Penske Automotive     Print Page | Close Window

SEC Filings

10-Q
PENSKE AUTOMOTIVE GROUP, INC. filed this Form 10-Q on 10/26/2017
Entire Document
 
PAG Form 10-Q September 30, 2017

 

 

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 September 30, 2017

 

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 October 20, 2017, there were 85,768,120 shares of voting common stock outstanding.

 

 

 

 

 


 

TABLE OF CONTENTS

 

 

 

Page

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

Item 1. Financial Statements 

 

 

 

Consolidated Condensed Balance Sheets as of September 30, 2017 and December 31, 2016 

3

 

 

Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2017 and 2016 

4

 

 

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016 

5

 

 

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 

6

 

 

Consolidated Condensed Statement of Equity for the nine months ended September 30, 2017 

7

 

 

Notes to Consolidated Condensed Financial Statements 

8

 

 

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

31

 

 

Item 3. Quantitative & Qualitative Disclosures About Market Risk 

62

 

 

Item 4. Controls and Procedures 

63

 

 

PART II — OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

64

 

 

Item 1A. Risk Factors 

64

 

 

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

65

 

 

Item 6. Exhibits 

66

 

 

2


 

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(Unaudited)

 

 

 

(In millions, except share

 

 

 

and per share amounts)

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37.2

 

$

24.0

 

Accounts receivable, net of allowance for doubtful accounts of $5.9 and $4.5

 

 

938.8

 

 

879.0

 

Inventories

 

 

3,770.3

 

 

3,408.2

 

Other current assets

 

 

96.5

 

 

73.9

 

Assets held for sale

 

 

 —

 

 

8.4

 

Total current assets

 

 

4,842.8

 

 

4,393.5

 

Property and equipment, net

 

 

2,091.4

 

 

1,806.5

 

Goodwill

 

 

1,660.4

 

 

1,291.2

 

Other indefinite-lived intangible assets

 

 

473.3

 

 

420.1

 

Equity method investments

 

 

1,184.9

 

 

893.4

 

Other long-term assets

 

 

29.5

 

 

28.3

 

Total assets

 

$

10,282.3

 

$

8,833.0

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Floor plan notes payable

 

$

2,222.3

 

$

2,084.5

 

Floor plan notes payable — non-trade

 

 

1,388.5

 

 

1,233.3

 

Accounts payable

 

 

609.0

 

 

497.4

 

Accrued expenses

 

 

388.5

 

 

360.0

 

Current portion of long-term debt

 

 

67.6

 

 

48.3

 

Liabilities held for sale

 

 

0.7

 

 

6.1

 

Total current liabilities

 

 

4,676.6

 

 

4,229.6

 

Long-term debt

 

 

2,170.5

 

 

1,828.8

 

Deferred tax liabilities

 

 

771.6

 

 

564.6

 

Other long-term liabilities

 

 

551.6

 

 

430.5

 

Total liabilities

 

 

8,170.3

 

 

7,053.5

 

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; 85,768,120 shares issued and outstanding at September 30, 2017; 85,214,345 shares issued and outstanding at December 31, 2016

 

 

 

 

 

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

 

 

523.0

 

 

497.1

 

Retained earnings

 

 

1,707.6

 

 

1,504.5

 

Accumulated other comprehensive income (loss)

 

 

(151.6)

 

 

(250.7)

 

Total Penske Automotive Group stockholders’ equity

 

 

2,079.0

 

 

1,750.9

 

Non-controlling interest

 

 

33.0

 

 

28.6

 

Total equity

 

 

2,112.0

 

 

1,779.5

 

Total liabilities and equity

 

$

10,282.3

 

$

8,833.0

 

See Notes to Consolidated Condensed Financial Statements

3


 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

 

(Unaudited)

 

 

(In millions, except per share amounts)

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail automotive dealership

 

$

5,085.4

 

$

4,772.1

 

$

14,882.5

 

$

14,121.8

 

Retail commercial truck dealership

 

 

299.6

 

 

266.1

 

 

739.8

 

 

782.3

 

Commercial vehicle distribution and other

 

 

139.4

 

 

113.8

 

 

366.6

 

 

326.6

 

Total revenues

 

$

5,524.4

 

$

5,152.0

 

$

15,988.9

 

$

15,230.7

 

Cost of sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail automotive dealership

 

 

4,341.2

 

 

4,097.4

 

 

12,684.0

 

 

12,080.1

 

Retail commercial truck dealership

 

 

255.3

 

 

227.9

 

 

619.1

 

 

672.6

 

Commercial vehicle distribution and other

 

 

105.3

 

 

82.5

 

 

271.6

 

 

238.7

 

Total cost of sales

 

 

4,701.8

 

 

4,407.8

 

 

13,574.7

 

 

12,991.4

 

Gross profit

 

 

822.6

 

 

744.2

 

 

2,414.2

 

 

2,239.3

 

Selling, general and administrative expenses

 

 

646.1

 

 

581.2

 

 

1,869.8

 

 

1,722.8

 

Depreciation

 

 

24.3

 

 

21.5

 

 

70.0

 

 

66.8

 

Operating income

 

 

152.2

 

 

141.5

 

 

474.4

 

 

449.7

 

Floor plan interest expense

 

 

(16.4)

 

 

(11.9)

 

 

(45.6)

 

 

(37.8)

 

Other interest expense

 

 

(27.8)

 

 

(25.1)

 

 

(79.2)

 

 

(61.8)

 

Equity in earnings of affiliates

 

 

30.9

 

 

25.6

 

 

70.9

 

 

43.1

 

Income from continuing operations before income taxes

 

 

138.9

 

 

130.1

 

 

420.5

 

 

393.2

 

Income taxes

 

 

(44.7)

 

 

(41.7)

 

 

(136.0)

 

 

(128.4)

 

Income from continuing operations

 

 

94.2

 

 

88.4

 

 

284.5

 

 

264.8

 

Income (loss) from discontinued operations, net of tax

 

 

0.1

 

 

0.1

 

 

(0.3)

 

 

(1.1)

 

Net income

 

 

94.3

 

 

88.5

 

 

284.2

 

 

263.7

 

Less: (Loss) income attributable to non-controlling interests

 

 

(0.1)

 

 

1.0

 

 

1.0

 

 

3.4

 

Net income attributable to Penske Automotive Group common stockholders

 

$

94.4

 

$

87.5

 

$

283.2

 

$

260.3

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.10

 

$

1.03

 

$

3.30

 

$

3.03

 

Discontinued operations

 

$

0.00

 

$

0.00

 

$

(0.00)

 

$

(0.01)

 

Net income attributable to Penske Automotive Group common stockholders

 

$

1.10

 

$

1.03

 

$

3.30

 

$

3.02

 

Shares used in determining basic earnings per share

 

 

85.9

 

 

85.2

 

 

85.9

 

 

86.2

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

1.10

 

$

1.03

 

$

3.30

 

$

3.03

 

Discontinued operations

 

$

0.00

 

$

0.00

 

$

(0.00)

 

$

(0.01)

 

Net income attributable to Penske Automotive Group common stockholders

 

$

1.10

 

$

1.03

 

$

3.30

 

$

3.02

 

Shares used in determining diluted earnings per share

 

 

86.0

 

 

85.2

 

 

85.9

 

 

86.3

 

Amounts attributable to Penske Automotive Group common stockholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

94.2

 

$

88.4

 

$

284.5

 

$

264.8

 

Less: (Loss) income attributable to non-controlling interests

 

 

(0.1)

 

 

1.0

 

 

1.0

 

 

3.4

 

Income from continuing operations, net of tax

 

 

94.3

 

 

87.4

 

 

283.5

 

 

261.4

 

Income (loss) from discontinued operations, net of tax

 

 

0.1

 

 

0.1

 

 

(0.3)

 

 

(1.1)

 

Net income attributable to Penske Automotive Group common stockholders

 

$

94.4

 

$

87.5

 

$

283.2

 

$

260.3

 

Cash dividends per share

 

$

0.32

 

$

0.28

 

$

0.93

 

$

0.81

 

 

See Notes to Consolidated Condensed Financial Statements

 

 

4


 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

 

2017

    

2016

 

 

(Unaudited)

 

 

(In millions)

 

Net income

 

$

94.3

 

$

88.5

 

$

284.2

 

$

263.7

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

31.7

 

 

(9.6)

 

 

94.1

 

 

(65.4)

 

Other adjustments to comprehensive income, net

 

 

3.6

 

 

(1.2)

 

 

7.8

 

 

0.3

 

Other comprehensive income (loss), net of tax

 

 

35.3

 

 

(10.8)

 

 

101.9

 

 

(65.1)

 

Comprehensive income

 

 

129.6

 

 

77.7

 

 

386.1

 

 

198.6

 

Less: Comprehensive income attributable to non-controlling interests

 

 

0.6

 

 

1.3

 

 

3.8

 

 

4.5

 

Comprehensive income attributable to Penske Automotive Group common stockholders

 

$

129.0

 

$

76.4

 

$

382.3

 

$

194.1

 

 

See Notes to Consolidated Condensed Financial Statements

5


 

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

    

2017

    

2016

 

 

 

(Unaudited)

 

 

 

(In millions)

 

Operating Activities:

 

 

 

 

 

 

 

Net income

 

$

284.2

 

$

263.7

 

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

 

 

 

 

 

 

 

Depreciation

 

 

70.0

 

 

66.8

 

Earnings of equity method investments

 

 

(53.1)

 

 

(37.3)

 

Loss from discontinued operations, net of tax

 

 

0.3

 

 

1.1

 

Deferred income taxes

 

 

204.9

 

 

96.4

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(48.7)

 

 

(67.1)

 

Inventories

 

 

(226.7)

 

 

246.6

 

Floor plan notes payable

 

 

137.8

 

 

(174.1)

 

Accounts payable and accrued expenses

 

 

98.4

 

 

15.5

 

Other

 

 

(0.3)

 

 

51.7

 

Net cash provided by continuing operating activities

 

 

466.8

 

 

463.3

 

Investing Activities:

 

 

 

 

 

 

 

Purchase of equipment and improvements

 

 

(180.1)

 

 

(171.7)

 

Acquisition of additional ownership interest in Penske Truck Leasing

 

 

(239.1)

 

 

(498.5)

 

Acquisitions net, including repayment of sellers’ floor plan notes payable of $101.6 and $59.1, respectively

 

 

(449.7)

 

 

(106.0)

 

Other

 

 

13.3

 

 

(9.5)

 

Net cash used in continuing investing activities

 

 

(855.6)

 

 

(785.7)

 

Financing Activities:

 

 

 

 

 

 

 

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

 

 

1,621.0

 

 

1,172.5

 

Repayments under U.S. credit agreement revolving credit line

 

 

(1,645.0)

 

 

(1,127.5)

 

Issuance of 3.75% senior subordinated notes

 

 

300.0

 

 

 —

 

Issuance of 5.50% senior subordinated notes

 

 

 —

 

 

500.0

 

Net borrowings of other long-term debt

 

 

74.3

 

 

74.3

 

Net borrowings of floor plan notes payable — non-trade

 

 

155.2

 

 

12.8

 

Payment of debt issuance costs

 

 

(4.0)

 

 

(6.7)

 

Repurchases of common stock

 

 

(18.5)

 

 

(173.6)

 

Dividends

 

 

(80.1)

 

 

(70.3)

 

Other

 

 

(5.8)

 

 

(15.8)

 

Net cash provided by continuing financing activities

 

 

397.1

 

 

365.7

 

Discontinued operations:

 

 

 

 

 

 

 

Net cash provided by discontinued operating activities

 

 

0.5

 

 

1.3

 

Net cash provided by discontinued investing activities

 

 

2.4

 

 

1.7

 

Net cash used in discontinued financing activities

 

 

(0.2)

 

 

 —

 

Net cash provided by discontinued operations

 

 

2.7

 

 

3.0

 

Effect of exchange rate changes on cash and cash equivalents

 

 

2.2

 

 

(19.3)

 

Net change in cash and cash equivalents

 

 

13.2

 

 

27.0

 

Cash and cash equivalents, beginning of period

 

 

24.0

 

 

62.4

 

Cash and cash equivalents, end of period

 

$

37.2

 

$

89.4

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

Cash paid for:

 

 

 

 

 

 

 

Interest

 

$

102.2

 

$

76.2

 

Income taxes

 

 

21.3

 

 

37.2

 

Seller financed/assumed debt

 

 

3.8

 

 

 —

 

Non cash activities:

 

 

 

 

 

 

 

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, January 1, 2017

    

85,214,345

    

$

 —

    

$

497.1

    

$

1,504.5

    

$

(250.7)

    

$

1,750.9

    

$

28.6

    

$

1,779.5

 

Equity compensation

 

323,998

 

 

 —

 

 

12.4

 

 

 —

 

 

 —

 

 

12.4

 

 

 —

 

 

12.4

 

Repurchases of common stock

 

(435,710)

 

 

 —

 

 

(18.5)

 

 

 —

 

 

 —

 

 

(18.5)

 

 

 —

 

 

(18.5)

 

Issuance of common stock

 

665,487

 

 

 —

 

 

32.4

 

 

 —

 

 

 —

 

 

32.4

 

 

 —

 

 

32.4

 

Dividends

 

 —

 

 

 —

 

 

 —

 

 

(80.1)

 

 

 —

 

 

(80.1)

 

 

 —

 

 

(80.1)

 

Purchase of subsidiary shares from non-controlling interest

 

 —

 

 

 —

 

 

(0.4)

 

 

 —

 

 

 —

 

 

(0.4)

 

 

(0.3)

 

 

(0.7)

 

Distributions to non-controlling interests

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1.4)

 

 

(1.4)

 

Foreign currency translation

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

91.3

 

 

91.3

 

 

2.8

 

 

94.1

 

Other

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

7.8

 

 

7.8

 

 

2.3

 

 

10.1

 

Net income

 

 —

 

 

 —

 

 

 —

 

 

283.2

 

 

 —

 

 

283.2

 

 

1.0

 

 

284.2

 

Balance, September 30, 2017

 

85,768,120

 

$

 —

 

$

523.0

 

$

1,707.6

 

$

(151.6)

 

$

2,079.0

 

$

33.0

 

$

2,112.0

 

 

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 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.

 

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 September 30, 2017, we operated 354 retail automotive franchises, of which 162 franchises are located in the U.S. and 192 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, 2017, we retailed and wholesaled more than 471,700 vehicles. We are diversified geographically, with 58% of our total retail automotive dealership revenues in the nine months ended September 30, 2017 generated in the U.S. and Puerto Rico and 42% generated outside the U.S. We offer over 40 vehicle brands, with 70% of our retail automotive dealership revenue in the nine months ended September 30, 2017 generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our dealerships offer 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 these dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry.

 

In the first quarter of 2017, we acquired CarSense in the U.S. and CarShop in the U.K., both businesses representing stand-alone used vehicle dealerships which we believe complement our existing franchised retail automotive dealership operations and provide scalable opportunities across our market areas. Our CarSense operations consist of five locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas, including southern New Jersey. Our CarShop operations consist of five retail locations throughout the United Kingdom and a vehicle preparation center in Leighton Buzzard.

 

During the nine months ended September 30, 2017, we also acquired eight retail automotive franchises, were awarded three retail automotive franchises, and disposed of twelve retail automotive franchises. Of the retail automotive franchises acquired, two are located in New Jersey and represent the Jaguar and Land Rover brands, two are located in Arizona and represent the Mercedes-Benz and Sprinter brands, two are located in the U.K. and represent the BMW and MINI brands, and two are located in Germany as part of the Jacobs Group and represent the Audi and Volkswagen brands. Of the franchises disposed of, five represented smart franchises in the U.S. and three represented BMW and MINI franchises in the U.K.

 

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 September 30, 2017, PTG operated twenty locations, including fourteen full-service dealerships and six collision centers, offering primarily Freightliner and Western Star branded trucks. Four of these locations were acquired in April 2016 in the greater Toronto, Canada market area, and two of these locations were acquired in December 2016 in the Niagara Falls, Canada market area. 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.  

8


 

 

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 to a network of more than 70 dealership locations, including ten 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, Mercedes-Benz Industrial, 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 shared with PCV.

 

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 July 27, 2016, we acquired an additional 14.4% ownership interest in PTL from subsidiaries of GE Capital Global Holdings, LLC (collectively, “GE Capital”) for approximately $498.5 million in cash to bring our total ownership interest to 23.4%. Prior to this acquisition, we held a 9.0% ownership interest in PTL. On September 7, 2017, we acquired an additional 5.5% ownership interest from GE Capital for approximately $239.1 million in cash. At the same time, affiliates of Mitsui & Co., Ltd. (“Mitsui”), our second largest shareholder, acquired an additional 10.0% ownership interest in PTL at the same valuation. PTL is currently owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by 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 have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of September 30, 2017 and December 31, 2016 and for the three and nine month periods ended September 30, 2017 and 2016 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 prior periods have been revised for entities that have been treated as discontinued operations, 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, 2016, which are included as part of our Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This ASU supersedes the revenue recognition requirements in 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 contracts with customers. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers (Topic 606) — Deferral of the Effective Date” providing for a one-year deferral of the effective date of ASU 2014-09 and allowing for early adoption as of the original effective date. 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. The FASB has since also issued additional ASUs containing various updates to

9


 

Topic 606 which will all be adopted along with ASU 2014-09. These ASUs can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption, with early adoption permitted. We intend to adopt these ASUs on January 1, 2018. We have performed our preliminary assessment of the potential impact these accounting standard updates will have on our consolidated financial position, results of operations, and cash flows and have begun our documentation of the results of this assessment. Based on our assessment performed to date, we do not expect the adoption of these updates to have a material impact on our financial statements; however, we will be required to enhance our disclosures on revenue recognition upon adoption. We do not expect there to be a significant change in the timing of our revenue recognition, as we anticipate that our performance obligations under the new standard will be similar to those under existing guidance. Therefore, we expect to adopt using a cumulative-effect adjustment as of the date of adoption. We are also in the process of evaluating and documenting any changes in controls and procedures that may be necessary as part of our implementation of the new standards; however, we do not expect material changes. We will continue to assess the impact that these new standards will have our on our consolidated financial position, results of operations, and cash flows throughout the remainder of 2017.

 

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory (Topic 330).” Under ASU 2015-11, inventory that is measured using the first-in, first-out (FIFO), specific identification, or average cost methods should be measured at the lower of cost or net realizable value. This ASU does not impact inventory measurement under the last-in, first-out (LIFO) or retail inventory methods. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied prospectively. We adopted this ASU prospectively on the effective date of January 1, 2017. The adoption of this accounting standard update has not had a material impact on our consolidated financial position, results of operations, and cash flows.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) — Balance Sheet Classification of Deferred Taxes.” Under ASU 2015-17, entities are required to classify all deferred tax liabilities and assets as noncurrent in a classified statement of financial position. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied either prospectively or retrospectively. We adopted this ASU retrospectively on the effective date of January 1, 2017. Amounts reclassified from “Other current assets” to “Deferred tax liabilities” were $28.1 million as of December 31, 2016. Other than the revised presentation of our consolidated balance sheets, the adoption of this accounting standard update has not had a material impact on our consolidated financial position, results of operations, and cash flows.

 

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 are currently evaluating the other effects the adoption of this ASU will have on our consolidated financial statements. We believe our current off-balance sheet leasing commitments are reflected in our credit rating.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation —Stock Compensation (Topic 718) — Improvement to Employee Share-Based Payment Accounting.” This ASU simplified several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. This ASU was adopted on the effective date of January 1, 2017. As part of the adoption of this ASU, we have elected to record forfeitures as they occur. The amendments to timing of recognition of excess tax benefits, minimum statutory withholding requirements, and forfeitures were adopted using a modified retrospective approach. The cumulative-effect adjustment to retained earnings as of January 1, 2017 was not material. Amendments related to cash flow presentation of employee taxes paid was adopted retrospectively, with $6.1 million reclassified from operating activities to financing activities for the nine months ended September 30, 2016. Amendments related to the recognition of excess tax benefits on the income statement and presentation of excess tax benefits on the

10


 

statement of cash flows were adopted prospectively, and therefore, prior periods were not adjusted. The adoption of this accounting standard update has not had a material impact on our consolidated financial position, results of operations, and cash flows.

 

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 intend to adopt this ASU on January 1, 2018. We do not expect the adoption of this accounting standard update to have a material impact on our consolidated cash flows.

 

Assets Held for Sale and Discontinued Operations

 

We classify an entity as held for sale in the period in which all of the following criteria are met:

 

·

management, having the authority to approve the action, commits to a plan to sell the entity;

·

the entity is available for immediate sale in its present condition;

·

an active program to locate a buyer and other actions required to complete the plan to sell have been initiated;

·

the sale is probable and transfer is expected to be completed within one year;

·

the entity is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and

·

actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

 

In April 2014, the FASB issued ASU No. 2014-08 that changed the definition of a discontinued operation to include only those disposals of components of an entity or components of an entity that are classified as held for sale that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. We adopted this accounting standard update effective January 1, 2015.

 

Prior to the adoption of ASU No. 2014-08, we accounted for dispositions as discontinued operations when it was evident that the operations and cash flows of an entity being disposed of would be eliminated from ongoing operations, and we would not have any significant continuing involvement in its operations. The results of operations for those entities that were classified as discontinued operations prior to adoption of ASU No. 2014-08 are included in “Income (loss) from discontinued operations” in the accompanying Consolidated Condensed Statements of Income for all periods presented and will continue to be reported within discontinued operations in the future. Beginning with disposals or entities classified as held for sale subsequent to January 1, 2015, only those that represent a strategic shift that has, or will have, a major impact on our operations and financial results will be included in discontinued operations.

 

We had no entities newly classified as held for sale during the nine months ended September 30, 2017 that met the criteria to be classified as discontinued operations. As such, the combined financial information presented below represents only retail automotive dealerships that were classified as discontinued operations prior to adoption of ASU No. 2014-08:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Revenues

 

$

 —

 

$

5.6

 

$

2.1

 

$

19.6

 

Pre-tax gain (loss)

 

 

0.1

 

 

0.3

 

 

(0.5)

 

 

(1.7)

 

 

 

11


 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

 

Inventories

 

$

 —

 

$

4.6

 

Other assets

 

 

 —

 

 

3.8

 

Total assets

 

$

 —

 

$

8.4

 

Floor plan notes payable (including non-trade)

 

$

 —

 

$

4.8

 

Other liabilities

 

 

0.7

 

 

1.3

 

Total liabilities

 

$

0.7

 

$

6.1

 

 

Dispositions

 

During the nine months ended September 30, 2017, we disposed of twelve retail automotive franchises. The results of operations for one of the retail automotive franchises is included in discontinued operations for the nine months ended September 30, 2017 and for the three and nine months ended September 30, 2016. The remaining eleven retail automotive franchises did not meet the criteria to be classified as held for sale and treated as discontinued operations. Therefore, the results of operations for these businesses are included within continuing operations for the three and nine months ended September 30, 2017 and 2016.  

 

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 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

 

 

 

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 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%

12


 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

December 31, 2016

 

 

  

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

 

5.75% senior subordinated notes due 2022

 

$

545.7

 

$

562.9

 

$

545.1

 

$

567.6

 

5.375% senior subordinated notes due 2024

 

 

297.1

 

 

307.5

 

 

296.8

 

 

293.0

 

5.50% senior subordinated notes due 2026

 

 

494.2

 

 

511.4

 

 

493.7

 

 

489.4

 

3.75% senior subordinated notes due 2020

 

 

296.2

 

 

302.1

 

 

 —

 

 

 —

 

Mortgage facilities

 

 

211.8

 

 

210.2

 

 

199.9

 

 

195.6

 

 

 

 

2. Inventories

 

Inventories consisted of the following:

 

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2017

 

2016

    

Retail automotive dealership new vehicles

 

$

2,228.4

 

$

2,153.0

 

Retail automotive dealership used vehicles

 

 

926.6

 

 

771.7

 

Retail automotive parts, accessories and other

 

 

129.4

 

 

119.1

 

Retail commercial truck dealership vehicles and parts

 

 

227.8

 

 

170.3

 

Commercial vehicle distribution vehicles, parts and engines

 

 

258.1

 

 

194.1

 

Total inventories

 

$

3,770.3

 

$

3,408.2

 

 

We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $15.7 million and $12.9 million during the three months ended September 30, 2017 and 2016, respectively, and $40.2 million and $38.2 million during the nine months ended September 30, 2017 and 2016, respectively.

 

 

13


 

3. Business Combinations

 

We acquired CarSense, a stand-alone specialty retailer of used vehicles in the U.S. representing five locations, acquired CarShop, a stand-alone specialty retailer of used vehicles in the U.K. representing five locations and a vehicle preparation center, and acquired eight retail automotive franchises during the nine months ended September 30, 2017. During the nine months ended September 30, 2016, we acquired thirteen retail automotive franchises and five retail commercial truck dealerships. 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, 2017 and 2016 follows:

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

 

    

2017

    

2016

    

Accounts receivable

 

$

11.1

 

$

3.9

 

Inventory

 

 

139.9

 

 

63.4

 

Other current assets

 

 

2.9

 

 

0.2

 

Property and equipment

 

 

21.8

 

 

12.1

 

Indefinite-lived intangibles

 

 

366.9

 

 

32.9

 

Other non-current assets

 

 

0.1

 

 

2.7

 

Current liabilities

 

 

(33.6)

 

 

(4.4)

 

Non-current liabilities