1. Organization and Summary of Significant Accounting Policies
Unless the context otherwise requires, the use of the terms “PAG,” “we,” “us,” and “our” in these Notes to the Consolidated Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries.
Business Overview and Concentrations
We are an 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.
In 2016, our business generated $20.1 billion in total revenue, which is comprised of $18.7 billion from retail automotive dealerships, $1.0 billion from retail commercial truck dealerships and $0.4 billion from commercial vehicle distribution and other operations.
Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $18.7 billion in total retail automotive dealership revenue we generated in 2016. As of December 31, 2016, we operated 355 retail automotive franchises, of which 164 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.
We are engaged in the sale of new and used motor vehicles and related products and services, including vehicle service, collision repair, and placement of finance and lease contracts, third-party insurance products and other aftermarket products. We operate dealerships under franchise agreements with a number of automotive manufacturers and distributors. In accordance with individual franchise agreements, each dealership is subject to certain rights and restrictions typical of the industry. The ability of the manufacturers to influence the operations of the dealerships, or the loss of a significant number of franchise agreements, could have a material impact on our results of operations, financial position and cash flows.
For the year ended December 31, 2016, BMW/MINI franchises accounted for 25% of our total retail automotive dealership revenues, Audi/Volkswagen/Porsche/Bentley franchises accounted for 24%, Toyota/Lexus franchises accounted for 15%, and Mercedes-Benz/Sprinter/smart accounted for 10%. No other manufacturers’ franchises accounted for more than 10% of our total retail automotive dealership revenues. At December 31, 2016 and 2015, we had receivables from manufacturers of $196.5 million and $178.9 million, respectively. In addition, a large portion of our contracts in transit, which are included in accounts receivable, are due from manufacturers’ captive finance companies.
During the year ended December 31, 2016, we acquired twenty retail automotive franchises in the U.K. and Italy. Twelve of these franchises were acquired in July 2016 and represent our acquisition of a dealer group in the U.K., which includes seven Volkswagen franchises, one BMW franchise, one MINI franchise, one Audi franchise, one Skoda franchise, and one SEAT franchise. Seven of these franchises were acquired in Italy in October 2016, which include three Porsche franchises, one Audi franchise, one Land Rover franchise, one Volvo, and one Nissan franchise in the Bologna, Italy market. To fund the Italian acquisitions, we invested additional capital into our Italian joint venture and now own 84% of that venture. We were also awarded seven retail automotive franchises, disposed of ten retail automotive franchises, and transitioned seventeen franchises which represented the Scion brand to our existing Toyota franchises.
Additionally, during the first quarter of 2016, we acquired an additional 8% interest in the Jacobs Group, one of our German automotive dealership joint ventures, and now own 68% of that joint venture. In September 2015, we increased our ownership interest in the Jacobs Group from 50% to 60% upon acquisition of an additional 10% interest, resulting in us owning a controlling interest in this joint venture; we therefore began consolidating this entity in our financial results in the year ended December 31, 2015.