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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 September 30, 2014

 

or

 

o         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 o

 

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 o

 

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 the definitions of “accelerated filer,” “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

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

 

As of October 23, 2014, there were 90,227,323 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 September 30, 2014 and December 31, 2013

3

 

 

Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2014 and 2013

4

 

 

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013

5

 

 

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

6

 

 

Consolidated Condensed Statement of Equity for the nine months ended September 30, 2014

7

 

 

Notes to Consolidated Condensed Financial Statements

8

 

 

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

26

 

 

Item 3. Quantitative & Qualitative Disclosures About Market Risk

46

 

 

Item 4. Controls and Procedures

47

 

 

PART II — OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

47

 

 

Item 6. Exhibits

48

 

2



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In millions, except share amounts)

 

ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

150.5

 

$

49.8

 

Accounts receivable, net of allowance for doubtful accounts of $4.7 and $3.4

 

643.8

 

600.8

 

Inventories

 

2,479.0

 

2,518.3

 

Other current assets

 

100.4

 

88.4

 

Assets held for sale

 

45.6

 

107.3

 

 

 

 

 

 

 

Total current assets

 

3,419.3

 

3,364.6

 

Property and equipment, net

 

1,375.1

 

1,232.2

 

Goodwill

 

1,187.7

 

1,144.5

 

Franchise value

 

295.0

 

295.4

 

Equity method investments

 

386.5

 

346.9

 

Other long-term assets

 

18.7

 

31.9

 

 

 

 

 

 

 

Total assets

 

$

6,682.3

 

$

6,415.5

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

Floor plan notes payable

 

$

1,606.1

 

$

1,685.1

 

Floor plan notes payable — non-trade

 

893.6

 

901.6

 

Accounts payable

 

382.7

 

373.3

 

Accrued expenses

 

317.3

 

262.6

 

Current portion of long-term debt

 

71.8

 

50.0

 

Liabilities held for sale

 

33.7

 

59.7

 

 

 

 

 

 

 

Total current liabilities

 

3,305.2

 

3,332.3

 

Long-term debt

 

1,161.6

 

1,033.2

 

Deferred tax liabilities

 

374.3

 

361.4

 

Other long-term liabilities

 

185.8

 

166.5

 

 

 

 

 

 

 

Total liabilities

 

5,026.9

 

4,893.4

 

Commitments and contingent liabilities (Note 9)

 

 

 

 

 

Equity

 

 

 

 

 

Penske Automotive Group stockholders’ equity:

 

 

 

 

 

Preferred Stock, $0.0001 par value; 100,000 shares authorized; none issued and outstanding

 

 

 

Common Stock, $0.0001 par value, 240,000,000 shares authorized; 90,227,323 shares issued and outstanding at September 30, 2014; 90,243,731 shares issued and outstanding at December 31, 2013

 

 

 

Non-voting Common Stock, $0.0001 par value, 7,125,000 shares authorized; none issued and outstanding

 

 

 

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

 

 

 

Additional paid-in-capital

 

688.7

 

693.6

 

Retained earnings

 

962.6

 

799.2

 

Accumulated other comprehensive income (loss)

 

(13.4

)

11.6

 

 

 

 

 

 

 

Total Penske Automotive Group stockholders’ equity

 

1,637.9

 

1,504.4

 

 

 

 

 

 

 

Non-controlling interest

 

17.5

 

17.7

 

 

 

 

 

 

 

Total equity

 

1,655.4

 

1,522.1

 

 

 

 

 

 

 

Total liabilities and equity

 

$

6,682.3

 

$

6,415.5

 

 

See Notes to Consolidated Condensed Financial Statements

 

3



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In millions, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

New vehicle

 

$

2,231.1

 

$

1,964.5

 

$

6,495.5

 

$

5,575.3

 

Used vehicle

 

1,301.9

 

1,078.5

 

3,776.8

 

3,128.4

 

Finance and insurance, net

 

114.7

 

98.2

 

331.9

 

278.8

 

Service and parts

 

435.5

 

375.0

 

1,288.7

 

1,139.6

 

Fleet and wholesale

 

215.9

 

177.0

 

620.6

 

529.2

 

Commercial vehicles, car rental and other

 

118.8

 

65.9

 

359.1

 

87.7

 

Total revenues

 

$

4,417.9

 

$

3,759.1

 

$

12,872.6

 

$

10,739.0

 

Cost of sales:

 

 

 

 

 

 

 

 

 

New vehicle

 

2,059.9

 

1,817.0

 

5,994.7

 

5,152.4

 

Used vehicle

 

1,216.1

 

998.6

 

3,513.7

 

2,891.5

 

Service and parts

 

176.8

 

149.3

 

522.7

 

461.5

 

Fleet and wholesale

 

214.6

 

174.7

 

611.8

 

520.1

 

Commercial vehicles, car rental and other

 

91.8

 

48.4

 

280.1

 

56.3

 

Total cost of sales

 

3,759.2

 

3,188.0

 

10,923.0

 

9,081.8

 

Gross profit

 

658.7

 

571.1

 

1,949.6

 

1,657.2

 

Selling, general and administrative expenses

 

512.9

 

446.4

 

1,513.9

 

1,286.2

 

Depreciation

 

17.8

 

15.4

 

51.8

 

44.4

 

Operating income

 

128.0

 

109.3

 

383.9

 

326.6

 

Floor plan interest expense

 

(11.2

)

(10.6

)

(33.9

)

(31.4

)

Other interest expense

 

(13.3

)

(12.3

)

(39.5

)

(35.7

)

Equity in earnings of affiliates

 

12.7

 

11.2

 

28.7

 

22.4

 

Income from continuing operations before income taxes

 

116.2

 

97.6

 

339.2

 

281.9

 

Income taxes

 

(39.2

)

(31.3

)

(114.4

)

(94.5

)

Income from continuing operations

 

77.0

 

66.3

 

224.8

 

187.4

 

Loss from discontinued operations, net of tax

 

(1.9

)

(0.8

)

(7.9

)

(1.4

)

Net income

 

75.1

 

65.5

 

216.9

 

186.0

 

Less: Income attributable to non-controlling interests

 

0.6

 

0.2

 

2.0

 

1.0

 

Net income attributable to Penske Automotive Group common stockholders

 

$

74.5

 

$

65.3

 

$

214.9

 

$

185.0

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.85

 

$

0.73

 

$

2.46

 

$

2.06

 

Discontinued operations

 

(0.02

)

(0.01

)

(0.08

)

(0.01

)

Net income attributable to Penske Automotive Group common stockholders

 

$

0.83

 

$

0.72

 

$

2.38

 

$

2.05

 

Shares used in determining basic earnings per share (Note 6)

 

90.3

 

90.2

 

90.4

 

90.3

 

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

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.85

 

$

0.73

 

$

2.46

 

$

2.06

 

Discontinued operations

 

(0.02

)

(0.01

)

(0.08

)

(0.01

)

Net income attributable to Penske Automotive Group common stockholders

 

$

0.83

 

$

0.72

 

$

2.38

 

$

2.05

 

Shares used in determining diluted earnings per share (Note 6)

 

90.3

 

90.2

 

90.4

 

90.3

 

Amounts attributable to Penske Automotive Group common stockholders:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

77.0

 

$

66.3

 

$

224.8

 

$

187.4

 

Less: Income attributable to non-controlling interests

 

0.6

 

0.2

 

2.0

 

1.0

 

Income from continuing operations, net of tax

 

76.4

 

66.1

 

222.8

 

186.4

 

Loss from discontinued operations, net of tax

 

(1.9

)

(0.8

)

(7.9

)

(1.4

)

Net income attributable to Penske Automotive Group common stockholders

 

$

74.5

 

$

65.3

 

$

214.9

 

$

185.0

 

 

See Notes to Consolidated Condensed Financial Statements

 

4



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In millions)

 

Net Income

 

$

75.1

 

$

65.5

 

$

216.9

 

$

186.0

 

Other Comprehensive Income:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(53.5

)

41.8

 

(27.4

)

6.7

 

Unrealized gain (loss) on interest rate swaps:

 

 

 

 

 

 

 

 

 

Unrealized gain(loss) arising during the period, net of tax benefits

 

 

0.3

 

(0.2

)

0.8

 

Reclassification adjustment for loss included in floor plan interest expense, net of tax provision of $0.7, $0.4, $2.2, and $1.4, respectively

 

1.1

 

0.5

 

3.4

 

2.2

 

Unrealized gain on interest rate swaps, net of tax

 

1.1

 

0.8

 

3.2

 

3.0

 

Other adjustments to Comprehensive Income, net

 

1.4

 

(4.2

)

(1.8

)

(5.4

)

Other Comprehensive Income (Loss), Net of Taxes

 

(51.0

)

38.4

 

(26.0

)

4.3

 

Comprehensive Income

 

24.1

 

103.9

 

190.9

 

190.3

 

Less: Comprehensive (loss) income attributable to non-controlling interests

 

(0.1

)

0.2

 

1.0

 

1.5

 

Comprehensive income attributable to Penske Automotive Group common stockholders

 

$

24.2

 

$

103.7

 

$

189.9

 

$

188.8

 

 

See Notes to Consolidated Condensed Financial Statements

 

5



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2014

 

2013

 

 

 

(Unaudited)

 

 

 

(In millions)

 

Operating Activities:

 

 

 

 

 

Net income

 

$

216.9

 

$

186.0

 

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

 

 

 

 

 

Depreciation

 

51.8

 

44.4

 

Earnings of equity method investments

 

(22.9

)

(18.5

)

Loss from discontinued operations, net of tax

 

7.9

 

1.4

 

Deferred income taxes

 

9.8

 

47.1

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(43.1

)

(16.4

)

Inventories

 

69.2

 

(153.1

)

Floor plan notes payable

 

(79.0

)

126.5

 

Accounts payable and accrued expenses

 

62.8

 

66.3

 

Other

 

3.9

 

12.9

 

Net cash provided by continuing operating activities

 

277.3

 

296.6

 

Investing Activities:

 

 

 

 

 

Purchase of equipment and improvements

 

(119.6

)

(122.2

)

Purchase of car rental vehicles

 

(93.5

)

(82.3

)

Disposal of car rental vehicles

 

45.1

 

8.0

 

Dealership acquisitions net, including repayment of sellers’ floor plan notes payable of $23.0 and $1.0, respectively

 

(86.2

)

(221.2

)

Other

 

(25.3

)

(15.5

)

Net cash used in continuing investing activities

 

(279.5

)

(433.2

)

Financing Activities:

 

 

 

 

 

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

 

951.1

 

808.7

 

Repayments under U.S. credit agreement revolving credit line

 

(867.1

)

(814.7

)

Repayments under U.S. credit agreement term loan

 

 

(12.0

)

Proceeds from borrowings under car rental revolver

 

95.7

 

104.4

 

Repayments of car rental revolver

 

(72.6

)

(30.5

)

Net borrowings of other long-term debt

 

42.8

 

68.0

 

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

 

(8.0

)

78.0

 

Repurchases of common stock

 

(15.5

)

(15.8

)

Dividends

 

(51.5

)

(40.7

)

Other

 

0.3

 

0.2

 

Net cash provided by continuing financing activities

 

75.2

 

145.6

 

Discontinued operations:

 

 

 

 

 

Net cash (used in)/provided by discontinued operating activities

 

(23.2

)

13.0

 

Net cash provided by discontinued investing activities

 

54.1

 

29.2

 

Net cash used in discontinued financing activities

 

(3.2

)

(23.7

)

Net cash provided by discontinued operations

 

27.7

 

18.5

 

Net change in cash and cash equivalents

 

100.7

 

27.5

 

Cash and cash equivalents, beginning of period

 

49.8

 

43.8

 

Cash and cash equivalents, end of period

 

$

150.5

 

$

71.3

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for:

 

 

 

 

 

Interest

 

$

67.7

 

$

62.0

 

Income taxes

 

85.6

 

23.2

 

 

See Notes to Consolidated Condensed Financial Statements

 

6



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

Total

 

 

 

 

 

 

 

Common Stock

 

Additional

 

 

 

Other

 

Penske Automotive

 

 

 

 

 

 

 

Issued
Shares

 

Amount

 

Paid-in
Capital

 

Retained
Earnings

 

Comprehensive
Income (Loss)

 

Group Stockholders’
Equity

 

Non-controlling
Interest

 

Total
Equity

 

 

 

(Unaudited)

 

 

 

(Dollars in millions)

 

Balance, January 1, 2014

 

90,243,731

 

$

 

$

693.6

 

$

799.2

 

$

11.6

 

$

1,504.4

 

$

17.7

 

$

1,522.1

 

Equity compensation

 

318,942

 

 

10.3

 

 

 

10.3

 

 

10.3

 

Repurchases of common stock

 

(335,350

)

 

(15.5

)

 

 

(15.5

)

 

(15.5

)

Dividends

 

 

 

 

(51.5

)

 

(51.5

)

 

(51.5

)

Distributions to non-controlling interests

 

 

 

 

 

 

 

(1.5

)

(1.5

)

Purchase of controlling interest

 

 

 

 

 

 

 

0.2

 

0.2

 

Sale of subsidiary shares to non-controlling interest

 

 

 

0.3

 

 

 

0.3

 

0.1

 

0.4

 

Foreign currency translation

 

 

 

 

 

(26.4

)

(26.4

)

(1.0

)

(27.4

)

Interest rate swaps

 

 

 

 

 

3.2

 

3.2

 

 

3.2

 

Other

 

 

 

 

 

(1.8

)

(1.8

)

 

(1.8

)

Net income

 

 

 

 

214.9

 

 

214.9

 

2.0

 

216.9

 

Balance, September 30, 2014

 

90,227,323

 

$

 

$

688.7

 

$

962.6

 

$

(13.4

)

$

1,637.9

 

$

17.5

 

$

1,655.4

 

 

See Notes to Consolidated Condensed Financial Statements

 

7



Table of Contents

 

PENSKE AUTOMOTIVE GROUP, INC.

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)
(In millions, except per share amounts)

 

1. Interim Financial Statements

 

Business Overview

 

Unless the context otherwise requires, the use of the terms “PAG”, “we”, “us”, and “our” in these Notes to the Consolidated Condensed Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries.

 

We are an international transportation services company that operates automotive dealerships principally in the United States and Western Europe, and distributes commercial vehicles, engines, power systems and related parts and services principally in Australia and New Zealand. We employ approximately 20,000 people worldwide.

 

Automotive Dealership. We are the second largest automotive retailer headquartered in the U.S. as measured by the $14.7 billion in total revenue we generated in 2013. As of September 30, 2014, we operated 324 automotive retail franchises, of which 177 franchises are located in the U.S. and 147 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the nine months ended September 30, 2014, we retailed and wholesaled more than 363,000 vehicles. We are diversified geographically, with 61% of our total automotive dealership revenues in the nine months ended September 30, 2014 generated in the U.S. and Puerto Rico and 39% generated outside the U.S. We offer over 35 vehicle brands, with 71% of our automotive dealership revenue in the nine months ended September 30, 2014 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 operate these dealerships under franchise agreements with a number of automotive manufacturers and distributors which are subject to certain rights and restrictions typical of the industry.

 

During the nine months ended September 30, 2014, we acquired one U.S. franchise, BMW of Greenwich (CT), one U.K. franchise, Skipton VW, were awarded four franchises and disposed of seven franchises including four in Bremen, Germany which were consolidated with our Hamburg operations.  During the three months ended September 30, 2014, we invested $16.6 million for a 50% ownership interest in a group of BMW and MINI dealerships operating eight franchises in Barcelona, Spain.

 

Commercial Vehicle, Engine, Power Systems, and Parts Distribution. On August 30, 2013, we acquired Western Star Trucks Australia, the exclusive importer and distributor of Western Star heavy duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts across Australia, New Zealand and portions of Southeast Asia. The business distributes vehicles and parts to a network of more than 70 dealership locations including three company-owned retail commercial vehicle dealerships. In October 2014, we acquired MTU Detroit Diesel Australia Pty Ltd., a distributor of diesel and gas engines and power systems, operating across the on-and off-highway markets in Australia, New Zealand and the Pacific. The on-highway portion of this business complements our existing Western Star truck distribution business.

 

Car Rental. We are the Hertz car rental franchisee in the Memphis, Tennessee market and certain Indiana markets. We currently manage more than fifty on- and off-airport Hertz car rental locations with approximately 6,400 vehicles in the fleet. Our car rental business complements our existing U.S. automotive dealership operations.

 

Penske Truck Leasing. We hold a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (‘‘PTL’’), a leading provider of transportation services and supply chain management.

 

Basis of Presentation

 

The following unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our 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 September 30, 2014 and December 31, 2013 and for the three and nine month periods ended September 30, 2014 and 2013 is unaudited, but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for the prior periods have been revised for entities that have been treated as discontinued operations through September 30, 2014, and 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 our audited financial statements for the year ended December 31, 2013, which are included as part of our Annual Report on Form 10-K.

 

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Recent Accounting Pronouncements

 

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830) — Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation — Overall, or Subtopic 830-30, Foreign Currency Matters — Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. This ASU was effective prospectively for us for the annual period beginning January 1, 2014. The adoption of ASU No. 2013-05 has had no effect on our consolidated financial position, results of operations, or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815) — Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in ASU No. 2013-10 permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. This ASU was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of ASU No. 2013-10 has had no effect on our consolidated financial position, results of operations, or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 resolves the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU was effective for us for the annual period beginning January 1, 2014. The adoption of ASU No. 2013-11 has had no effect on our consolidated financial position, results of operations, or cash flows.

 

In April 2014, the FASB issued ASU No. 2014-8, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” ASU No. 2014-8 changes the requirements for reporting discontinued operations to only allow presentation of a disposal of an entity or component of an entity as a discontinued operation if it represents a strategic shift that has (or will have) a major effect on an entity’s operations or financial results. This ASU is effective for us for the annual period beginning January 1, 2015. We anticipate the adoption of ASU No. 2014-8 to result in fewer of our disposals qualifying for discontinued operations treatment.

 

In May 2014, the FASB issued ASU No. 2014-9, “Revenue from Contracts with Customers (Topic 606).” This ASU supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) 605, Revenue Recognition. ASU No. 2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. This ASU is effective for us beginning after January 1, 2017 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.  We are currently assessing the impact the adoption of this update will have on our consolidated financial position, results of operations, and cash flows.

 

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40) — Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 will require management to assess an entity’s ability to continue as a going concern for each annual and interim reporting period, and to provide related footnote disclosure in circumstances in which substantial doubt exists. This ASU is effective for us for the annual period ending December 31, 2016, and we will continue to assess the impact on our consolidated financial statements.

 

Discontinued Operations

 

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

 

In evaluating whether the cash flows of a dealership in our Retail reportable segment will be eliminated from ongoing operations, we consider whether it is likely that customers will migrate to similar franchises that we own in the same geographic market. Our consideration includes an evaluation of the brands sold at other dealerships we operate in the market and their proximity to the franchise being disposed. When we dispose of franchises, we typically do not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of PAG owned dealerships, we do not treat the disposition as a discontinued operation if we believe that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

 

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

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

25.4

 

$

80.1

 

$

101.6

 

$

351.8

 

Pre-tax income (loss)

 

$

(2.5

)

$

(0.6

)

$

(18.7

)

$

(1.2

)

Pre-tax gain (loss) on disposal

 

$

 

$

 

$

14.8

 

$

0.8

 

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Inventories

 

$

22.7

 

$

55.8

 

Other assets

 

22.9

 

51.5

 

Total assets

 

$

45.6

 

$

107.3

 

 

 

 

 

 

 

Floor plan notes payable (including non-trade)

 

$

18.3

 

$

43.6

 

Other liabilities

 

15.4

 

16.1

 

Total liabilities

 

$

33.7

 

$

59.7

 

 

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

 

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

 

Level 1                           Quoted prices in active markets for identical assets or liabilities

 

Level 2                           Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

 

Level 3                           Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

 

Our financial instruments consist of cash and cash equivalents, debt, floor plan notes payable, forward exchange contracts and interest rate swaps used to hedge future cash flows. Other than our fixed rate debt, 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.

 

Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on our current market interest rates for similar types of financial instruments (Level 2). A summary of the carrying values and fair values of our 5.75% senior subordinated notes and our fixed rate mortgage facilities are as follows:

 

 

 

September 30, 2014

 

December 31, 2013

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

5.75% senior subordinated notes due 2022

 

$

550.0

 

$

567.6

 

$

550.0

 

$

565.1

 

Mortgage facilities

 

130.9

 

131.6

 

118.6

 

117.0

 

 

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2. Inventories

 

Inventories consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

New vehicles

 

$

1,627.1

 

$

1,709.4

 

Used vehicles

 

629.9

 

585.5

 

Commercial vehicles

 

120.3

 

126.9

 

Parts, accessories and other

 

101.7

 

96.5

 

Total inventories

 

$

2,479.0

 

$

2,518.3

 

 

We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $10.9 million and $8.8 million during the three months ended September 30, 2014 and 2013, respectively, and $30.6 million and $25.2 million during the nine months ended September 30, 2014 and 2013, respectively.

 

3. Business Combinations

 

We acquired two automotive retail franchises during the nine months ended September 30, 2014.  We acquired Penske Commercial Vehicles as discussed in Note 1, one Hertz car rental franchise market area and one automotive retail franchise during the nine months ended September 30, 2013. During the nine months ended September 30, 2014 we also made an additional investment in an entity previously accounted under the equity method.  Our financial statements include the results of operations of the acquired entities from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in our 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 nine months ended September 30, 2014 and 2013 follows:

 

 

 

September 30

 

 

 

2014

 

2013

 

Accounts receivable

 

$

0.7

 

$

20.1

 

Inventory

 

29.1

 

124.3

 

Other current assets

 

1.2

 

2.8

 

Property and equipment

 

4.1

 

26.1

 

Indefinite-lived intangibles

 

57.1

 

133.1

 

Other non-current assets

 

 

8.4

 

Current liabilities

 

(2.6

)

(94.1

)

Non-current liabilities

 

(2.2

)

0.5

 

Total consideration

 

87.4

 

221.2

 

Seller financed/assumed debt

 

(1.2

)

 

Cash used in dealership acquisitions

 

$

86.2

 

$

221.2

 

 

The following unaudited consolidated pro forma results of operations of PAG for the three and nine months ended September 30, 2014 and 2013 give effect to acquisitions consummated during 2014 and 2013 as if they had occurred effective at the beginning of the period:

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Revenues

 

$

4,417.9

 

$

4,115.0

 

$

12,916.0

 

$

11,997.8

 

Income from continuing operations

 

76.4

 

73.5

 

222.9

 

216.6

 

Net income

 

74.5

 

72.7

 

215.0

 

215.2

 

Income from continuing operations per diluted common share

 

$

0.85

 

$

0.81

 

$

2.46

 

$

2.39

 

Net income per diluted common share

 

$

0.83

 

$

0.80

 

$

2.38

 

$

2.38

 

 

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4. Intangible Assets

 

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the nine months ended September 30, 2014:

 

 

 

Goodwill

 

Franchise
Value

 

Balance, January 1, 2014

 

$

1,144.5

 

$

295.4

 

Additions

 

55.2

 

1.9

 

Disposals

 

 

 

Foreign currency translation

 

(12.0

)

(2.3

)

Balance, September 30, 2014

 

$

1,187.7

 

$

295.0

 

 

All additions were within our Retail reportable segment. As of September 30, 2014, the goodwill balance within our Retail and Other reportable segments was $1,066.4 million and $121.3 million, respectively.

 

5. Vehicle Financing

 

We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale and a portion of our used vehicle inventories for retail sale under revolving floor plan arrangements with various lenders, including the 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 the 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 and distribution subsidiaries, and in the U.S., Australia and New Zealand 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 London Interbank Offered Rate (‘‘LIBOR’’), the Finance House Bank Rate, the Euro Interbank Offered Rate or Australian or New Zealand Bank Bill Swap Rate (‘‘BBSW’’). The weighted average interest rate on floor plan borrowings, including the effect of the interest rate swap discussed in Note 8, was 1.8% and 1.9% for the nine months ended September 30, 2014 and 2013, respectively. We classify 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 our consolidated balance sheets and classify related cash flows as a financing activity on our consolidated 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 equity 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 nine months ended September 30, 2014 and 2013 follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Weighted average number of common shares outstanding

 

90,286,098

 

90,201,075

 

90,371,363

 

90,297,797

 

Effect of non-participatory equity compensation

 

36,000

 

36,000

 

36,000

 

36,000

 

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

 

90,322,098

 

90,237,075

 

90,407,363

 

90,333,797

 

 

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7. Long-Term Debt

 

Long-term debt consisted of the following:

 

 

 

September 30,

 

December 31,

 

 

 

2014

 

2013

 

U.S. credit agreement - revolving credit line

 

$

174.0

 

$

90.0

 

U.S. credit agreement - term loan

 

98.0

 

98.0

 

U.K. credit agreement - revolving credit line

 

136.2

 

106.0

 

U.K. credit agreement - term loan

 

21.9

 

29.8

 

U.K. credit agreement - overdraft line of credit

 

 

 

5.75% senior subordinated notes due 2022

 

550.0

 

550.0

 

Rental car revolver

 

110.0

 

86.9

 

Mortgage facilities

 

130.9

 

118.6

 

Other

 

12.4

 

3.9

 

Total long-term debt

 

1,233.4

 

1,083.2

 

Less: current portion

 

(71.8

)

(50.0

)

Net long-term debt

 

$

1,161.6

 

$

1,033.2

 

 

U.S. Credit Agreement

 

On April 1, 2014, we amended and restated our U. S. credit agreement (the “U.S. credit agreement”) with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, principally to increase the revolving borrowing capacity from $375 million to $450 million and reduce the rate on collateralized borrowings to defined LIBOR plus 200 basis points (from defined LIBOR plus 225).

 

As amended, the U. S. credit agreement provides for up to $450 million in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes and a non-amortizing term loan with a balance of $98 million. The loans mature on the termination date of the facility which is September 30, 2017. The revolving loans bear interest at LIBOR plus 2.00%, subject to an incremental 1.50% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.00%, 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 U.S. 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 the amounts owed.

 

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 U.S. assets are subject to security interests granted to lenders under the U.S. credit agreement. As of September 30, 2014, $174.0 million of revolver borrowings and $98.0 million of term loans 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 £100.0 million revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10.0 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 September 30, 2014, outstanding loans under the U.K. credit agreement amounted to £84.0 million ($136.2 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.

 

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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 September 2014, we amended the U.K. credit agreement and U.K. term loan (discussed below) to provide the U.K. subsidiaries with covenant flexibility to fund the purchase of MTU Detroit Diesel Australia (discussed above).

 

In 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30.0 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 September 30, 2014, the amount outstanding under the U.K. term loan was £13.5 million ($21.9 million).

 

5.75% Senior Subordinated Notes

 

In August 2012, we issued $550.0 million in aggregate principal amount of 5.75% Senior Subordinated Notes due 2022 (the “5.75% Notes”).

 

Interest on the 5.75% Notes is payable semi-annually on April 1 and October 1 of each year. The 5.75% Notes mature on October 1, 2022, unless earlier redeemed or purchased by us. The 5.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our existing 100% owned U.S. subsidiaries. The 5.75% Notes also contain customary negative covenants and events of default.

 

On or after October 1, 2017, we may redeem the 5.75% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. We may also redeem up to 40% of the 5.75% Notes using the proceeds of specified equity offerings at any time prior to October 1, 2015 at a price specified in the indenture.

 

If we experience certain “change of control” events specified in the indenture, holders of the 5.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

 

Car Rental Revolver

 

We are party to a credit agreement with Toyota Motor Credit Corporation that currently provides us with up to $200.0 million in revolving loans for the acquisition of rental vehicles. The revolving loans bear interest at three-month LIBOR plus 2.50%. This agreement provides the lender with a secured interest in the vehicles and our rental car operations’ other assets, requires us to make monthly curtailment payments and expires in October 2015. As of September 30, 2014, outstanding loans under the rental car revolver amounted to $110.0 million.

 

Working Capital Loan Agreement

 

In December 2013, we entered into a working capital loan agreement with Mercedes-Benz Financial Services Australia Pty Ltd that provides us with up to AU $28.0 million ($25.9 million) of working capital availability. This agreement provides the lender with a secured interest in certain inventory and receivables of our commercial vehicle business. The loan bears interest at the Australian BBSW 30-day Bill Rate plus 2.35%. As of September 30, 2014, no loans were outstanding under the working capital loan agreement.

 

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 September 30, 2014, we owed $130.9 million of principal under our mortgage facilities.

 

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Table of Contents

 

8. Derivatives and Hedging

 

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 a rate of 2.135% and $100.0 million of our floating rate floor plan debt is fixed at a rate of 1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

 

We used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of September 30, 2014 and December 31, 2013, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $2.5 million and $7.7 million, respectively. During 2014 and 2013, there was no hedge ineffectiveness recorded in our income statement. During the three and nine months ended September 30, 2014, the swaps increased the weighted average interest rate on our floor plan borrowings by approximately 29 basis points.

 

Our commercial vehicle business sells vehicles and parts purchased from manufacturers in the U.S., Germany, and the U.K. In order to protect against exchange rate movements, we enter into foreign exchange forward contracts against anticipated cash flows. The contracts are timed to mature when major shipments are scheduled to arrive in Australia and when receipt of payment from customers is expected. We classify our foreign exchange forward contracts as cash flow hedges and state them at fair value. We used Level 2 inputs to estimate the fair value of the forward foreign exchange contracts. The fair value of the contracts designated as hedging instruments was estimated to be an asset of $1.5 million and $2.2 million as of September 30, 2014 and December 31, 2013, respectively.

 

9. Commitments and Contingent Liabilities

 

We are 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 September 30, 2014, we were 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 our 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 our results of operations, financial condition or cash flows.

 

We have historically structured our operations so as to minimize 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 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 September 30, 2014, we were in compliance with all covenants under these leases.

 

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 the 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 hold a 9.0% ownership interest in PTL. Historically General Electric Capital Corporation (“GECC”) has provided PTL with a majority of its financing. Since April 2012, PTL has refinanced all of its GECC indebtedness. As part of that refinancing, we and the other PTL partners created a new company (“Holdings”), which, together with GECC, co-issued $700.0 million of 3.8% senior unsecured notes (the “Holdings Bonds”). 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 9.0% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9.0% of interest payments under the Holdings Bonds, plus fees and default interest, if any.

 

Our floor plan credit agreement with Mercedes Benz Financial Services Australia (“MBA”) provides us revolving loans for the acquisition of commercial vehicles for distribution to our retail network. This facility includes a limited parent guarantee and a commitment to repurchase dealer vehicles in the event the dealer’s floor plan agreement with MBA is terminated.

 

We have $24.1 million of letters of credit outstanding as of September 30, 2014, and have posted $13.3 million of surety bonds in the ordinary course of business.

 

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Table of Contents

 

10. Equity

 

Share Repurchase

 

During the nine months ended September 30, 2014, we repurchased 175,000 shares of our outstanding common stock for $8.0 million, or an average of $45.95 per share, under a program approved by our Board of Directors. During the third quarter of 2014, we did not repurchase any common stock under this program. As of September 30, 2014, our remaining authorization under the program was $77.6 million. Additionally, during the nine months ended September 30, 2014, we acquired 160,350 shares of our common stock for $7.5 million, or an average of $46.48, from employees in connection with a net share settlement feature of employee equity awards.

 

11. Accumulated Other Comprehensive Income / (Loss)

 

Changes in accumulated other comprehensive income / (loss) by component and the reclassifications out of accumulated other comprehensive income / (loss) during the three and nine months ended September 30, 2014 and 2013, attributable to Penske Automotive Group common stockholders follows:

 

Three Months Ended September 30, 2014

 

 

 

Foreign Currency
Translation

 

Other

 

Total

 

Balance at June 30, 2014

 

$

37.8

 

$

(0.9

)

$

36.9

 

Other comprehensive income before reclassifications

 

(52.8

)

1.4

 

(51.4

)

Amounts reclassified from accumulated other comprehensive income - net of tax

 

 

1.1

 

1.1

 

Net current-period other comprehensive income

 

(52.8

)

2.5

 

(50.3

)

Balance at September 30, 2014

 

$

(15.0

)

$

1.6

 

$

(13.4

)

 

Three Months Ended September 30, 2013

 

 

 

Foreign Currency
Translation

 

Other

 

Total

 

Balance at June 30, 2013

 

$

(36.9

)

$

(4.6

)

$

(41.5

)

Other comprehensive income before reclassifications

 

41.8

 

(3.9

)

37.9

 

Amounts reclassified from accumulated other comprehensive income - net of tax

 

 

0.5

 

0.5

 

Net current-period other comprehensive income

 

41.8

 

(3.4

)

38.4

 

Balance at September 30, 2013

 

$

4.9

 

$

(8.0

)

$

(3.1

)

 

Nine Months Ended September 30, 2014

 

 

 

Foreign Currency
Translation

 

Other

 

Total

 

Balance at December 31, 2013

 

$

11.4

 

$

0.2

 

$

11.6

 

Other comprehensive income before reclassifications

 

(26.4

)

(2.0

)

(28.4

)

Amounts reclassified from accumulated other comprehensive income - net of tax

 

 

3.4

 

3.4

 

Net current-period other comprehensive income

 

(26.4

)

1.4

 

(25.0

)

Balance at September 30, 2014

 

$

(15.0

)

$

1.6

 

$

(13.4

)

 

16



Table of Contents

 

Nine Months Ended September 30, 2013

 

 

 

Foreign Currency
Translation

 

Other

 

Total

 

Balance at December 31, 2012

 

$

(1.2

)

$

(5.6

)

$

(6.8

)

Other comprehensive income before reclassifications

 

7.0

 

(4.6

)

2.4

 

Amounts reclassified from accumulated other comprehensive income - net of tax

 

(0.9

)

2.2

 

1.3

 

Net current-period other comprehensive income

 

6.1

 

(2.4

)

3.7

 

Balance at September 30, 2013

 

$

4.9

 

$

(8.0

)

$

(3.1

)

 

Within the amounts reclassified from accumulated other comprehensive income, amounts associated with Other relate to interest rate swaps and are included in floor plan interest expense.  The amount associated with foreign currency translation for the nine months ended September 30, 2013 is included in selling, general, and administrative expenses.

 

12. Segment Information

 

Our operations are organized by management into operating segments by line of business and geography. We have determined that we have two reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail, consisting of our automotive retail operations, and (ii) Other, consisting of our commercial vehicle operating segment, our car rental business operating segment and our investments in non-automotive retail operations operating segment. 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: Eastern, Central, and Western United States and International. The geographic operating segments 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).

 

Revenue and segment income for the three and nine months ended September 30, 2014 and 2013 follows:

 

Three Months Ended September 30

 

 

 

Retail

 

Other

 

Intersegment
Elimination

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

2014

 

$

4,305.3

 

$

119.0

 

$

(6.4

)

$

4,417.9

 

2013

 

3,698.8

 

66.0

 

(5.7

)

3,759.1

 

Segment income

 

 

 

 

 

 

 

 

 

2014

 

100.8

 

15.2

 

0.2

 

116.2

 

2013

 

84.0

 

13.5

 

0.1

 

97.6

 

 

Nine Months Ended September 30

 

 

 

Retail

 

Other

 

Intersegment
Elimination

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

2014

 

$

12,566.0

 

$

359.7

 

$

(53.1

)

$

12,872.6

 

2013

 

10,678.1

 

88.0

 

(27.1

)

10,739.0

 

Segment income

 

 

 

 

 

 

 

 

 

2014

 

301.0

 

38.4

 

(0.2

)

339.2

 

2013

 

259.0

 

23.2

 

(0.3

)

281.9

 

 

17



Table of Contents

 

13. Condensed Consolidating Financial Information

 

The following tables include condensed consolidating financial information as of September 30, 2014 and December 31, 2013 and for the three and nine month periods ended September 30, 2014 and 2013 for Penske Automotive Group, Inc. (as the issuer of the 5.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing non-U.S. entities). Guarantor subsidiaries are directly or indirectly 100% owned by PAG, and the guarantees are full and unconditional, and jointly and several. 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
September 30, 2014

 

 

 

Total
Company

 

Eliminations

 

Penske
Automotive
Group

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

150.5

 

$

 

$

 

$

 

$

150.5

 

Accounts receivable, net

 

643.8

 

(405.2

)

405.2

 

311.9

 

331.9

 

Inventories

 

2,479.0

 

 

 

1,368.2

 

1,110.8

 

Other current assets

 

100.4

 

 

3.9

 

30.3

 

66.2

 

Assets held for sale

 

45.6

 

 

 

10.4

 

35.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

3,419.3

 

(405.2

)

409.1

 

1,720.8

 

1,694.6

 

Property and equipment, net

 

1,375.1

 

 

3.7

 

885.7

 

485.7

 

Intangible assets

 

1,482.7

 

 

 

826.6

 

656.1

 

Equity method investments

 

386.5

 

 

316.8

 

 

69.7

 

Other long-term assets

 

18.7

 

(1,867.3

)

1,878.0

 

5.4

 

2.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,682.3

 

$

(2,272.5

)

$

2,607.6

 

$

3,438.5

 

$

2,908.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable

 

$

1,606.1

 

$

 

$

 

$

893.9

 

$

712.2

 

Floor plan notes payable — non-trade

 

893.6

 

 

127.0

 

414.6

 

352.0

 

Accounts payable

 

382.7

 

 

3.0

 

139.3

 

240.4

 

Accrued expenses

 

317.3

 

(405.2

)

0.2

 

153.0

 

569.3

 

Current portion of long-term debt

 

71.8

 

 

 

57.7

 

14.1

 

Liabilities held for sale

 

33.7

 

 

 

4.6

 

29.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

3,305.2

 

(405.2

)

130.2

 

1,663.1

 

1,917.1

 

Long-term debt

 

1,161.6

 

(255.0

)

822.0

 

174.3

 

420.3

 

Deferred tax liabilities

 

374.3

 

 

 

349.1

 

25.2

 

Other long-term liabilities

 

185.8

 

 

 

61.9

 

123.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

5,026.9

 

(660.2

)

952.2

 

2,248.4

 

2,486.5

 

Total equity

 

1,655.4

 

(1,612.3

)

1,655.4

 

1,190.1

 

422.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

6,682.3

 

$

(2,272.5

)

$

2,607.6

 

$

3,438.5

 

$

2,908.7

 

 

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Table of Contents

 

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2013

 

 

 

Total
Company

 

Eliminations

 

Penske
Automotive
Group

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49.8

 

$

 

$

 

$

12.6

 

$

37.2

 

Accounts receivable, net

 

600.8

 

(392.5

)

392.5

 

382.1

 

218.7

 

Inventories

 

2,518.3

 

 

 

1,416.2

 

1,102.1

 

Other current assets

 

88.4

 

 

2.9

 

43.4

 

42.1

 

Assets held for sale

 

107.3

 

 

 

61.0

 

46.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

3,364.6

 

(392.5

)

395.4

 

1,915.3

 

1,446.4

 

Property and equipment, net

 

1,232.2

 

 

4.0

 

800.0

 

428.2

 

Intangible assets

 

1,439.9

 

 

 

771.6

 

668.3

 

Equity method investments

 

346.9

 

 

294.9

 

 

52.0

 

Other long-term assets

 

31.9

 

(1,686.0

)

1,697.5

 

5.2

 

15.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

6,415.5

 

$

(2,078.5

)

$

2,391.8

 

$

3,492.1

 

$

2,610.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor plan notes payable

 

$

1,685.1

 

$

 

$

 

$

1,009.5

 

$

675.6

 

Floor plan notes payable — non-trade

 

901.6

 

 

128.1

 

445.7

 

327.8

 

Accounts payable

 

373.3

 

 

3.5

 

141.7

 

228.1

 

Accrued expenses

 

262.6

 

(392.5

)

0.1

 

122.2

 

532.8

 

Current portion of long-term debt

 

50.0

 

 

 

39.5

 

10.5

 

Liabilities held for sale

 

59.7

 

 

 

31.0

 

28.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

3,332.3

 

(392.5

)

131.7

 

1,789.6

 

1,803.5

 

Long-term debt

 

1,033.2

 

(123.6

)

738.0

 

158.4

 

260.4

 

Deferred tax liabilities

 

361.4

 

 

 

337.6

 

23.8

 

Other long-term liabilities

 

166.5

 

 

 

68.8

 

97.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

4,893.4

 

(516.1

)

869.7

 

2,354.4

 

2,185.4

 

Total equity

 

1,522.1

 

(1,562.4

)

1,522.1

 

1,137.7

 

424.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

6,415.5

 

$

(2,078.5

)

$

2,391.8

 

$

3,492.1

 

$

2,610.1

 

 

19



Table of Contents

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2014

 

 

 

Total
Company

 

Eliminations

 

Penske
Automotive
Group

 

Guarantor
Subsidiaries

 

Non-Guarantor
Subsidiaries

 

 

 

(In millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

4,417.9

 

$

 

$

 

$

2,516.9

 

$

1,901.0

 

Cost of sales

 

3,759.2

 

 

 

2,128.5

 

1,630.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

658.7

 

 

 

388.4

 

270.3

 

Selling, general and administrative expenses

 

512.9

 

 

11.5

 

293.8

 

207.6

 

Depreciation

 

17.8

 

 

0.4

 

10.1

 

7.3

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income (loss)

 

128.0

 

 

(11.9

)

84.5

 

55.4

 

Floor plan interest expense

 

(11.2

)

 

(2.4

)

(5.2

)

(3.6

)

Other interest expense

 

(13.3