill in our reportable segments using the criteria in ASC 350-20-35-3 to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. If it were determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, additional analysis would be unnecessary. During 2011, we concluded that it was not more likely than not that any of the four reporting unit’s fair value was less than their carrying amount.

If the additional impairment testing was necessary, we would have estimated the fair value of our reporting units using an “income” valuation approach. The “income” valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using our weighted average cost of capital as the discount rate. This consideration would also include a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest and other significant assumptions including revenue and profitability growth, franchise profit margins, residual values and our cost of capital.

Investments

We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investee’s income each period. The net book value of our investments was $296.6 million and $298.6 million as of June 30, 2012 and December 31, 2011, respectively. Investments for which there is not a liquid, actively traded market are reviewed periodically by management for indicators of impairment. If an indicator of impairment is identified, management estimates the fair value of the investment using a discounted cash flow approach, which includes assumptions relating to revenue and profitability growth, profit margins, and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments’ carrying value to fair value.

Self-Insurance

We retain risk relating to certain of our general liability insurance, workers’ compensation insurance, auto physical damage insurance, property insurance, employment practices liability insurance, directors and officers insurance and employee medical benefits in the U.S. As a result, we are likely to be responsible for a significant portion of the claims and losses incurred under these programs. The amount of risk we retain varies by program, and, for certain exposures, we have pre-determined maximum loss limits for certain individual claims and/or insurance periods. Losses, if any, above any such pre-determined loss limits are paid by third-party insurance carriers. Our estimate of future losses is prepared by management using our historical loss experience and industry-based development factors. Aggregate reserves relating to retained risk were $26.9 million and $25.9 million as of June 30, 2012 and December 31, 2011, respectively. Changes in the reserve estimate during 2012 relate primarily to our general liability and workers compensation programs.

 

26


Table of Contents

Income Taxes

Tax regulations may require items to be included in our tax returns at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax returns in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax returns that have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit.

Classification in Continuing and Discontinued Operations

We classify the results of our operations in our consolidated financial statements based on generally accepted accounting principles relating to discontinued operations, which requires judgments, including whether a business will be divested, the period required to complete the divestiture, and the likelihood of changes to the divestiture plans. If we determine that a business should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, our consolidated financial statements for prior periods are revised to reflect such reclassification.

New Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, “Fair Value Measurements and Disclosures (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 clarifies the application of existing fair value measurement and disclosure requirements, changes certain principles related to measuring fair value, and requires additional disclosures about fair value measurements. ASU No. 2011-04 is effective for periods beginning after December 15, 2011. We adopted the standard on January 1, 2012. Adoption of ASU No. 2011-04 did not affect our consolidated financial position, results of operations, or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220) — Presentation of Comprehensive Income”, which requires the presentation of components of other comprehensive income with the components of net income. We adopted the standard on January 1, 2012. Adoption of ASU No. 2011-05 did not affect our consolidated financial position, results of operations, or cash flows.

In December 2011, the FASB issued ASU No. 2011-11, “Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities.” ASU No. 2011-11 will require disclosure of the effect or potential effect of offsetting arrangements on our financial position as well as enhanced disclosure of the rights of setoff associated with our recognized assets and recognized liabilities. ASU No. 2011-11 is effective for periods beginning on or after January 1, 2013. Since these amended principles require only additional disclosures concerning offsetting and related arrangements, adoption will not affect our consolidated financial position, results of operations, or cash flows.

 

27


Table of Contents

Results of Operations

The following tables present comparative financial data relating to our operating performance in the aggregate and on a “same-store” basis. Dealership results are included in same-store comparisons when we have consolidated the acquired entity during the entirety of both periods being compared. As an example, if a dealership was acquired on January 15, 2010, the results of the acquired entity would be included in annual same store comparisons beginning with the year ended December 31, 2012 and in quarterly same store comparisons beginning with the quarter ended June 30, 2011.

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

New Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

New retail unit sales

     46,766        37,484        9,282        24.8

Same store new retail unit sales

     42,876        37,303        5,573        14.9

New retail sales revenue

   $ 1,729.2      $ 1,399.5        329.7        23.6

Same store new retail sales revenue

   $ 1,586.6      $ 1,394.6        192.0        13.8

New retail sales revenue per unit

   $ 36,975      $ 37,335        (360     -1.0

Same store new retail sales revenue per unit

   $ 37,004      $ 37,384        (380     -1.0

Gross profit — new

   $ 138.9      $ 119.2        19.7        16.5

Same store gross profit — new

   $ 126.8      $ 118.7        8.1        6.8

Average gross profit per new vehicle retailed

   $ 2,969      $ 3,179        (210     -6.6

Same store average gross profit per new vehicle retailed

   $ 2,958      $ 3,183        (225     -7.1

Gross margin % — new

     8.0     8.5     -0.5     -5.9

Same store gross margin % — new

     8.0     8.5     -0.5     -5.9

Units

Retail unit sales of new vehicles increased 9,282 units, or 24.8%, from 2011 to 2012. The increase is due to a 5,573 unit, or 14.9%, increase in same store retail unit sales during the period, coupled with a 3,709 unit increase from net dealership acquisitions. The same store increase was due primarily to unit sales increases in our premium and foreign volume brand stores in the U.S.

Revenues

New vehicle retail sales revenue increased $329.7 million, or 23.6%, from 2011 to 2012. The increase is due to a $192.0 million, or 13.8%, increase in same store revenues, coupled with a $137.7 million increase from net dealership acquisitions. The same store revenue increase is due primarily to the 14.9% increase in same store retail unit sales, which increased revenue by $206.2 million, somewhat offset by a $380, or 1%, decrease in comparative average selling prices per unit which decreased revenue by $14.2 million.

Gross Profit

Retail gross profit from new vehicle sales increased $19.7 million, or 16.5%, from 2011 to 2012. The increase is due to an $11.6 million increase from net dealership acquisitions coupled with an $8.1 million, or 6.8%, increase in same store gross profit. The same store increase is due primarily to the 14.9% increase in retail unit sales, which increased gross profit by $16.5 million, somewhat offset by a $225, or 7.1%, decrease in the average gross profit per new vehicle retailed, which decreased gross profit by $8.4 million.

 

28


Table of Contents

Used Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Used retail unit sales

     37,580        32,290        5,290        16.4

Same store used retail unit sales

     34,943        32,201        2,742        8.5

Used retail sales revenue

   $ 964.5      $ 855.6        108.9        12.7

Same store used retail sales revenue

   $ 899.5      $ 853.8        45.7        5.4

Used retail sales revenue per unit

   $ 25,666      $ 26,497        (831     -3.1

Same store used retail sales revenue per unit

   $ 25,741      $ 26,514        (773     -2.9

Gross profit — used

   $ 74.1      $ 71.2        2.9        4.1

Same store gross profit — used

   $ 69.5      $ 71.1        (1.6     -2.3

Average gross profit per used vehicle retailed

   $ 1,972      $ 2,206        (234     -10.6

Same store average gross profit per used vehicle retailed

   $ 1,988      $ 2,208        (220     -10.0

Gross margin % — used

     7.7     8.3     -0.6     -7.2

Same store gross margin % — used

     7.7     8.3     -0.6     -7.2

Units

Retail unit sales of used vehicles increased 5,290 units, or 16.4%, from 2011 to 2012. The increase is due to a 2,742 unit, or 8.5%, increase in same store retail unit sales, coupled with a 2,548 unit increase from net dealership acquisitions. The same store increase was due primarily to unit sales increases in premium and volume foreign brand stores in the U.S.

Revenues

Used vehicle retail sales revenue increased $108.9 million, or 12.7%, from 2011 to 2012. The increase is due to a $63.2 million increase from net dealership acquisitions coupled with a $45.7 million, or 5.4%, increase in same store revenues. The same store revenue increase is due to the 8.5% increase in same store retail unit sales which increased revenue by $70.6 million, somewhat offset by a $773, or 2.9%, decrease in comparative average selling prices per unit, which decreased revenue by $24.9 million.

Gross Profit

Retail gross profit from used vehicle sales increased $2.9 million, or 4.1%, from 2011 to 2012. The increase is due to a $4.5 million increase from net dealership acquisitions, somewhat offset by a $1.6 million, or 2.3%, decrease in same store gross profit. The decrease in same store gross profit is due to the $220 or 10%, decrease in average gross profit per used vehicle retailed, which decreased retail gross profit by $7.1 million, somewhat offset by a 8.5% increase in used retail unit sales, which increased gross profit by $5.5 million.

Finance and Insurance Data

 

Dollars in millions, except per unit amounts                  2012 vs. 2011  
     2012      2011      Change     % Change  

Finance and insurance revenue

   $ 82.7       $ 69.0       $ 13.7        19.9

Same store finance and insurance revenue

   $ 78.0       $ 68.8       $ 9.2        13.4

Finance and insurance revenue per unit

   $ 980       $ 989       $ (9     -0.9

Same store finance and insurance revenue per unit

   $ 1,002       $ 990       $ 12        1.2

Finance and insurance revenue increased $13.7 million, or 19.9%, from 2011 to 2012. The increase is due to a $9.2 million, or 13.4%, increase in same store revenues during the period, coupled with a $4.5 million increase from net dealership acquisitions. The same store revenue increase is due to a 12% increase in same store retail unit sales, which increased revenue by $8.3 million, coupled with a $12, or 1.2%, increase in comparative average finance and insurance revenue per unit which increased revenue by $0.9 million.

 

29


Table of Contents

Service and Parts Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Service and parts revenue

   $ 368.8      $ 339.6        29.2        8.6

Same store service and parts revenue

   $ 340.7      $ 338.7        2.0        0.6

Gross profit

   $ 216.0      $ 194.6        21.4        11.0

Same store gross profit

   $ 200.1      $ 194.1        6.0        3.1

Gross margin

     58.6     57.3     1.3     2.3

Same store gross margin

     58.7     57.3     1.4     2.4

Revenues

Service and parts revenue increased $29.2 million, or 8.6%, from 2011 to 2012. The increase is due to a $27.2 million increase from net dealership acquisitions, coupled with a $2.0 million, or 0.6%, increase in same store revenues during the period. The increase in same store revenue is due to a $3.0 million, or 1.2%, increase in customer pay revenue, and a $1.8 million, or 55.2%, increase in vehicle preparation revenue. These same store revenue increases were somewhat offset by a $2.2 million, or 3.3%, decrease in warranty revenue, and a $0.6 million, of 2.4%, decrease in body shop revenue.

Gross Profit

Service and parts gross profit increased $21.4 million, or 11%, from 2011 to 2012. The increase is due to a $15.4 million increase from net dealership acquisitions, coupled with a $6.0 million, or 3.1%, increase in same store gross profit during the period. The same store gross profit increase is due to a $2.0 million, or 0.6%, increase in same store revenues, which increased gross profit by $1.2 million, coupled with a 2.4% increase in gross margin, which increased gross profit by $4.8 million. The same store gross profit increase is composed of a $5.5 million, or 20.4%, increase in vehicle preparation gross profit, and a $2.7 million, or 2.2%, increase in customer pay gross profit. These same store gross profit increases were somewhat offset by a $2.0 million, or 5.6%, decrease in warranty gross profit, and a $0.2 million, or 1.3%, decrease in body shop gross profit.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) increased $35.2 million, or 9.4%, from $374.3 million to $409.5 million. The aggregate increase is due to a $27.1 million increase from net dealership acquisitions, coupled with an $8.1 million, or 2.2%, increase in same store SG&A. The increase in same store SG&A is due to a net increase in variable selling expenses, including increases in variable compensation, as a result of a 4.8% increase in same store retail gross profit versus the prior year. SG&A expenses decreased as a percentage of gross profit from 82.1% to 79.8%.

Floor Plan Interest Expense

Floor plan interest expense, including the impact of swap transactions, increased $3.1 million, or 44.1%, from $6.9 million to $10.0 million, due primarily to a $2.7 million, or 38.7%, increase in same store floor plan interest expense. The same store increase is due primarily to increases in applicable interest rates due to the impact of swap transactions, as well as increased amounts outstanding under floor plan arrangements. The same store increase is coupled with a $0.4 million increase from net dealership acquisitions.

Other Interest Expense

Other interest expense increased $1.1 million, or 10.8%, from $10.5 million to $11.6 million. The increase is due primarily to incremental borrowings made during the latter part of 2011 in the U.S. and the first quarter of 2012 in the U.K. to finance acquisitions.

Equity in Earnings of Affiliates

Equity in earnings of affiliates increased $0.3 million. The increase is due to an increase in earnings at Penske Truck Leasing offset by a decline in the results at our foreign automotive joint ventures.

Income Taxes

Income taxes increased $6.4 million, or 31%, from $20.5 million to $26.9 million. The increase from 2011 to 2012 is due primarily to an increase in our pre-tax income versus the prior year.

 

30


Table of Contents

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

New Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

New retail unit sales

     89,773        75,994        13,779        18.1

Same store new retail unit sales

     81,994        75,337        6,657        8.8

New retail sales revenue

   $ 3,303.4      $ 2,778.0        525.4        18.9

Same store new retail sales revenue

   $ 3,020.3      $ 2,757.1        263.2        9.5

New retail sales revenue per unit

   $ 36,797      $ 36,556        241        0.7

Same store new retail sales revenue per unit

   $ 36,836      $ 36,597        239        0.7

Gross profit — new

   $ 270.6      $ 228.4        42.2        18.5

Same store gross profit — new

   $ 245.9      $ 226.4        19.5        8.6

Average gross profit per new vehicle retailed

   $ 3,015      $ 3,005        10        0.3

Same store average gross profit per new vehicle retailed

   $ 2,999      $ 3,005        (6     -0.2

Gross margin % — new

     8.2     8.2     0.0     0.0

Same store gross margin % — new

     8.1     8.2     -0.1     -1.2

Units

Retail unit sales of new vehicles increased 13,779 units, or 18.1%, from 2011 to 2012. The increase is due to a 7,122 unit increase from net dealership acquisitions, coupled with a 6,657 unit, or 8.8%, increase in same store retail unit sales during the period. The same store increase was due primarily to unit sales increases in our volume foreign brand stores in the U.S. and to a lesser extent unit sales increases at our premium brand stores in the U.S. and U.K.

Revenues

New vehicle retail sales revenue increased $525.4 million, or 18.9%, from 2011 to 2012. The increase is due to a $263.2 million, or 9.5%, increase in same store revenues, coupled with a $262.2 million increase from net dealership acquisitions. The same store revenue increase is due primarily to a $239, or 0.7%, increase in average selling prices per unit which increased revenue by $18.0 million, coupled with the 8.8% increase in retail unit sales, which increased revenue by $245.2 million.

Gross Profit

Retail gross profit from new vehicle sales increased $42.2 million, or 18.5%, from 2011 to 2012. The increase is due to a $22.7 million increase from net dealership acquisitions, coupled with a $19.5 million, or 8.6%, increase in same store gross profit. The same store increase is due primarily to a 8.8% increase in retail unit sales, which increased gross profit by $20.0 million, somewhat offset by a $6, or 0.2%, decrease in the average gross profit per new vehicle retailed, which decreased gross profit by $0.5 million.

 

31


Table of Contents

Used Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Used retail unit sales

     75,848        62,441        13,407        21.5

Same store used retail unit sales

     70,041        61,888        8,153        13.2

Used retail sales revenue

   $ 1,931.1      $ 1,643.6        287.5        17.5

Same store used retail sales revenue

   $ 1,784.8      $ 1,629.7        155.1        9.5

Used retail sales revenue per unit

   $ 25,461      $ 26,323        (862     -3.3

Same store used retail sales revenue per unit

   $ 25,482      $ 26,333        (851     -3.2

Gross profit — used

   $ 152.2      $ 136.0        16.2        11.9

Same store gross profit — used

   $ 141.9      $ 135.0        6.9        5.1

Average gross profit per used vehicle retailed

   $ 2,007      $ 2,178        (171     -7.9

Same store average gross profit per used vehicle retailed

   $ 2,026      $ 2,181        (155     -7.1

Gross margin % — used

     7.9     8.3     -0.4     -4.8

Same store gross margin % — used

     8.0     8.3     -0.3     (3.6 %) 

Units

Retail unit sales of used vehicles increased 13,407 units, or 21.5%, from 2011 to 2012. The increase is due to an 8,153 unit, or 13.2%, increase in same store retail unit sales, coupled with a 5,254 unit increase from net dealership acquisitions. The same store increase was due primarily to unit sales increases in premium and volume foreign brand stores in the U.S.

Revenues

Used vehicle retail sales revenue increased $287.5 million, or 17.5%, from 2011 to 2012. The increase is due to a $155.1 million, or 9.5%, increase in same store revenues, coupled with a $132.4 million increase from net dealership acquisitions. The same store revenue increase is due to the 13.2% increase in same store retail unit sales which increased revenue by $207.8 million, somewhat offset by an $851, or 3.2%, decrease in comparative average selling prices per unit, which decreased revenue by $52.7 million.

Gross Profit

Retail gross profit from used vehicle sales increased $16.2 million, or 11.9%, from 2011 to 2012. The increase is due to a $9.3 million increase from net dealership acquisitions, coupled with a $6.9 million, or 5.1%, increase in same store gross profit. The increase in same store gross profit is due to the 13.2% increase in used retail unit sales, which increased gross profit by $16.5 million, somewhat offset by a $155, or 7.1%, decrease in average gross profit per used vehicle retailed, which decreased retail gross profit by $9.6 million.

Finance and Insurance Data

 

Dollars in millions, except per unit amounts                  2012 vs. 2011  
     2012      2011      Change      % Change  

Finance and insurance revenue

   $ 162.5       $ 135.3       $ 27.2         20.1

Same store finance and insurance revenue

   $ 152.6       $ 134.2       $ 18.4         13.7

Finance and insurance revenue per unit

   $ 981       $ 978       $ 3         0.3

Same store finance and insurance revenue per unit

   $ 1,004       $ 978       $ 26         2.7

Finance and insurance revenue increased $27.2 million, or 20.1%, from 2011 to 2012. The increase is due to an $18.4 million, or 13.7%, increase in same store revenues during the period, coupled with an $8.8 million increase from net dealership acquisitions. The same store revenue increase is due to a 10.8% increase in total retail unit sales, which increased revenue by $14.9 million, coupled with a $26, or 2.7%, increase in comparative average finance and insurance revenue per unit which increased revenue by $3.5 million.

 

32


Table of Contents

Service and Parts Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Service and parts revenue

   $ 737.1      $ 679.7        57.4        8.4

Same store service and parts revenue

   $ 679.2      $ 674.5        4.7        0.7

Gross profit

   $ 428.4      $ 388.7        39.7        10.2

Same store gross profit

   $ 395.2      $ 386.0        9.2        2.4

Gross margin

     58.1     57.2     0.9     1.6

Same store gross margin

     58.2     57.2     1.0     1.7

Revenues

Service and parts revenue increased $57.4 million, or 8.4%, from 2011 to 2012. The increase is due to a $52.7 million increase from net dealership acquisitions, coupled with a $4.7 million, or 0.7%, increase in same store revenues during the period. The increase in same store revenue is due to a $9.2 million, or 1.9%, increase in customer pay revenue, and a $2.6 million, or 36.9%, increase in vehicle preparation revenue. These same store revenue increases were somewhat offset by a $5.9 million, or 4.2%, decrease in warranty revenue, and a $1.2 million, or 2.7%, decrease in body shop revenue.

Gross Profit

Service and parts gross profit increased $39.7 million, or 10.2%, from 2011 to 2012. The increase is due to a $30.5 million increase from net dealership acquisitions, coupled with a $9.2 million, or 2.4%, increase in same store gross profit during the period. The same store gross profit increase is due to the $4.7 million, or 0.7%, increase in same store revenues, which increased gross profit by $2.8 million, coupled with a 1.7% increase in gross margin, which increased gross profit by $6.4 million. The same store gross profit increase is composed of a $9.1 million, or 17.0%, increase in vehicle preparation gross profit, and a $5.7 million, or 2.5%, increase in customer pay gross profit. These same store gross profit increases were somewhat offset by a $5.2 million, or 7.2%, decrease in warranty gross profit, and a $0.4 million, or 1.5%, decrease in body shop gross profit.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) increased $78.4 million, or 10.8%, from $728.4 million to $806.8 million. The aggregate increase is due to a $53.1 million increase from net dealership acquisitions, coupled with a $25.3 million, or 3.5%, increase in same store SG&A. The increase in same store SG&A is due to a net increase in variable selling expenses, including increases in variable compensation, as a result of a 6.1% increase in same store retail gross profit versus the prior year. SG&A expenses decreased as a percentage of gross profit from 81.5% to 79.2%.

Floor Plan Interest Expense

Floor plan interest expense, including the impact of swap transactions, increased $5.8 million, or 42.4%, from $13.8 million to $19.6 million, due primarily to a $5.1 million, or 37.2%, increase in same store floor plan interest expense. The same store increase is due primarily to the impact of swap transactions, as well as increased amounts outstanding under floor plan arrangements. The same store increase is coupled with a $0.7 million increase from net dealership acquisitions.

Other Interest Expense

Other interest expense increased $2.1 million, or 9.4%, from $21.7 million to $23.8 million. The increase is due primarily to incremental borrowings made during the latter part of 2011 and first six months of 2012 to finance acquisitions.

Equity in Earnings of Affiliates

Equity in earnings of affiliates increased $4.7 million, or 59.1%, from $7.9 million to $12.6 million. The increase is due to an increase in earnings at Penske Truck Leasing offset by a decline in the results at our foreign automotive joint ventures.

Income Taxes

Income taxes increased $17.7 million, or 49.1%, from $36.0 million to $53.7 million. The increase from 2011 to 2012 is due to an increase in our pre-tax income versus the prior year combined with an increase in the effective tax rate from 32.2% to 34.9%.

 

33


Table of Contents

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, inventory financing, the acquisition of new businesses, the improvement and expansion of existing facilities, the purchase or construction of new facilities, debt service and repayments, dividends, and potentially repurchases of our outstanding securities under the program discussed below. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions, mortgages, dividends and distributions from joint venture investments, or the issuance of equity securities.

We have historically expanded our retail automotive operations through organic growth and the acquisition of retail automotive dealerships. We believe that cash flow from operations, dividends and distributions from our joint venture investments and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our operations and commitments for at least the next twelve months. In the event we pursue significant acquisitions, other expansion opportunities, significant repurchases of our outstanding securities; or refinance or repay existing debt, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional borrowings, which sources of funds may not necessarily be available on terms acceptable to us, if at all. In addition, our liquidity could be negatively impacted in the event we fail to comply with the covenants under our various financing and operating agreements or in the event our floor plan financing is withdrawn.

As of June 30, 2012, we had $226.9 million and £84.3 million ($131.6 million) available for borrowing under our U.S. credit agreement and our U.K. credit agreement, respectively.

Securities Repurchases

From time to time, our Board of Directors has authorized securities repurchase programs pursuant to which we may, as market conditions warrant, purchase our outstanding common stock, debt or convertible debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. We have historically funded any such repurchases using cash flow from operations and borrowings under our U.S. credit facility. The decision to make repurchases will be based on factors such as the market price of the relevant security versus our view of its intrinsic value, the potential impact of such repurchases on our capital structure, and our consideration of any alternative uses of our capital, such as for strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy.

During the second quarter of 2012, we acquired 55,631 shares of our common stock for $1,307, or an average of $23.49 per share, from employees in connection with vesting of employee restricted stock awards. During the six months ended June 30, 2012, we repurchased 350,000 shares of our outstanding common stock for $8,522, or an average of $24.35 per share, under a program approved by our Board of Directors. As of June 30, 2012, we have $98.3 million in authorization under the existing securities repurchase program.

Dividends

We paid the following cash dividends on our common stock in 2011 and 2012:

 

Per Share Dividends  

2011

  

Second Quarter

   $ 0.07   

Third Quarter

     0.08   

Fourth Quarter

     0.09   

2012

  

First Quarter

   $ 0.10   

Second Quarter

     0.11   

We also have announced a cash dividend of $0.12 per share payable on September 4, 2012 to shareholders of record on August 10, 2012. Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors which may include our earnings, capital requirements, restrictions relating to any then-existing indebtedness, financial condition, and other factors.

 

34


Table of Contents

Inventory Financing

We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan arrangements with various lenders, including a majority through captive finance companies associated with automotive manufacturers. In the U.S., the floor plan arrangements are due on demand; however, we have not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. We typically make monthly interest payments on the amount financed. Outside of the U.S., substantially all of our floor plan arrangements are payable on demand or have an original maturity of 90 days or less, and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.

The floor plan agreements typically grant a security interest in substantially all of the assets of our dealership subsidiaries, and in the U.S. are guaranteed by us. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined LIBOR, Finance House Base Rate, or Euro Interbank Offered Rate. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing. We also receive non-refundable credits from certain of our vehicle manufacturers, which are treated as a reduction of cost of sales as vehicles are sold.

U.S. Credit Agreement

We are party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. credit agreement”), which provides for up to $375 million in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a balance of $127 million, and for an additional $10.0 million of availability for letters of credit, through September 2014. The revolving loans bear interest at a defined LIBOR plus 2.50%, subject to an incremental 1.00% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be re-borrowed.

The U.S. credit agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial and other tests and ratios, each as defined in the U.S. credit agreement, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of any amounts owed. As of June 30, 2012, we were in compliance with all covenants under the U.S. credit agreement, and we believe we will remain in compliance with such covenants for the next twelve months. In making such determination, we considered the current margin of compliance with the covenants and our expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments. See “Forward Looking Statements.”

The U.S. credit agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our domestic assets are subject to security interests granted to lenders under the U.S. credit agreement. As of June 30, 2012, $127 million of term loans, $0.5 million of letters of credit and $114 million of revolver borrowings were outstanding under the U.S. credit agreement.

U.K. Credit Agreement

Our subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a £100 million revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10 million demand overdraft line of credit with RBS (collectively, the “U.K. credit agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of June 30, 2012, outstanding loans under the U.K. credit agreement amounted to £27 million ($42.4 million).

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of any amounts owed. As of June 30, 2012, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement and we believe they will remain in compliance with such covenants for the next twelve months. In making such determination, we considered the current margin of compliance with the covenants and our expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments in the U.K. See “Forward Looking Statements”.

 

35


Table of Contents

The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries’ assets are subject to security interests granted to lenders under the U.K. credit agreement.

In January 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30 million term loan which was used for working capital and an acquisition. The term loan is repayable in £1.5 million quarterly installments through 2015 with a final payment of £7.5 million due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries’ ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of June 30, 2012, the amount outstanding under the U.K. term loan was £27 million ($42.4 million).

7.75% Senior Subordinated Notes

In December 2006, we issued $375.0 million aggregate principal amount of 7.75% senior subordinated notes due 2016 (the “7.75% Notes”). The 7.75% Notes are unsecured senior subordinated notes and are subordinate to all existing and future senior debt, including debt under our credit agreements, mortgages and floor plan indebtedness. The 7.75% Notes are guaranteed by substantially all of our wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. We can redeem all or some of the 7.75% Notes at our option at specified redemption prices (currently 103.875% of the principal amount of the notes). Upon certain sales of assets or specific kinds of changes of control, we are required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of June 30, 2012, we were in compliance with all negative covenants and there were no events of default. We expect to remain in compliance during the next twelve months.

3.5% Senior Subordinated Convertible Notes

On May 25, 2012, we provided notice to holders of the Notes that we were exercising our right to redeem the Notes at a price of 100% of the principal amount outstanding plus accrued and unpaid interest to, but excluding June 25, 2012. In lieu of surrendering the notes for redemption, Note holders could elect to convert the Notes at any time prior to the close of business on June 21, 2012 based on a conversion rate of 42.7796 shares of our common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share).

Upon conversion of the Convertible Notes, for each $1,000 Note, a holder was entitled to receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture covering the Convertible Notes. To the extent the conversion value exceeded $1,000, we were required to also deliver, cash, common stock or a combination of cash and common stock with respect to the value in excess of $1,000.

Holders of $25.6 million outstanding principal amount of Convertible Notes elected to convert their Notes. We settled the principal and interest due on the remaining $37.8 million on June 25, 2012. In July, we paid the converting holders the conversion balance due of $24.9 million in cash. Following this payment, we had fulfilled all of our obligations under the Convertible Notes.

Mortgage Facilities

We are party to several mortgages, which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to our other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of June 30, 2012, we owed $74.1 million of principal under our mortgage facilities.

Short-term Borrowings

We have three principal sources of short-term borrowing: the revolving portion of the U.S. credit agreement, the revolving portion of the U.K. credit agreement, and the floor plan agreements in place that we utilize to finance our vehicle inventories. All of the cash generated in our operations is initially used to pay down our floor plan indebtedness. Over time, we are able to access availability under the floor plan agreements to fund our cash needs, including payments made relating to our higher interest rate revolving credit agreements.

 

36


Table of Contents

During the six months ended June 30, 2012, outstanding revolving commitments varied between $102.5 and $188.5 million under the U.S. credit agreement and between £2.0 million and £92.0 million under the U.K. credit agreement’s revolving credit line (excluding the overdraft facility), and the amounts outstanding under our floor plan agreements varied based on the timing of the receipt and expenditure of cash in our operations, driven principally by the levels of our vehicle inventories.

Interest Rate Swaps

We periodically use interest rate swaps to manage interest rate risk associated with our variable rate floor plan debt. We are party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor plan debt is fixed at 2.135% and $100.0 million of our floating rate floor plan debt is fixed at1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements. During the three and six months ended June 30, 2012, the swaps increased the weighted average interest rate on our floor plan borrowing by 39 and 40 basis points, respectively.

PTL Dividends

We own a 9.0% limited partnership interest in Penske Truck Leasing. During the six months ended June 30, 2012 and 2011, respectively, we received $12.5 million and $7.8 million of pro rata cash distributions relating to this investment. We currently expect to continue to receive future distributions from PTL quarterly, subject to its financial performance.

Operating Leases

We have historically structured our operations so as to minimize our ownership of real property. As a result, we lease or sublease substantially all of our facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at our election. Pursuant to the leases for some of our larger facilities, we are required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require us to post collateral in the form of a letter of credit. A breach of our other lease covenants give rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of June 30, 2012, we were in compliance with all covenants under these leases, and we believe we will remain in compliance with such covenants for the next twelve months.

Sale/Leaseback Arrangements

We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds which vary from period to period.

Off-Balance Sheet Arrangements

We have sold a number of dealerships to third parties and, as a condition to certain of those sales, remain liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. We are also party to lease agreements on properties that we no longer use in our retail operations that we have sublet to third parties. We rely on subtenants to pay the rent and maintain the property at these locations. In the event a subtenant does not perform as expected, we may not be able to recover amounts owed to us and we could be required to fulfill these obligations. We believe we have made appropriate reserves relating to these locations.

We hold a 9.0% limited partnership interest in PTL. In April and May 2012, PTL has refinanced a significant amount of its indebtedness. As part of that refinancing, we and the other PTL partners created a new company (“Holdings”), which, together with General Electric Capital Corporation (“GECC”), co-issued $700 million of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700 million derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700 million of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.

Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, we have agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $0.95 million for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9% of interest payments under the Holdings Bonds, plus fees and default interest, if any. Although we do not currently expect to make material payments to GECC under this agreement, this outcome cannot be predicted with certainty.

 

37


Table of Contents

Cash Flows

Cash and cash equivalents increased by $8.5 million during the six months ended June 30, 2012 and decreased by $12.5 million during the six months ended June 30, 2011. The major components of these changes are discussed below.

Cash Flows from Continuing Operating Activities

Cash provided by continuing operating activities was $204.2 million and $41.7 million during the six months ended June 30, 2012 and 2011, respectively. Cash flows from continuing operating activities includes net income, as adjusted for non-cash items and the effects of changes in working capital.

We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. We retain the right to select which, if any, financing source to utilize in connection with the procurement of vehicle inventories. Many vehicle manufacturers provide vehicle financing for the dealers representing their brands; however, it is not a requirement that we utilize this financing. Historically, our floor plan finance source has been based on aggregate pricing considerations.

In accordance with generally accepted accounting principles relating to the statement of cash flows, we report all cash flows arising in connection with floor plan notes payable with the manufacturer of a particular new vehicle as an operating activity in our statement of cash flows, and all cash flows arising in connection with floor plan notes payable to a party other than the manufacturer of a particular new vehicle and all floor plan notes payable relating to pre-owned vehicles as a financing activity in our statement of cash flows. Currently, the majority of our non-trade vehicle financing is with other manufacturer captive lenders. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing.

We believe that changes in aggregate floor plan liabilities are typically linked to changes in vehicle inventory and, therefore, are an integral part of understanding changes in our working capital and operating cash flow. As a result, we prepare the following reconciliation to highlight our operating cash flows with all changes in veh