Attached files
file | filename |
---|---|
EX-32 - EX-32 - PENSKE AUTOMOTIVE GROUP, INC. | pag-20180331xex32.htm |
EX-31.2 - EX-31.2 - PENSKE AUTOMOTIVE GROUP, INC. | pag-20180331ex3124b7fd1.htm |
EX-31.1 - EX-31.1 - PENSKE AUTOMOTIVE GROUP, INC. | pag-20180331ex3110d35ee.htm |
EX-12 - EX-12 - PENSKE AUTOMOTIVE GROUP, INC. | pag-20180331ex121fc3660.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
|
Accelerated filer ☐ |
|
Non-accelerated filer ☐ |
|
Smaller reporting company ☐ |
|
Emerging growth company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of April 23, 2018, there were 84,975,160 shares of voting common stock outstanding.
2
PART I — FINANCIAL INFORMATION
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
|
|
March 31, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
|
|
(Unaudited) |
|
||||
|
|
(In millions, except share |
|
||||
|
|
and per share amounts) |
|
||||
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
52.8 |
|
$ |
45.7 |
|
Accounts receivable, net of allowance for doubtful accounts of $5.0 and $5.5 |
|
|
1,035.4 |
|
|
954.9 |
|
Inventories |
|
|
3,972.2 |
|
|
3,944.1 |
|
Other current assets |
|
|
105.0 |
|
|
81.8 |
|
Total current assets |
|
|
5,165.4 |
|
|
5,026.5 |
|
Property and equipment, net |
|
|
2,173.5 |
|
|
2,108.6 |
|
Goodwill |
|
|
1,731.8 |
|
|
1,660.5 |
|
Other indefinite-lived intangible assets |
|
|
481.4 |
|
|
474.0 |
|
Equity method investments |
|
|
1,276.2 |
|
|
1,256.6 |
|
Other long-term assets |
|
|
14.7 |
|
|
14.4 |
|
Total assets |
|
$ |
10,843.0 |
|
$ |
10,540.6 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Floor plan notes payable |
|
$ |
2,355.6 |
|
$ |
2,343.2 |
|
Floor plan notes payable — non-trade |
|
|
1,413.8 |
|
|
1,418.6 |
|
Accounts payable |
|
|
720.5 |
|
|
641.6 |
|
Accrued expenses |
|
|
563.9 |
|
|
523.5 |
|
Current portion of long-term debt |
|
|
84.3 |
|
|
72.8 |
|
Liabilities held for sale |
|
|
0.7 |
|
|
0.7 |
|
Total current liabilities |
|
|
5,138.8 |
|
|
5,000.4 |
|
Long-term debt |
|
|
2,136.9 |
|
|
2,090.4 |
|
Deferred tax liabilities |
|
|
505.5 |
|
|
481.5 |
|
Other long-term liabilities |
|
|
567.4 |
|
|
540.3 |
|
Total liabilities |
|
|
8,348.6 |
|
|
8,112.6 |
|
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; 84,975,410 shares issued and outstanding at March 31, 2018; 85,787,507 shares issued and outstanding at December 31, 2017 |
|
|
— |
|
|
— |
|
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 |
|
|
485.2 |
|
|
532.3 |
|
Retained earnings |
|
|
2,094.9 |
|
|
2,009.4 |
|
Accumulated other comprehensive income (loss) |
|
|
(114.7) |
|
|
(146.5) |
|
Total Penske Automotive Group stockholders’ equity |
|
|
2,465.4 |
|
|
2,395.2 |
|
Non-controlling interest |
|
|
29.0 |
|
|
32.8 |
|
Total equity |
|
|
2,494.4 |
|
|
2,428.0 |
|
Total liabilities and equity |
|
$ |
10,843.0 |
|
$ |
10,540.6 |
|
See Notes to Consolidated Condensed Financial Statements
3
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2018 |
|
2017 |
|
||
|
|
(Unaudited) |
|
||||
|
|
(In millions, except per share amounts) |
|
||||
Revenue: |
|
|
|
|
|
|
|
Retail automotive dealership |
|
$ |
5,296.0 |
|
$ |
4,756.4 |
|
Retail commercial truck dealership |
|
|
292.4 |
|
|
211.7 |
|
Commercial vehicle distribution and other |
|
|
158.5 |
|
|
113.0 |
|
Total revenues |
|
|
5,746.9 |
|
|
5,081.1 |
|
Cost of sales: |
|
|
|
|
|
|
|
Retail automotive dealership |
|
|
4,517.7 |
|
|
4,048.1 |
|
Retail commercial truck dealership |
|
|
245.8 |
|
|
175.3 |
|
Commercial vehicle distribution and other |
|
|
119.0 |
|
|
83.4 |
|
Total cost of sales |
|
|
4,882.5 |
|
|
4,306.8 |
|
Gross profit |
|
|
864.4 |
|
|
774.3 |
|
Selling, general and administrative expenses |
|
|
663.1 |
|
|
601.7 |
|
Depreciation |
|
|
25.6 |
|
|
22.4 |
|
Operating income |
|
|
175.7 |
|
|
150.2 |
|
Floor plan interest expense |
|
|
(18.9) |
|
|
(13.7) |
|
Other interest expense |
|
|
(29.8) |
|
|
(25.0) |
|
Equity in earnings of affiliates |
|
|
17.3 |
|
|
13.2 |
|
Income from continuing operations before income taxes |
|
|
144.3 |
|
|
124.7 |
|
Income taxes |
|
|
(36.6) |
|
|
(41.1) |
|
Income from continuing operations |
|
|
107.7 |
|
|
83.6 |
|
Income (loss) from discontinued operations, net of tax |
|
|
0.1 |
|
|
(0.6) |
|
Net income |
|
|
107.8 |
|
|
83.0 |
|
Less: (Loss) income attributable to non-controlling interests |
|
|
(0.3) |
|
|
0.4 |
|
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
108.1 |
|
$ |
82.6 |
|
Basic earnings per share attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.26 |
|
$ |
0.97 |
|
Discontinued operations |
|
|
0.00 |
|
|
(0.01) |
|
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
1.26 |
|
$ |
0.96 |
|
Shares used in determining basic earnings per share |
|
|
86.0 |
|
|
85.6 |
|
Diluted earnings per share attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
Continuing operations |
|
$ |
1.26 |
|
$ |
0.97 |
|
Discontinued operations |
|
|
0.00 |
|
|
(0.01) |
|
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
1.26 |
|
$ |
0.96 |
|
Shares used in determining diluted earnings per share |
|
|
86.0 |
|
|
85.6 |
|
Amounts attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
107.7 |
|
$ |
83.6 |
|
Less: (Loss) income attributable to non-controlling interests |
|
|
(0.3) |
|
|
0.4 |
|
Income from continuing operations, net of tax |
|
|
108.0 |
|
|
83.2 |
|
Income (loss) from discontinued operations, net of tax |
|
|
0.1 |
|
|
(0.6) |
|
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
108.1 |
|
$ |
82.6 |
|
Cash dividends per share |
|
$ |
0.34 |
|
$ |
0.30 |
|
See Notes to Consolidated Condensed Financial Statements
4
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2018 |
|
2017 |
|
||
|
|
(Unaudited) |
|
||||
|
|
(In millions) |
|
||||
Net income |
|
$ |
107.8 |
|
$ |
83.0 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
30.7 |
|
|
24.7 |
|
Other adjustments to comprehensive income, net |
|
|
1.1 |
|
|
1.4 |
|
Other comprehensive income, net of tax |
|
|
31.8 |
|
|
26.1 |
|
Comprehensive income |
|
|
139.6 |
|
|
109.1 |
|
Less: Comprehensive (loss) income attributable to non-controlling interests |
|
|
(0.3) |
|
|
0.8 |
|
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
139.9 |
|
$ |
108.3 |
|
See Notes to Consolidated Condensed Financial Statements
5
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|
|
Three Months Ended |
|
||||
|
|
March 31, |
|
||||
|
|
2018 |
|
2017 |
|
||
|
|
(Unaudited) |
|
||||
|
|
(In millions) |
|
||||
Operating Activities: |
|
|
|
|
|
|
|
Net income |
|
$ |
107.8 |
|
$ |
83.0 |
|
Adjustments to reconcile net income to net cash from continuing operating activities: |
|
|
|
|
|
|
|
Depreciation |
|
|
25.6 |
|
|
22.4 |
|
Earnings of equity method investments |
|
|
(17.3) |
|
|
(13.2) |
|
(Income) loss from discontinued operations, net of tax |
|
|
(0.1) |
|
|
0.6 |
|
Deferred income taxes |
|
|
23.7 |
|
|
42.5 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
(76.7) |
|
|
33.5 |
|
Inventories |
|
|
9.2 |
|
|
(52.5) |
|
Floor plan notes payable |
|
|
20.9 |
|
|
20.4 |
|
Accounts payable and accrued expenses |
|
|
108.8 |
|
|
86.0 |
|
Other |
|
|
(27.1) |
|
|
(24.1) |
|
Net cash provided by continuing operating activities |
|
|
174.8 |
|
|
198.6 |
|
Investing Activities: |
|
|
|
|
|
|
|
Purchase of equipment and improvements |
|
|
(64.7) |
|
|
(36.9) |
|
Proceeds from sale of dealerships |
|
|
58.4 |
|
|
9.0 |
|
Acquisitions net, including repayment of sellers’ floor plan notes payable of $25.8 and $81.2, respectively |
|
|
(156.5) |
|
|
(314.2) |
|
Other |
|
|
(6.3) |
|
|
— |
|
Net cash used in continuing investing activities |
|
|
(169.1) |
|
|
(342.1) |
|
Financing Activities: |
|
|
|
|
|
|
|
Proceeds from borrowings under U.S. credit agreement revolving credit line |
|
|
396.0 |
|
|
523.0 |
|
Repayments under U.S. credit agreement revolving credit line |
|
|
(440.0) |
|
|
(476.0) |
|
Net borrowings of other long-term debt |
|
|
128.6 |
|
|
106.1 |
|
Net (repayments) borrowings of floor plan notes payable — non-trade |
|
|
(4.8) |
|
|
63.0 |
|
Repurchases of common stock |
|
|
(50.0) |
|
|
(2.7) |
|
Dividends |
|
|
(29.2) |
|
|
(25.6) |
|
Net cash provided by continuing financing activities |
|
|
0.6 |
|
|
187.8 |
|
Discontinued operations: |
|
|
|
|
|
|
|
Net cash provided by (used in) discontinued operating activities |
|
|
0.1 |
|
|
(7.0) |
|
Net cash provided by discontinued investing activities |
|
|
— |
|
|
9.7 |
|
Net cash used in discontinued financing activities |
|
|
— |
|
|
(0.2) |
|
Net cash provided by discontinued operations |
|
|
0.1 |
|
|
2.5 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
0.7 |
|
|
1.4 |
|
Net change in cash and cash equivalents |
|
|
7.1 |
|
|
48.2 |
|
Cash and cash equivalents, beginning of period |
|
|
45.7 |
|
|
24.0 |
|
Cash and cash equivalents, end of period |
|
$ |
52.8 |
|
$ |
72.2 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
Cash paid (received) for: |
|
|
|
|
|
|
|
Interest |
|
$ |
32.4 |
|
$ |
20.3 |
|
Income taxes |
|
|
6.4 |
|
|
(8.4) |
|
Seller financed/assumed debt |
|
|
— |
|
|
3.8 |
|
Non cash activities: |
|
|
|
|
|
|
|
Deferred consideration |
|
$ |
12.0 |
|
$ |
— |
|
Consideration transferred through common stock issuance |
|
|
— |
|
|
32.4 |
|
Contingent consideration |
|
|
— |
|
|
20.0 |
|
See Notes to Consolidated Condensed Financial Statements
6
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
|
|
|
|
|
|
|
||
|
|
Common Stock |
|
Additional |
|
|
|
|
Other |
|
Penske |
|
|
|
|
|
|
|
||||||
|
|
Issued |
|
|
|
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Automotive Group |
|
Non-controlling |
|
Total |
|
||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
Income (Loss) |
|
Stockholders’ Equity |
|
Interest |
|
Equity |
|
|||||||
|
|
(Unaudited) |
|
|||||||||||||||||||||
|
|
(Dollars in millions) |
|
|||||||||||||||||||||
Balance, December 31, 2017 |
|
85,787,507 |
|
$ |
— |
|
$ |
532.3 |
|
$ |
2,009.4 |
|
$ |
(146.5) |
|
$ |
2,395.2 |
|
$ |
32.8 |
|
$ |
2,428.0 |
|
Adoption of ASC 606 (Note 1) |
|
— |
|
|
— |
|
|
— |
|
|
6.6 |
|
|
— |
|
|
6.6 |
|
|
— |
|
|
6.6 |
|
Equity compensation |
|
320,919 |
|
|
— |
|
|
4.5 |
|
|
— |
|
|
— |
|
|
4.5 |
|
|
— |
|
|
4.5 |
|
Repurchases of common stock |
|
(1,133,016) |
|
|
— |
|
|
(50.0) |
|
|
— |
|
|
— |
|
|
(50.0) |
|
|
— |
|
|
(50.0) |
|
Dividends |
|
— |
|
|
— |
|
|
— |
|
|
(29.2) |
|
|
— |
|
|
(29.2) |
|
|
— |
|
|
(29.2) |
|
Purchase of subsidiary shares from non-controlling interest |
|
— |
|
|
— |
|
|
(1.4) |
|
|
— |
|
|
— |
|
|
(1.4) |
|
|
(3.1) |
|
|
(4.5) |
|
Distributions to non-controlling interest |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(0.1) |
|
|
(0.1) |
|
Foreign currency translation |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
30.7 |
|
|
30.7 |
|
|
— |
|
|
30.7 |
|
Other |
|
— |
|
|
— |
|
|
(0.2) |
|
|
— |
|
|
1.1 |
|
|
0.9 |
|
|
(0.3) |
|
|
0.6 |
|
Net income |
|
— |
|
|
— |
|
|
— |
|
|
108.1 |
|
|
— |
|
|
108.1 |
|
|
(0.3) |
|
|
107.8 |
|
Balance, March 31, 2018 |
|
84,975,410 |
|
$ |
— |
|
$ |
485.2 |
|
$ |
2,094.9 |
|
$ |
(114.7) |
|
$ |
2,465.4 |
|
$ |
29.0 |
|
$ |
2,494.4 |
|
See Notes to Consolidated Condensed Financial Statements
7
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In millions, except share and 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 a diversified international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.
Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $19.8 billion in total retail automotive dealership revenue we generated in 2017. As of March 31, 2018, we operated 342 retail automotive franchises, of which 151 franchises are located in the U.S. and 191 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the three months ended March 31, 2018, we retailed and wholesaled more than 162,000 vehicles. We are diversified geographically, with 52% of our total retail automotive dealership revenues in the three months ended March 31, 2018 generated in the U.S. and Puerto Rico and 48% generated outside the U.S. We offer over 40 vehicle brands, with 70% of our retail automotive dealership revenue in the three months ended March 31, 2018 generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our franchised 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 third-party finance and insurance products, third-party extended service and maintenance contracts and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry.
We operate fourteen stand-alone used vehicle dealerships in the U.S. and the U.K. We acquired CarSense in the U.S. and CarShop in the U.K. in the first quarter of 2017 and acquired The Car People in the U.K. in January 2018. Our CarSense operations in the U.S. consist of five locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas, including southern New Jersey. Our CarShop operations in the U.K. consist of five retail locations and a vehicle preparation center operating principally throughout Southern England. The Car People operations in the U.K. consist of four retail locations operating across Northern England, which complements CarShop’s locations principally in Southern England.
During the three months ended March 31, 2018, we acquired four retail automotive franchises and disposed of five retail automotive franchises. The four retail automotive franchises acquired are located in Italy and represent the Mercedes-Benz and smart brands.
Retail Commercial Truck Dealership. We operate a heavy and medium-duty truck dealership group known as Premier Truck Group (“PTG”) with locations in Texas, Oklahoma, Tennessee, Georgia, and Canada. As of March 31, 2018, PTG operated twenty locations, including fourteen full-service dealerships and six collision centers, offering primarily Freightliner and Western Star branded trucks. PTG also offers a full range of used trucks available for sale as well as service and parts departments, providing a full range of maintenance and repair services.
Commercial Vehicle Distribution. We are 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 the Pacific. This business, known as Penske Commercial Vehicles Australia (“PCV Australia”), distributes commercial vehicles and parts
8
to a network of more than 70 dealership locations, including eight company-owned retail commercial vehicle dealerships.
We are also a leading distributor of diesel and gas engines and power systems, principally representing MTU, Detroit Diesel, Allison Transmission and MTU Onsite Energy. This business, known as Penske Power Systems (“PPS”), offers products across the on- and off-highway markets in Australia, New Zealand and portions of the Pacific and supports full parts and aftersales service through a network of branches, field locations and dealers across the region. The on-highway portion of this business complements our PCV Australia distribution business, including integrated operations at retail locations selling PCV brands.
Penske Truck Leasing. We currently hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading provider of transportation services and supply chain management. PTL is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental and contract maintenance, along with logistic services such as dedicated contract carriage, distribution center management, transportation management and lead logistics provider. On September 7, 2017, we acquired an additional 5.5% ownership interest in PTL from subsidiaries of GE Capital Global Holdings, LLC (collectively, “GE Capital”) for approximately $239.1 million in cash. Prior to this acquisition, we held a 23.4% ownership interest in PTL. PTL is currently owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). GE Capital no longer owns any ownership interests in PTL. We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments.
Basis of Presentation
The accompanying 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 (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of March 31, 2018 and December 31, 2017 and for the three month periods ended March 31, 2018 and 2017 is unaudited, but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. 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, 2017, which are included as part of our Annual Report on Form 10-K.
Estimates
The preparation of financial statements in conformity with U.S. GAAP 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 that 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 |
|
|
|
9
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, and forward exchange contracts 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 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, 5.375% senior subordinated notes, 5.50% senior subordinated notes, 3.75% senior subordinated notes, and our fixed rate mortgage facilities are as follows:
|
|
March 31, 2018 |
|
December 31, 2017 |
|
||||||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
||||
5.75% senior subordinated notes due 2022 |
|
$ |
546.2 |
|
$ |
561.2 |
|
$ |
545.9 |
|
$ |
562.3 |
|
5.375% senior subordinated notes due 2024 |
|
|
297.3 |
|
|
298.1 |
|
|
297.2 |
|
|
300.2 |
|
5.50% senior subordinated notes due 2026 |
|
|
494.6 |
|
|
484.6 |
|
|
494.4 |
|
|
505.0 |
|
3.75% senior subordinated notes due 2020 |
|
|
296.8 |
|
|
295.1 |
|
|
296.5 |
|
|
301.7 |
|
Mortgage facilities |
|
|
214.4 |
|
|
210.0 |
|
|
235.5 |
|
|
233.4 |
|
Assets Held for Sale and Discontinued Operations
We had no entities newly classified as held for sale during the three months ended March 31, 2018 or 2017 that met the criteria to be classified as discontinued operations. The financial information for entities that were classified as discontinued operations prior to adoption of Accounting Standards Update No. 2014-08 are included in “Income (loss) from discontinued operations” in the accompanying consolidated condensed statements of income and “Liabilities held for sale” in the accompanying consolidated condensed balance sheets for all periods presented.
Disposals
During the three months ended March 31, 2018, we disposed of five retail automotive franchises. The results of operations for these businesses are included within continuing operations for the three months ended March 31, 2018 and 2017, as these franchises did not meet the criteria to be classified as held for sale and treated as discontinued operations.
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.
10
The U.S. Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act modifies several provisions of the Internal Revenue Code related to corporations, including a permanent corporate income tax rate reduction from 35% to 21%, effective January 1, 2018. The Act also significantly changes international tax laws for tax years beginning after December 31, 2017 and requires a one-time mandatory deemed repatriation of all cumulative post-1986 foreign earnings and profits of a U.S. shareholder’s foreign subsidiaries, which we recognized in 2017, the year of enactment.
On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete such income tax accounting under ASC 740. In accordance with SAB 118, we have analyzed and computed the U.S. tax impact of the Act to the best of our ability with the information available at this time and consider our conclusions to be reasonable estimates. Additional information gathering and analysis will be required to refine our detailed computations, primarily related to the earnings and profits and related foreign tax credits for the most recent tax year ended December 31, 2017. Any subsequent adjustments to our provisional estimates will be recorded to current tax expense or deferred tax expense (for foreign tax credit carryovers) in the quarter of 2018 when our analysis is considered final and complete. No adjustments were recorded during the first quarter of 2018.
We have considered and analyzed the applicability of the global intangible low-taxed income (“GILTI”) provisions of the Act beginning in 2018 and its effect on our annualized effective tax rate for 2018. The effect of the GILTI inclusions on the 2018 annualized effective tax rate was not material. We have adopted the method of accounting for GILTI inclusions as a period expense and therefore have not accrued any deferred taxes in relation to this provision in the first quarter of 2018 or in the 2017 consolidated financial statements.
Recent Accounting Pronouncements
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The FASB also issued additional ASUs containing various updates to Topic 606 which are to be adopted along with ASU 2014-09 (collectively, “the new revenue recognition standard,” “ASC 606”). ASC 606 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” In accordance with the new revenue recognition standard, an entity recognizes 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 contracts with customers. For public companies, the new revenue recognition standard is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Entities may adopt the new guidance retrospectively to each prior reporting period presented under a full retrospective approach, or as a cumulative-effect adjustment as of the date of adoption under a modified retrospective approach. We adopted ASC 606 on January 1, 2018 using the modified retrospective approach to contracts not completed as of the date of adoption, with no restatement of comparative periods, and a cumulative-effect adjustment to retained earnings recognized as of the date of adoption.
As part of the adoption of ASC 606, we performed an assessment of the impact the new revenue recognition standard would have on our consolidated financial statements. Our assessment also considered required changes in internal controls resulting from the adoption of the new revenue recognition standard. Although new controls have been implemented as a result of the adoption, such changes were not deemed material. A summary of the impact of the adoption of ASC 606 on our consolidated financial statements is included below.
For our Retail Automotive and Retail Commercial Truck reportable segments, under legacy guidance we recognized revenues at a point in time upon meeting relevant revenue recognition criteria. Under ASC 606, the timing of revenue recognition for our service, parts and collision revenue stream changed, as we concluded that performance obligations for service and collision work are satisfied over time under the new revenue recognition standard. All other revenue
11
streams for these businesses continue to be recognized at a point in time, and our performance obligations and revenue recognition timing and practices are substantially similar to how revenues were recorded under legacy guidance.
For our Other reportable segment consisting primarily of our businesses in Australia and New Zealand, Penske Commercial Vehicles Australia and Penske Power Systems, under legacy guidance we recognized revenues for vehicles, engines, parts, and services at a point in time upon meeting relevant revenue recognition criteria. For our long-term power generation contracts at Penske Power Systems, we recognized revenues using the percentage of completion method in accordance with contract milestones. Under ASC 606, the timing of revenue recognition for the service and parts revenue stream for PCV Australia and PPS changed, as we concluded that performance obligations for service work are satisfied over time under the new revenue recognition standard. For revenues previously recognized using the percentage of completion method, these revenues are recognized as performance obligations are satisfied over time, consistent with the timing of recognition under legacy guidance, but are now recognized using an output method, which measures the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised. All other revenue streams for these businesses continue to be recognized at a point in time, and our performance obligations and revenue recognition timing and practices are substantially similar to how revenues were recorded under legacy guidance.
See Note 2 “Revenues” for additional disclosures in accordance with the new revenue recognition standard.
The adoption of the new revenue recognition standard resulted in a net, after-tax cumulative effect adjustment to retained earnings of approximately $6.6 million as of January 1, 2018. The details of this adjustment are summarized below.
|
|
Balance at |
|
Adjustments Due |
|
Balance at |
|
|||
|
|
December 31, 2017 |
|
to ASC 606 |
|
January 1, 2018 |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
954.9 |
|
$ |
22.4 |
|
$ |
977.3 |
|
Inventories |
|
|
3,944.1 |
|
|
(13.4) |
|
|
3,930.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
523.5 |
|
$ |
0.1 |
|
$ |
523.6 |
|
Deferred tax liabilities |
|
|
481.5 |
|
|
2.3 |
|
|
483.8 |
|
Retained earnings |
|
|
2,009.4 |
|
|
6.6 |
|
|
2,016.0 |
|
The following tables summarize the impact of the adoption of ASC 606 on our consolidated condensed statement of income and consolidated condensed balance sheet for the three months ended and as of March 31, 2018:
|
|
For the Three Months Ended March 31, 2018 |
|
|||||||
Statement of Income |
|
As |
|
Without Adoption |
|
Impact of Adoption |
|
|||
|
|
Reported |
|
of ASC 606 |
|
of ASC 606 |
|
|||
Revenue: |
|
|
|
|
|
|
|
|
|
|
Retail automotive dealership |
|
$ |
5,296.0 |
|
$ |
5,295.5 |
|
$ |
0.5 |
|
Retail commercial truck dealership |
|
|
292.4 |
|
|
291.5 |
|
|
0.9 |
|
Commercial vehicle distribution and other |
|
|
158.5 |
|
|
157.0 |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
Retail automotive dealership |
|
|
4,517.7 |
|
|
4,517.1 |
|
|
0.6 |
|
Retail commercial truck dealership |
|
|
245.8 |
|
|
245.3 |
|
|
0.5 |
|
Commercial vehicle distribution and other |
|
|
119.0 |
|
|
117.8 |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
864.4 |
|
|
863.8 |
|
|
0.6 |
|
Income taxes |
|
|
(36.6) |
|
|
(36.4) |
|
|
0.2 |
|
Net income |
|
|
107.8 |
|
|
107.4 |
|
|
0.4 |
|
12
|
|
March 31, 2018 |
|
|||||||
Balance Sheet |
|
As |
|
Without Adoption |
|
Impact of ASC 606 |
|
|||
|
|
Reported |
|
of ASC 606 |
|
Adoption |
|
|||
Assets |
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
$ |
1,035.4 |
|
$ |
1,010.1 |
|
$ |
25.3 |
|
Inventories |
|
|
3,972.2 |
|
|
3,987.9 |
|
|
(15.7) |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
563.9 |
|
$ |
563.8 |
|
$ |
0.1 |
|
Deferred tax liabilities |
|
|
505.5 |
|
|
503.0 |
|
|
2.5 |
|
Retained earnings |
|
|
2,094.9 |
|
|
2,087.9 |
|
|
7.0 |
|
Accounting for Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this new guidance, a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. We intend to adopt this ASU on January 1, 2019. The amendments from this update are to be applied using a modified retrospective approach. The adoption of this ASU will result in a significant increase to our consolidated balance sheets for lease liabilities and right-of-use assets. We believe our current off-balance sheet leasing commitments are reflected in our credit rating. We are currently evaluating the other impacts the adoption of this accounting standard update will have on our consolidated financial statements. We are also in the process of evaluating and documenting any changes in controls and procedures that may be necessary as part of the adoption.
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments.” This ASU provides new guidance on eight specific cash flow issues related to how such cash receipts and cash payments should be presented in a statement of cash flows. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied retrospectively. We adopted this ASU retrospectively on January 1, 2018. The adoption of this accounting standard update did not have an impact on our consolidated cash flows for the three months ended March 31, 2018.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220) — Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the U.S. Tax Cuts and Jobs Act (“the Act”). The update also requires entities to disclose whether or not they elected to reclassify the tax effects related to the Act as well as their accounting policy for releasing income tax effects from accumulated other comprehensive income. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. We do not intend to adopt the optional guidance of this accounting standard update, as the potential impact on our consolidated financial statements is not material.
2. Revenues
Automotive and commercial truck dealerships represent the majority of our revenues. New and used vehicle revenues typically include sales to retail customers, to fleet customers, and to leasing companies providing consumer 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 by customers for repair, maintenance and collision services,
13
and the sale of replacement parts and other aftermarket accessories, as well as warranty repairs that are reimbursed directly by various OEMs. Revenues are recognized upon satisfaction of our performance obligations under contracts with our customers and are measured at the amount of consideration we expect to be entitled to in exchange for transferring goods or providing services. A discussion of revenue recognition by reportable segment is included below.
Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition
Dealership Vehicle Sales. We record revenue for vehicle sales at a point in time when vehicles are delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. The amount of consideration we receive for vehicle sales is stated within the executed contract with our customer and is reduced by any noncash consideration representing the fair value of trade-in vehicles, if applicable. Payment is typically due and collected within 30 days subsequent to transfer of control of the vehicle.
Dealership Parts and Service Sales. We record revenue for vehicle service and collision work over time as work is completed, and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment. The amount of consideration we receive for parts and service sales, including collision repair work, is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to the completion of services for the customer. We allow for customer returns of parts sales up to 30 days after the sale; however, parts returns are not material.
Dealership 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 products to customers, including guaranteed vehicle protection insurance, vehicle theft protection and extended service contracts. These commissions are recorded as revenue at a point in time when the customer enters into the contract. Payment is typically due and collected within 30 days subsequent to the execution of the contract with the customer. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts and other insurance products, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we received may be charged back based on the terms of the contracts. The revenue we record relating to these transactions is net of an estimate of the amount of chargebacks we will be required to pay. Our estimate is based upon our historical experience with similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products. Aggregate reserves relating to chargeback activity were $25.3 million and $24.9 million as of March 31, 2018 and December 31, 2017, respectively.
Commercial Vehicle Distribution and Other Revenue Recognition
Penske Commercial Vehicles Australia. We record revenue from the distribution of vehicles and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed, and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.
The amount of consideration we receive for vehicle and product sales is stated within the executed contract with our customer. The amount of consideration we receive for parts and service sales is based upon labor hours expended and
14
parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.
Penske Power Systems. We record revenue from the distribution of engines and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed, and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.
For our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones, which is considered an output method that requires judgment to determine our progress towards contract completion and the corresponding amount of revenue to recognize. Any revisions to estimates related to revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.
The amount of consideration we receive for engine, product, and power generation sales is stated within the executed contract with our customer. The amount of consideration we receive for service sales is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.
Other. Other revenue primarily consists of our non-automotive motorcycle dealership operations. Revenue recognition practices for these operations do not differ materially from those described under “Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition” above.
Retail Automotive Dealership
The following tables disaggregate our retail automotive reportable segment revenue by product type and geographic location for the three months ended March 31, 2018 and 2017:
|
|
Three Months Ended March 31, |
|
||||
Retail Automotive Dealership Revenue |
|
2018 |
|
2017 |
|
||
New vehicle |
|
$ |
2,446.8 |
|
$ |
2,307.4 |
|
Used vehicle |
|
|
1,866.8 |
|
|
1,541.0 |
|
Finance and insurance, net |
|
|
160.8 |
|
|
137.4 |
|
Service and parts |
|
|
543.5 |
|
|
498.9 |
|
Fleet and wholesale |
|
|
278.1 |
|
|
271.7 |
|
Total retail automotive dealership revenue |
|
$ |
5,296.0 |
|
$ |
4,756.4 |
|
|
|
Three Months Ended March 31, |
|
||||
Retail Automotive Dealership Revenue |
|
2018 |
|
2017 |
|
||
U.S. |
|
$ |
2,750.9 |
|
$ |
2,656.2 |
|
U.K. |
|
|
2,192.8 |
|
|
1,826.4 |
|
Germany and Italy |
|
|
352.3 |
|
|
273.8 |
|
Total retail automotive dealership revenue |
|
$ |
5,296.0 |
|
$ |
4,756.4 |
|
15
Retail Commercial Truck Dealership
The following table disaggregates our retail commercial truck reportable segment revenue by product type for the three months ended March 31, 2018 and 2017:
|
|
Three Months Ended March 31, |
|
||||
Retail Commercial Truck Dealership Revenue |
|
2018 |
|
2017 |
|
||