PENSKE AUTOMOTIVE GROUP, INC. This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in Part II, Item 1A "Risk Factors" and "Forward-Looking Statements." We have acquired and initiated a number of businesses during the periods presented and addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements include the results of operations of those businesses from the date acquired or when they commenced operations. Our period to period results of operations may vary depending on the dates of acquisitions or disposals.
Overview
We are a diversified international transportation services company that operates
automotive and commercial truck dealerships principally in
COVID-19 Disclosure
Overview - The outbreak of COVID-19 across the globe has adversely impacted each
of our markets and the global economy, leading to disruptions to our business.
The pandemic continues in all of our markets. Governmental authorities are
taking countermeasures to slow the outbreak, including shelter-in-place orders,
stay at home orders, large-scale restrictions on travel and government-funded
assistance programs to individuals and businesses. For the first two months of
2020 prior to the COVID-19 pandemic, our retail automotive business same-store
new vehicle revenue increased 5.3%, used vehicle revenues increased 7.3%, F&I
increased 10.7%, and service and parts increased 3.0%, similar to performance we
experienced in 2019. These results continued into early March, then
progressively declined as shelter-in-place policies were established impacting
many of our locations. In
In response to shelter-in-place orders resulting from the COVID-19 pandemic, most of our automotive, and many of our commercial vehicle, showrooms were closed (though some have reopened). In permissible jurisdictions, however, we continued limited sales activity by appointment or through our e-commerce channels. Virtually all of our service, parts and collision center departments have remained open during the crisis and curb-side or home delivery offerings have supplemented our traditional service offerings. We have modified certain business practices to conform to government restrictions and best practices encouraged by government and regulatory authorities. In all of our locations, we have implemented enhanced cleaning procedures, enforced social distancing guidelines and taken other precautions to protect our employees and customers. We will continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment.
Across the company, we implemented a hiring freeze, expense reductions including
in advertising, and postponed an estimated
Most of our manufacturer partners began periodic suspension of production beginning in late March with some announcing extensions into May. We believe our current inventory levels will allow us to continue to do business with the slowdown in sales driven by the pandemic. We are strategically managing inventory levels by monitoring incoming units and deferring or canceling purchases. Our manufacturer partners began providing us with additional incentive
27
Table of Contents
support in March. In addition, our manufacturer and lending partners are providing support to retail customers such as increased incentives, payment deferrals, as well as 0% financing on certain vehicles and term lengths.
Commercial truck dealership sales and service operations remained open in most
locations around the
Penske Transportation Solutions - We have a 28.9% ownership interest in Penske Transportation Solutions ("PTS"). As an integral part of the North American supply chain, PTS has been generally classified as essential by governmental authorities. This has allowed PTS to remain operating in much of its business, providing crucial supply chain and transportation services to its customers. While its full-service leasing and contract maintenance businesses remained consistent, commercial rental utilization has slowed. PTS experienced mixed results in the logistics services business as increased volume in the grocery sector was offset by plant closings in automotive and manufacturing. In response, PTS implemented, among other items, approximately 7,000 layoffs, a 30% reduction in executive salaries, and reduced associate work schedules.
Liquidity - As of
Risks and Uncertainties - The full impact that COVID-19 will have on our business cannot be predicted at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, the effect of government assistance programs, and other unintended consequences. This impact could include changes in customer demand; our relationship with, and the financial and operational capacities of, vehicle manufacturers, captive finance companies and other suppliers; workforce availability; risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms); the adequacy of our cash flow and earnings and other conditions which may affect our liquidity; our ability to
28
Table of Contents
pay our quarterly dividend at prior levels; and disruptions to our technology network and other critical systems, including our dealer management systems and software or other facilities or equipment.
We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the global economy and may materially affect our businesses as outlined above, or in other manners, all of which would adversely impact our business and results of operations.
During the three months ended
Retail Automotive Dealership. We believe we are the second largest automotive
retailer headquartered in the
We also operate sixteen used vehicle supercenters in the
Retail automotive dealerships represented 88.2% of our total revenues and 87.3%
of our total gross profit in the three months ended
Retail Commercial Truck Dealership. We operate a heavy and medium-duty truck
dealership group known as
This business represented 9.8% of our total revenues and 8.9% of our total gross
profit in the three months ended
Penske Australia. We are the exclusive importer and distributor of
29
Table of Contents
These businesses represented 2.0% of our total revenues and 3.8% of our total
gross profit in the three months ended
Penske Transportation Solutions. We hold a 28.9% ownership interest in
Outlook
Retail Automotive Dealership. For the three months ended
During the three months ended
Retail Commercial Truck Dealership. During the three months ended
Commercial Vehicle Distribution. Our Penske Australia distribution business
operates principally in the Australian and
30
Table of Contents
heavy-duty truck market reported sales of 2,217 units, representing a decrease
of 23.9% from the same period last year, while the
Penske Transportation Solutions. PTS services have been largely deemed essential by government authorities during the COVID-19 pandemic and a majority of the PTS business is generated by multi-year contracts for full-service leasing, contract maintenance and logistics services. See COVID-19 Disclosure" above.
As described in "Forward-Looking Statements," there are a number of factors that could cause actual results to differ materially from our expectations. See Part II, Item 1A, "Risk Factors."
Operating Overview
Automotive and commercial truck dealerships represent the majority of our results of operations. 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, and the sale of replacement parts and other aftermarket accessories, as well as warranty repairs that are reimbursed directly by various OEMs.
Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts transactions. Our gross profit varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues resulting in higher gross profit margins. Factors such as inventory and vehicle availability, customer demand, consumer confidence, unemployment, general economic conditions, seasonality, weather, credit availability, fuel prices, and manufacturers' advertising and incentives also impact the mix of our revenues, and therefore influence our gross profit margin.
The results of our commercial vehicle distribution business in
Aggregate revenue and gross profit decreased
As exchange rates fluctuate, our revenue and results of operations as reported
in
Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other expenses. As the majority of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, we believe our expenses can be adjusted over time to reflect economic trends.
Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-
31
Table of Contents
bearing debt, other than interest relating to floor plan financing and includes
interest relating to our retail commercial truck dealership and commercial
vehicle distribution operations. The cost of our variable rate indebtedness is
based on the prime rate, defined London Interbank Offered Rate ("LIBOR"), the
Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTS.
The future success of our business is dependent upon, among other things, general economic and industry conditions, including the recovery time-frame for the global economy in light of COVID-19; our ability to react effectively to changing business conditions in light of COVID-19; our ability to consummate and integrate acquisitions; the level of vehicle sales in the markets where we operate; our ability to increase sales of higher margin products, especially service and parts sales; our ability to realize returns on our significant capital investment in new and upgraded dealership facilities; our ability to navigate a rapidly changing automotive and truck landscape; the success of our distribution of commercial vehicles, engines, and power systems; and the return realized from our investments in various joint ventures and other non-consolidated investments. See Part II, Item 1A, "Risk Factors" and "Forward-Looking Statements" below.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
The accounting policies and estimates that we believe to be most dependent upon the use of estimates and assumptions are: revenue recognition, goodwill and other indefinite-lived intangible assets, investments, self-insurance reserves, lease recognition, and income taxes. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 annual report on Form 10-K for additional detail and discussion of these critical accounting policies and estimates. There have been no material changes in critical accounting policies and estimates as described in our most recent annual report.
Refer to Part I, Item 1, Note 1 and Note 3 of the Notes to our Consolidated Condensed Financial Statements for disclosures regarding estimates and judgments related to lease recognition. Refer to Part I, Item 1, Note 2 of the Notes to our Consolidated Condensed Financial Statements for disclosures regarding estimates and judgments related to revenue recognition. Refer to "Income Taxes" within Part I, Item 1, Note 1 of the Notes to our Consolidated Condensed Financial Statements for disclosures regarding estimates and judgments related to income taxes.
Results of Operations
The following tables present comparative financial data relating to our
operating performance in the aggregate and on a "same-store" basis. Dealership
results are included in same-store comparisons when we have consolidated the
acquired entity during the entirety of both periods being compared. As an
example, if a dealership were acquired on
The results for the three months ended
32
Table of Contents
Three Months Ended
Retail Automotive Dealership New Vehicle Data
(In millions, except unit and per unit amounts)
2020 vs. 2019
New Vehicle Data 2020 2019 Change % Change
New retail unit sales 43,187 54,370 (11,183) (20.6) %
Same-store new retail unit sales 43,151 52,327 (9,176) (17.5) %
New retail sales revenue $ 1,864.5 $ 2,231.2 $ (366.7) (16.4) %
Same-store new retail sales revenue $ 1,863.5 $ 2,174.4 $ (310.9) (14.3) %
New retail sales revenue per unit $ 43,172 $ 41,037 $ 2,135 5.2 %
Same-store new retail sales revenue per unit
$ 138.6 $ 172.7 $ (34.1) (19.7) % Same-store gross profit - new$ 138.6 $ 168.0 $ (29.4) (17.5) %
Average gross profit per new vehicle retailed
$ 3,211 $ 3,210 $ 1 0.0 % Gross margin % - new 7.4 % 7.7 % (0.3) % (3.9) % Same-store gross margin % - new 7.4 % 7.7 % (0.3) % (3.9) % Units
Retail unit sales of new vehicles decreased from 2019 to 2020 due to a 9,176
unit, or 17.5%, decrease in same-store new retail unit sales, coupled with a
2,007 unit decrease from net dealership dispositions. Same-store units decreased
12.9% in the
Revenues
New vehicle retail sales revenue decreased from 2019 to 2020 due to a
Gross Profit
Retail gross profit from new vehicle sales decreased from 2019 to 2020 due to a
33
Table of Contents
Retail Automotive Dealership Used Vehicle Data
(In millions, except unit and per unit amounts)
2020 vs. 2019
Used Vehicle Data 2020 2019 Change % Change
Used retail unit sales 63,050 72,744 (9,694) (13.3) %
Same-store used retail unit sales 61,719 70,364 (8,645) (12.3) %
Used retail sales revenue $ 1,619.6 $ 1,852.0 $ (232.4) (12.5) %
Same-store used retail sales revenue $ 1,597.6 $ 1,800.7 $ (203.1) (11.3) %
Used retail sales revenue per unit $ 25,688 $ 25,459 $ 229 0.9 %
Same-store used retail sales revenue per unit
$ 85.9 $ 92.9 $ (7.0) (7.5) % Same-store gross profit - used$ 84.8 $ 93.4 $ (8.6) (9.2) %
Average gross profit per used vehicle retailed
$ 1,375 $ 1,327 $ 48 3.6 % Gross margin % - used 5.3 % 5.0 % 0.3 % 6.0 % Same-store gross margin % - used 5.3 % 5.2 % 0.1 % 1.9 % Units
Retail unit sales of used vehicles decreased from 2019 to 2020 due to an 8,645
unit, or 12.3%, decrease in same-store used retail unit sales, coupled with a
1,049 unit decrease from net dealership dispositions. Same-store units decreased
10.3% in the
Revenues
Used vehicle retail sales revenue decreased from 2019 to 2020 due to a
Gross Profit
Retail gross profit from used vehicle sales decreased from 2019 to 2020 due to
an
34
Table of Contents
Retail Automotive Dealership Finance and Insurance Data
(In millions, except unit and per unit amounts)
2020 vs. 2019
Finance and Insurance Data 2020 2019 Change % Change
Total retail unit sales 106,237 127,114 (20,877) (16.4) %
Total same-store retail unit sales 104,870 122,691 (17,821) (14.5) %
Finance and insurance revenue $ 144.4 $ 160.0 $ (15.6) (9.8) %
Same-store finance and insurance revenue $ 142.9 $ 156.6 $ (13.7) (8.7) %
Finance and insurance revenue per unit $ 1,359 $ 1,259 $ 100 7.9 %
Same-store finance and insurance revenue per unit
Finance and insurance revenue decreased from 2019 to 2020 due to a
Retail Automotive Dealership Service and Parts Data
(In millions)
2020 vs. 2019
Service and Parts Data 2020 2019 Change % Change
Service and parts revenue $ 513.3 $ 559.8 $ (46.5) (8.3) %
Same-store service and parts revenue $ 512.6 $ 546.3 $ (33.7) (6.2) %
Gross profit - service and parts $ 303.7 $ 331.4 $ (27.7) (8.4) %
Same-store service and parts gross profit
59.2 % 59.2 % - % - %
Same-store service and parts gross margin % 59.1 % 59.2 % (0.1) % (0.2) %
Revenues
Service and parts revenue decreased from 2019 to 2020, with a decrease of 6.5%
in the
Gross Profit
Service and parts gross profit decreased from 2019 to 2020 due to a
35
Table of Contents
Retail Commercial Truck Dealership Data
(In millions, except unit and per unit amounts)
2020 vs. 2019
New Commercial Truck Data 2020 2019 Change % Change
New retail unit sales 2,811 1,887 924 49.0 %
Same-store new retail unit sales 1,845 1,887 (42) (2.2) %
New retail sales revenue $ 318.2 $ 207.4 $ 110.8 53.4 %
Same-store new retail sales revenue $ 206.0 $ 207.4 $ (1.4) (0.7) %
New retail sales revenue per unit $ 113,214 $ 109,887 $ 3,327 3.0 %
Same-store new retail sales revenue per
unit $ 111,660 $ 109,887 $ 1,773 1.6 %
Gross profit - new $ 12.5 $ 10.2 $ 2.3 22.5 %
Same-store gross profit - new $ 7.6 $ 10.2 $ (2.6) (25.5) %
Average gross profit per new truck retailed
$ 4,116 $ 5,391 $ (1,275) (23.7) % Gross margin % - new 3.9 % 4.9 % (1.0) % (20.4) % Same-store gross margin % - new 3.7 % 4.9 % (1.2) % (24.5) % Units
Retail unit sales of new trucks increased from 2019 to 2020 due to a 966 unit
increase from net dealership acquisitions, partially offset by a 42, or 2.2%,
unit decrease in same-store retail unit sales. Same-store new truck units
decreased 2.2%, largely due to the 25.8% decrease in the North American Class 8
heavy-duty truck market retail sales during the three months ended
Revenues
New commercial truck retail sales revenue increased from 2019 to 2020 due to a
Gross Profit
New commercial truck retail gross profit increased from 2019 to 2020 due to a
36
Table of Contents
2020 vs. 2019
Used Commercial Truck Data 2020 2019 Change % Change
Used retail unit sales 698 416 282 67.8 %
Same-store used retail unit sales 512 416 96 23.1 %
Used retail sales revenue $ 34.6 $ 24.1 $ 10.5 43.6 %
Same-store used retail sales revenue $ 25.1 $ 24.1 $ 1.0 4.1 %
Used retail sales revenue per unit $ 49,619 $ 58,032 $ (8,413) (14.5) %
Same-store used retail sales revenue per
unit $ 49,016 $ 58,032 $ (9,016) (15.5) %
Gross profit - used $ (2.5) $ 2.7 $ (5.2) (192.6) %
Same-store gross profit - used $ (0.1) $ 2.7 $ (2.8) (103.7) %
Average gross profit per used truck
retailed $ (3,511) $ 6,557 $ (10,068) (153.5) %
Same-store average gross profit per used
truck retailed $ (217) $ 6,557 $ (6,774) (103.3) %
Gross margin % - used (7.2) % 11.2 % (18.4) % (164.3) %
Same-store gross margin % - used (0.4) % 11.2 % (11.6) % (103.6) %
Units
Retail unit sales of used trucks increased from 2019 to 2020 due to a 186 unit increase from net dealership acquisitions, coupled with a 96, or 23.1%, unit increase in same-store retail unit sales. We believe the increase in used truck sales is due to the decrease in average selling price and our digital marketing efforts.
Revenues
Used commercial truck retail sales revenue increased from 2019 to 2020 due to a
Gross Profit
Used commercial truck retail gross profit decreased from 2019 to 2020 due to a
2020 vs. 2019
Service and Parts Data 2020 2019 Change % Change
Service and parts revenue $ 124.3 $ 91.5 $ 32.8 35.8 %
Same-store service and parts revenue $ 86.1 $ 91.2 $ (5.1) (5.6) %
Gross profit - service and parts $ 53.4 $ 36.1 $ 17.3 47.9 %
Same-store service and parts gross profit
43.0 % 39.5 % 3.5 % 8.9 %
Same-store service and parts gross margin % 40.2 % 39.5 % 0.7 % 1.8 %
Revenues
Service and parts revenue increased from 2019 to 2020 due to a
37
Table of Contents
Gross Profit
Service and parts gross profit increased from 2019 to 2020 due to an
Commercial Vehicle Distribution Data
(In millions, except unit amounts)
2020 vs. 2019
Penske Australia Data 2020 2019 Change % Change
Vehicle unit sales 219 444 (225) (50.7) %
Sales revenue $ 101.1 $ 140.9 $ (39.8) (28.2) %
Gross profit $ 29.8 $ 35.5 $ (5.7) (16.1) %
Our Penske Australia operations are primarily comprised of commercial vehicle,
engine, and power systems distribution. This business generated
The decrease in units is primarily due to the decline in the Australian
heavy-duty truck market. The decline in revenue from 2019 to 2020 is largely
attributable to the decline in the Australian and
Selling, General and Administrative Data
(In millions)
2020 vs. 2019
Selling, General and Administrative Data 2020 2019 Change % Change
Personnel expense $ 373.9 $ 392.2 $ (18.3) (4.7) %
Advertising expense $ 26.2 $ 24.7 $ 1.5 6.1 %
Rent & related expense $ 83.9 $ 83.8 $ 0.1 0.1 %
Other expense $ 157.8 $ 165.7 $ (7.9) (4.8) %
Total SG&A expenses $ 641.8 $ 666.4 $ (24.6) (3.7) %
Same-store SG&A expenses $ 620.8 $ 649.4 $ (28.6) (4.4) %
Personnel expense as % of gross profit 48.1 % 46.1 % 2.0 % 4.3 %
Advertising expense as % of gross profit 3.4 % 2.9 % 0.5 % 17.2 %
Rent & related expense as % of gross profit 10.8 % 9.8 % 1.0 % 10.2 %
Other expense as % of gross profit 20.3 % 19.5 % 0.8 % 4.1 %
Total SG&A expenses as % of gross profit 82.6 % 78.3 % 4.3 % 5.5 %
Same-store SG&A expenses as % of same-store gross profit 82.5 % 77.7 % 4.8 % 6.2 %
Selling, general and administrative expenses ("SG&A") decreased from 2019 to
2020 due to a
38
Table of Contents
Depreciation
(In millions)
2020 vs. 2019
2020 2019 Change % Change
Depreciation $ 28.5 $ 26.4 $ 2.1 8.0 %
The increase in depreciation from 2019 to 2020 is due to a
Floor Plan Interest Expense
(In millions)
2020 vs. 2019
2020 2019 Change % Change
Floor plan interest expense $ 17.7 $ 21.8 $ (4.1) (18.8) %
The decrease in floor plan interest expense from 2019 to 2020 is primarily due
to a
Other Interest Expense
(In millions)
2020 vs. 2019
2020 2019 Change % Change
Other interest expense $ 31.7 $ 29.9 $ 1.8 6.0 %
The increase in other interest expense from 2019 to 2020 is primarily due to an
increase in outstanding revolver borrowings under the
Equity in Earnings of Affiliates
(In millions)
2020 vs. 2019
2020 2019 Change % Change
Equity in earnings of affiliates
The decrease in equity in earnings of affiliates from 2019 to 2020 is primarily
due to a decrease of
39
Table of Contents
Income Taxes
(In millions)
2020 vs. 2019
2020 2019 Change % Change
Income taxes $ 20.1 $ 34.7 $ (14.6) (42.1) %
Income taxes decreased from 2019 to 2020 primarily due to a
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing, the acquisition of new businesses, the improvement and expansion of existing facilities, the purchase or construction of new facilities, debt service and repayments, dividends and potential repurchases of our outstanding securities under the program discussed below. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions, mortgages, and dividends and distributions from joint venture investments.
We have historically expanded our operations through organic growth and the acquisition of dealerships and other businesses. We believe that cash flow from operations, dividends and distributions from our joint venture investments, and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our existing operations and current commitments for at least the next twelve months. In the event that economic conditions remain impacted for longer than we expect due to the COVID-19 pandemic, we pursue significant acquisitions or other expansion opportunities, pursue significant repurchases of our outstanding securities, or refinance or repay existing debt, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional borrowings, which sources of funds may not necessarily be available on terms acceptable to us, if at all. In addition, our liquidity could be negatively impacted in the event we fail to comply with the covenants under our various financing and operating agreements or in the event our floor plan financing is withdrawn.
On
As of
Securities Repurchases
From time to time, our Board of Directors has authorized securities repurchase
programs pursuant to which we may, as market conditions warrant, purchase our
outstanding common stock or debt on the open market, in privately negotiated
transactions, via a tender offer, or through a pre-arranged trading plan. We
have historically funded any such repurchases using cash flow from operations,
borrowings under our
40
Table of Contents
Dividends
We paid the following cash dividends on our common stock in 2019 and 2020:
Per Share Dividends
2019
First Quarter $ 0.38
Second Quarter 0.39
Third Quarter 0.40
Fourth Quarter 0.41
2020
First Quarter $ 0.42 Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors, which may include our earnings, capital requirements, restrictions relating to any then-existing indebtedness, financial condition and other factors.
Vehicle Financing
Refer to the disclosures provided in Part I, Item 1, Note 8 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other revolving arrangements.
Long-Term Debt Obligations As ofMarch 31, 2020 , we had the following long-term debt obligations outstanding:March 31 , (In millions) 2020
117.9
U.K. credit agreement - overdraft line of credit 6.3
3.75% senior subordinated notes due 2020 299.5
5.75% senior subordinated notes due 2022 547.9
5.375% senior subordinated notes due 2024 298.2
5.50% senior subordinated notes due 2026 495.9
Australia capital loan agreement 27.1
Australia working capital loan agreement 12.3
Mortgage facilities 416.7
Other 48.9
Total long-term debt $ 2,620.7 As of
41
Table of Contents
Short-Term Borrowings
We have four principal sources of short-term borrowings: the revolving portion
of the
During the three months ended
Interest Rate Swaps
The Company periodically uses interest rate swaps to manage interest rate risk
associated with the Company's variable rate floor plan debt. In
PTS Dividends
We hold a 28.9% ownership interest in PTS as noted above. Their partnership
agreement requires PTS, subject to applicable law and the terms of its credit
agreements, to make quarterly distributions to the partners with respect to each
fiscal year by no later than 45 days after the end of each of the first three
quarters of the year and by
Sale/Leaseback Arrangements
We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds that vary from period to period.
Operating Leases
As of
Off-Balance Sheet Arrangements
Refer to the disclosures provided in Part I, Item 1, Note 12 of the Notes to our
Consolidated Condensed Financial Statements for a description of our off-balance
sheet arrangements, which include lease obligations and a repurchase commitment
related to our floor plan credit agreement with
42
Table of Contents
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees
with respect to senior subordinated notes of
Each of the Senior Subordinated Notes are our unsecured, senior subordinated
obligations and are guaranteed on an unsecured senior subordinated basis by our
100% owned
Guarantor subsidiaries are directly or indirectly 100% owned by PAG, and the guarantees are full and unconditional, and joint and several. The guarantees may be released under certain circumstances upon resale, or transfer by us of the stock of the related guarantor or all or substantially all of the assets of the guarantor to a non-affiliate. Non-wholly owned and foreign subsidiaries of PAG do not guarantee the Senior Subordinated Notes ("Non-Guarantor Subsidiaries"). The following tables present summarized financial information for PAG and the Guarantor Subsidiaries on a combined basis. The financial information of issuers and guarantors is presented on a combined basis; intercompany balances and transactions between issuers and guarantors have been eliminated; the issuer's or guarantor's amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries and related parties are disclosed separately.
Condensed income statement information:
PAG and Guarantor Subsidiaries
Three Months Ended Twelve Months Ended
March 31, 2020 December 31, 2019
Revenues $ 2,775.5 $ 12,928.8
Gross profit 459.5 2,019.2
Equity in earnings of affiliates 13.6 142.4
Income from continuing operations 38.3 318.8
Net income 38.3 319.2
Net income attributable to Penske Automotive Group 38.3 319.2
Condensed balance sheet information:
PAG and Guarantor Subsidiaries
March 31, 2020 December 31, 2019
Current assets (1) $ 3,339.5 $ 3,157.5
Property and equipment, net 1,107.7 1,104.9
Equity method investments 1,333.2 1,328.8
Other noncurrent assets 3,217.0 3,230.9
Current liabilities 2,561.7 2,684.2
Noncurrent liabilities 4,501.3 4,175.3
(1) Includes
31 2019, respectively, due from Non-Guarantors.
During the three months ended
43
Table of Contents
Cash Flows
The following table summarizes the changes in our cash provided by (used in)
operating, investing, and financing activities. The major components of these
changes are discussed below.
Three Months Ended March 31,
(In millions) 2020 2019
Net cash provided by continuing operating activities $ 211.9 $ 91.4
Net cash used in continuing investing activities (16.1) (49.9)
Net cash provided by (used in) continuing financing activities 209.9 (37.1)
Net cash provided by (used in) discontinued operations 0.1 (0.1)
Effect of exchange rate changes on cash and cash equivalents (2.0) (0.2)
Net change in cash and cash equivalents $ 403.8 $ 4.1
Cash Flows from Continuing Operating Activities
Cash flows from continuing operating activities includes net income, as adjusted for non-cash items and the effects of changes in working capital.
We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale, and a portion of our used vehicle inventories for retail sale, under floor plan and other revolving arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. We retain the right to select which, if any, financing source to utilize in connection with the procurement of vehicle inventories. Many vehicle manufacturers provide vehicle financing for the dealers representing their brands; however, it is not a requirement that we utilize this financing. Historically, our floor plan finance source has been based on aggregate pricing considerations.
In accordance with generally accepted accounting principles relating to the
statement of cash flows, we report all cash flows arising in connection with
floor plan notes payable with the manufacturer of a particular new vehicle as an
operating activity in our statement of cash flows, and all cash flows arising in
connection with floor plan notes payable to a party other than the manufacturer
of a particular new vehicle, all floor plan notes payable relating to pre-owned
vehicles, and all floor plan notes payable related to our commercial vehicles in
We believe that changes in aggregate floor plan liabilities are typically linked to changes in vehicle inventory, and therefore, are an integral part of understanding changes in our working capital and operating cash flow. As a result, we prepare the following reconciliation to highlight our operating cash flows with all changes in vehicle floor plan being classified as an operating activity for informational purposes:
Three Months Ended March 31,
(In millions) 2020 2019
Net cash from continuing operating activities as reported
11.7 60.1
Net cash from continuing operating activities including all
floor plan notes payable $ 223.6 $ 151.5 Cash Flows from Continuing Investing Activities
Cash flows from continuing investing activities consist primarily of cash used
for capital expenditures, proceeds from the sale of dealerships, and net
expenditures for acquisitions and other investments. Capital expenditures were
44
Table of Contents
with operating cash flows or borrowings under our
Cash Flows from Continuing Financing Activities
Cash flows from continuing financing activities include net borrowings or repayments of long-term debt, net repayments of floor plan notes payable non-trade, repurchases of common stock, and dividends.
We had net borrowings of long-term debt of
Cash Flows from Discontinued Operations
Cash flows relating to discontinued operations are not currently considered, nor are they expected to be, material to our liquidity or our capital resources. Management does not believe that there are any material past, present or upcoming cash transactions relating to discontinued operations.
Related Party Transactions Stockholders Agreement
Several of our directors and officers are affiliated with
Other Related Party Interests and Transactions
We sometimes pay to and/or receive fees from
We own a 28.9% interest in PTS. PTS, discussed previously, is owned 41.1% by
45
Table of Contents
Joint Venture Relationships
We are party to a number of joint ventures pursuant to which we own and operate
automotive dealerships together with other investors. We may provide these
dealerships with working capital and other debt financing at costs that are
based on our incremental borrowing rate. As of
Location Dealerships Ownership Interest
Fairfield, Connecticut Audi, Mercedes-Benz, Sprinter, Porsche 80.00 % (A)
Greenwich, Connecticut Mercedes-Benz 80.00 % (A)
Edison, New Jersey Bentley, Ferrari, Maserati 20.00 % (B)
BMW, MINI, Maserati, Porsche, Audi,
Land Rover, Volvo, Mercedes-Benz,
Northern Italy smart, Lamborghini 84.10 % (A)
Aachen, Germany Audi, Maserati, SEAT, Skoda, Volkswagen 91.80 % (A)
Frankfurt, Germany Lexus, Toyota, Volkswagen 50.00 % (B)
Barcelona, Spain BMW, MINI 50.00 % (B)
Tokyo, Japan BMW, MINI, Rolls-Royce, Ferrari, ALPINA 49.00 % (B)
(A)Entity is consolidated in our financial statements. (B)Entity is accounted for using the equity method of accounting.
Additionally, we are party to non-automotive joint ventures representing our investments in PTS (28.9%) and Penske Commercial Leasing Australia (28%) that are accounted for under the equity method.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, fluctuating with general economic cycles. During economic downturns, the automotive and truck retailing industries tend to experience periods of decline and recession similar to those experienced by the general economy. We believe that these industries are influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates, and credit availability.
Our business is dependent on a number of factors including general economic
conditions, fuel prices, interest rate fluctuations, credit availability,
environmental and other government regulations and customer business cycles.
Seasonality
Dealership. Our business is modestly seasonal overall. Our
Commercial Vehicle Distribution. Our commercial vehicle distribution business
generally experiences higher sales volumes during the second quarter of the
year, which is primarily attributable to commercial vehicle customers completing
annual capital expenditures before their fiscal year-end, which is typically
46
Table of Contents
Effects of Inflation
We believe that inflation rates over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services; however, we cannot be sure there will be no such effect in the future. We finance substantially all of our inventory through various revolving floor plan arrangements with interest rates that vary based on various benchmarks. Such rates have historically increased during periods of increasing inflation.
Forward-Looking Statements
Certain statements and information set forth herein, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute "forward-looking statements" within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "goal," "plan," "seek," "project," "continue," "will," "would," and variations of such words and similar expressions are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this report or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements include, without limitation, statements with respect to:
? our expectations regarding the COVID-19 pandemic;
? our future financial and operating performance;
? future acquisitions and dispositions;
? future potential capital expenditures and securities repurchases;
? our ability to realize cost savings and synergies;
? our ability to respond to economic cycles;
? trends in the automotive retail industry and commercial vehicles industries and
in the general economy in the various countries in which we operate;
? our ability to access the remaining availability under our credit agreements;
? our liquidity;
? performance of joint ventures, including PTS;
? future foreign exchange rates and geopolitical events, such as Brexit;
? the outcome of various legal proceedings;
? results of self-insurance plans;
? trends affecting the automotive industry generally and our future financial
condition or results of operations; and
? our business strategy.
47
Table of Contents
Forward-looking statements involve known and unknown risks and uncertainties and
are not assurances of future performance. Actual results may differ materially
from anticipated results due to a variety of factors, including the factors
identified in our 2019 annual report on Form 10-K filed
our business and the automotive retail and commercial vehicles industries in
general are susceptible to adverse economic conditions, including changes in
interest rates, foreign exchange rates, customer demand, customer confidence,
? fuel prices, unemployment rates and credit availability (including any adverse
impact from the COVID-19 pandemic discussed in Part I, Item 2, Management's
Discussion and Analysis of Financial Condition and Results of Operations and
Part II, Item 1A. Risk Factors);
? the political and economic outcome of Brexit in the
increased tariffs, import product restrictions, and foreign trade risks that
? may impair our ability to sell foreign vehicles profitably, including any
eventual tariffs resulting from the threats from the
add 25% tariffs on foreign vehicles or parts;
? the number of new and used vehicles sold in our markets;
the effect on our businesses of the trend of electrification of vehicle
? engines, new mobility technologies such as shared vehicle services, such as
Uber and Lyft, and the eventual availability of driverless vehicles;
vehicle manufacturers exercise significant control over our operations, and we
? depend on them and the continuation of our franchise and distribution
agreements in order to operate our business;
we depend on the success, popularity and availability of the brands we sell,
and adverse conditions affecting one or more vehicle manufacturers, including
the adverse impact on the vehicle and parts supply chain due to natural
disasters or other disruptions that interrupt the supply of vehicles and parts
? to us (including any disruptions resulting from the new fuel economy testing
and Co2 emissions legislation in the
pandemic discussed in Part I, Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations and Part II, Item 1A. Risk
Factors), may negatively impact our revenues and profitability;
? we are subject to the risk that a substantial number of our new or used
inventory may be unavailable due to recall or other reasons;
the success of our commercial vehicle distribution operations and engine and
power systems distribution operations depends upon continued availability of
? the vehicles, engines, power systems, and other parts we distribute, demand for
those vehicles, engines, power systems, and parts and general economic
conditions in those markets;
? a restructuring of any significant vehicle manufacturer or supplier;
? our operations may be affected by severe weather, such as the recent hurricanes
in
? we have substantial risk of loss not covered by insurance;
we may not be able to satisfy our capital requirements for acquisitions,
? facility renovation projects, financing the purchase of our inventory, or
refinancing of our debt when it becomes due;
48
Table of Contents
our level of indebtedness may limit our ability to obtain financing generally
? and may require that a significant portion of our cash flow be used for debt
service;
? non-compliance with the financial ratios and other covenants under our credit
agreements and operating leases;
higher interest rates may significantly increase our variable rate interest
? costs and, because many customers finance their vehicle purchases, decrease
vehicle sales;
our operations outside of the
? relating to changes in foreign currency values, which have most recently
occurred as a result of the
with respect to PTS, changes in the financial health of its customers, labor
strikes or work stoppages by its employees, a reduction in PTS' asset
utilization rates, continued availability from truck manufacturers and
suppliers of vehicles and parts for its fleet, changes in values of used trucks
which affects PTS' profitability on truck sales, compliance costs in regards to
? its trucking fleet and truck drivers, its ability to retain qualified drivers
and technicians, risks associated with its participation in multi-employer
pension plans, conditions in the capital markets to assure PTS' continued
availability of capital to purchase trucks, the effect of changes in lease
accounting rules on PTS customers' purchase/lease decisions, and industry
competition, each of which could impact distributions to us;
we are dependent on continued security and availability of our information
? technology systems and we may be subject to fines, penalties, and other costs
under applicable privacy laws if we do not maintain our confidential customer
and employee information properly;
? if we lose key personnel, especially our Chief Executive Officer, or are unable
to attract additional qualified personnel;
new or enhanced regulations relating to automobile dealerships including those
? being considered by the
certain compensation we receive relating to automotive financing in the
? changes in tax, financial or regulatory rules or requirements;
we could be subject to legal and administrative proceedings which, if the
? outcomes are adverse to us, could have a material adverse effect on our
business;
if state dealer laws in the
? dealerships may be subject to increased competition and may be more susceptible
to termination, non-renewal or renegotiation of their franchise agreements;
? some of our directors and officers may have conflicts of interest with respect
to certain related party transactions and other business interests; and
? shares of our common stock eligible for future sale may cause the market price
of our common stock to drop significantly, even if our business is doing well.
We urge you to carefully consider these risk factors and further information
under "Item 1A. Risk Factors" in evaluating all forward-looking statements
regarding our business. Readers of this report are cautioned not to place undue
reliance on the forward-looking statements contained in this report. All
forward-looking statements attributable to us are qualified in their entirety by
this cautionary statement. Except to the extent required by the federal
securities laws and the
49
Table of Contents© Edgar Online, source
