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 "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 inthe United States ,Canada , andWestern Europe and distributes commercial vehicles, power systems, and related parts and services principally inAustralia and New Zealand . We employ over 23,000 people worldwide. COVID-19 Disclosure
Overview - The outbreak of the COVID-19 pandemic across the globe adversely impacted each of our markets and the global economy beginning in the first quarter of 2020, leading to disruptions to our business. Governmental authorities have taken countermeasures to slow the outbreak, including shelter-in-place orders, restrictions on travel, and government-funded assistance programs to individuals and businesses. The shelter-in-place orders and resulting business closures severely and negatively impacted our results, in particular in the second quarter of 2020. While the pandemic continues in all of our markets, as these orders lapsed and businesses reopened, we experienced improved business conditions and improved financial results in the third and fourth quarters, primarily driven by our cost cutting measures and increased gross profit on vehicles sold. During 2020, our new and used gross profit per unit increased 17.1% and 29.3%, principally resulting from limited vehicle availability due to plant shutdowns related to the COVID-19 pandemic, as new and used retail automotive gross profit per unit increased when compared to 2019. In addition, selling, general, and administrative expenses as a percentage of gross profit decreased by 3.6 percentage points in 2020 in part due to employee reductions, temporary compensation reductions, government assistance, and other expense reductions noted below.
The situation caused by the COVID-19 pandemic is highly fluid and rapidly evolving, and while we continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment, we cannot anticipate with any certainty the length, scope, or severity of the business impact from the COVID-19 pandemic in each of the jurisdictions that we operate. See "Part I, Item 1A. Risk Factors."
In response to shelter-in-place orders resulting from the COVID-19 pandemic, many of our automotive and commercial vehicle showrooms experienced temporary closures during 2020. Nearly all of our service, parts, and collision center departments remained open during the crisis, and curbside or home delivery offerings supplemented our traditional service offerings. We modified certain business practices to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. We continue to offer sales activity by appointment and through our e-commerce channels. In all of our locations, we implemented enhanced cleaning procedures, enforced social distancing guidelines, and took other precautions to maintain the health and safety of our employees and customers. We continue to experience interim business closures at some of our facilities in response to a customer or employee reporting a positive test result for COVID-19. When we become aware of such result, we notify appropriate personnel and deep clean our facility, which may include closure of that facility. We also are experiencing increased costs for providing the appropriate level of safety equipment for our facilities, employees, and customers, as well as increased costs for daily and enhanced
deep cleaning when appropriate.
Beginning in the first quarter of 2020, we implemented a hiring freeze and
expense reductions across the company, including the postponement and
elimination of an estimated
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approximately 15,000 employees in April and May in various countries, though we
returned most of those employees to work during the course of the year. We also
reduced our workforce by approximately 3,300 employees or 12.4% compared to
December 31, 2019 . During 2020, many of our employees who were not furloughed
worked reduced hours and experienced pay cuts, including a six-month 100%
reduction in salary for our CEO and President and 25% temporary reductions in
salary for our other named executive officers. In addition, our Board of
Directors waived six months of board service fees in 2020. The compensation
levels for our executive officers and Board of Directors have since returned to
their pre-COVID-19 levels.
Most of our manufacturer partners began suspending production beginning in lateMarch 2020 , and production disruptions continued into the second quarter of 2020. These disruptions resulted in lower inventory levels, in particular for new vehicles and limited inventory of certain models. Our manufacturer partners began providing us with additional incentive support inMarch 2020 , and our manufacturer and lending partners have provided support to retail customers, such as increased incentives, payment deferrals, as well as 0% financing on certain vehicles and term lengths. While production has improved, the level of new vehicle inventory remains well below historical levels, which has contributed to increased gross profit on vehicles sold.United States - Beginning inMarch 2020 , shelter-in-place rules in many states either required we close dealerships or limit our automotive dealership operations to essential services. Virtual/online sales of new and used vehicles remained available in all locations, while the service departments remained open to support critical transportation needs. InMay 2020 , many shelter-in-place rules began to expire, and restrictions were slowly lifted in many states allowing us to reopen dealerships all of which remain open, subject in certain locations to personnel capacity limits. For the year endedDecember 31, 2020 , new and used retail automotive gross profit per unit increased 19.5% and 16.8%, primarily due to inventory shortages and additional manufacturer incentives, while our automotive dealerships experienced a 14.4% decrease in unit volume and a 12.5% decrease in service and parts revenues compared to the prior year on a same-store basis. OurU.S. Used Vehicle SuperCenters experienced a same-store used unit sales decline of 26.9% in 2020, largely attributable to lower inventory and the COVID-19 pandemic. Commercial truck dealership sales and service operations were classified as essential businesses and remained open throughout 2020 in most locations around theU.S. andCanada providing services to our customers. For the year endedDecember 31, 2020 , the North American Class 6-8 retail sales market declined 29.6%, and our new same-store unit sales and revenue declined 10.0% and 5.2%, respectively, during the same period. 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 which 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 slowed during the second quarter of 2020 but increased with the expirations of the shelter-in-place orders. In the third quarter of 2020, PTS began to experience increased levels of utilization and profitability as business conditions improved. In its logistics services business, throughout 2020, PTS experienced heavy volumes in the grocery sector which were offset by plant closings in automotive and manufacturing. In the third quarter of 2020, most of PTS' logistics customers returned to normal operations, generating strong results. PTS has also experienced improved remarketing results as truck prices improved in response to limited inventory. In response to the COVID-19 pandemic, PTS initially furloughed over 5,000 employees, most of which returned to work. PTS also reduced executive salaries by up to 30%, which reductions have been eliminated.United Kingdom - All dealerships closed onMarch 24, 2020 , in accordance with government orders, though we provided service and parts operations on an emergency basis. Over 90% of the employees in theU.K. were placed on furlough beginningMarch 24, 2020 . However, we opened substantially all service and parts operations inmid-May 2020 and showrooms in earlyJune 2020 . During the fourth quarter of 2020 and continuing into 2021, in response to increased incidence of the COVID-19 pandemic, certain parts of theU.K. reinstated shelter-in-place orders which required our dealerships to close. We continue to conduct sales through our online "Click & Collect" program, which allows vehicle sales without showroom access. Despite showroom closures in theU.K. during the fourth quarter of 2020, ourUK dealers experienced a 5.6% increase in gross profit when compared to the fourth quarter of 2019 driven by an increase in gross profit per unit and sales through our e-commerce channels. For the year endedDecember 31, 2020 , new and used retail automotive gross profit per unit increased 10.1% and 45.6%, primarily due to inventory shortages and additional 36
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manufacturer incentives, while our automotive dealerships experienced a 20.5% decrease in unit volume and a 14.1% decrease in service and parts revenues compared to the prior year on a same-store basis. OurU.K. Used Vehicle SuperCenters also experienced a same-store gross profit per unit increase of 35.2%, primarily due to improved inventory management, and a same-store used unit sales decrease of 31.3% in 2020.Australia - In most jurisdictions, non-essential business operations were closed by government order inMarch 2020 though many governmental restrictions have since been lifted. Penske Australia has been deemed essential throughout the COVID-19 pandemic, and therefore, sales, parts, service, and defense functions continue to remain operational. Throughout 2020, Penske Australia results of operations have remained consistent in spite of the COVID-19 pandemic. Government Assistance - We received government assistance in most of our jurisdictions through COVID-19 related government programs which provided tax credits or direct wage or health care assistance payments to us. These programs generally require us to claim tax credits or apply to the government for reimbursement of wages or employee health benefits based on the applicable laws and programs within each jurisdiction. During 2020, we received$57.5 million of wage assistance for furloughed employees in theU.K. , as well as an additional$8.5 million of assistance and tax credits in ourU.S. and other jurisdictions. As a result, we recorded a reduction to selling, general, and administrative expenses of approximately$66.0 million for the amounts of government assistance received during 2020. Liquidity - As ofDecember 31, 2020 , we had$49.5 million of cash and access to an additional$952 million of availability through our revolving credit facilities. This amount includes$100 million of additional borrowing capacity under ourU.S. credit agreement which we amended effectiveAugust 1, 2020 . During the third quarter of 2020, we repaid in full at scheduled maturity our$300 million 3.75% senior subordinated notes dueAugust 15, 2020 . We also issued$550 million in aggregate principal amount of 3.50% senior subordinated notes due 2025 inAugust 2020 , the proceeds of which were used to redeem our$550 million in aggregate principal amount of 5.75% senior subordinated notes due 2022 onOctober 1, 2020 . During the fourth quarter of 2020, we also redeemed our$300 million 5.375% senior subordinated notes due 2024 at a redemption price equal to 101.792% of the principal amount together with accrued and unpaid interest, using availability under ourU.S. revolving credit facility and cash flow from operations. Refer to Part II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements for further discussion of our long-term debt. Risks and Uncertainties - The full impact that the COVID-19 pandemic will have on our business cannot be predicted at this time due to numerous uncertainties, including the duration of the outbreak, travel restrictions, business closures, the effectiveness of actions taken to contain the disease, the distribution rate and acceptance rate of a vaccine, the effect of government assistance programs, production levels from our manufacturing partners, 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 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. Business Overview In 2020, our business generated$20.4 billion in total revenue, which is comprised of approximately$17.9 billion from retail automotive dealerships,$2.1 billion from retail commercial truck dealerships, and$454.2 million from commercial vehicle distribution and other operations. We generated$3.2 billion in gross profit, which is comprised of$2.8 billion from retail automotive dealerships,$280.9 million from retail commercial truck dealerships, and$122.3 million from commercial vehicle distribution and other operations. 37 Table of Contents Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in theU.S. as measured by the$17.9 billion in total retail automotive dealership revenue we generated in 2020. As ofDecember 31, 2020 , we operated 304 retail automotive franchises, of which 142 franchises are located in theU.S. and 162 franchises are located outside of theU.S. The franchises outside theU.S. are located primarily in theU.K. In 2020, we retailed and wholesaled more than 505,000 vehicles. We are diversified geographically with 57% of our total retail automotive dealership revenues in 2020 generated in theU.S. andPuerto Rico and 43% generated outside theU.S. We offer over 35 vehicle brands with 71% of our retail automotive dealership revenue in 2020 generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz, and Porsche. Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services, the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products. In 2020, we also acquired the remaining 8.2% interest in one of our former retail automotive joint ventures in Aachen,Germany . We also operate seventeen Used Vehicle SuperCenters in theU.S. and theU.K. , which retail and wholesale used vehicles under a one price, "no-haggle" methodology. Our operations in theU.S. consist of six retail locations operating in thePhiladelphia andPittsburgh, Pennsylvania market areas. Our operations in theU.K. consist of eleven retail locations and a vehicle preparation center. During 2020, we opened one Used Vehicle SuperCenter inNottingham, United Kingdom . For the year endedDecember 31, 2020 , these Used Vehicle SuperCenters retailed 53,207 units and generated$1.0 billion in revenue.
Retail automotive dealerships represented 87.7% of our total revenues and 87.3% of our total gross profit in 2020.
Retail Commercial Truck Dealership. We operate a heavy and medium duty truck dealership group known asPremier Truck Group ("PTG") offering primarilyFreightliner and Western Star trucks (bothDaimler brands) with locations inTexas ,Oklahoma ,Tennessee ,Georgia ,Utah ,Idaho , andCanada . As ofDecember 31, 2020 , PTG operated twenty-five locations. 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.
This business represented 10.1% of our total revenues and 8.8% of our total gross profit in 2020.
Penske Australia. We are the exclusive importer and distributor ofWestern Star heavy-duty trucks, MAN heavy and medium duty trucks and buses (aVW Group brand), andDennis Eagle refuse collection vehicles, together with associated parts, acrossAustralia ,New Zealand , and portions of the Pacific. In most of these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing MTU,Detroit Diesel , Allison Transmission, MTU Onsite Energy,Rolls Royce Power Systems , and Bergen Engines. This business, known as Penske Australia, offers products across the on- and off-highway markets, including in the construction, mining, marine, defense, and power generation sectors and supports full parts and aftersales service through a network of branches, field locations, and dealers across the region.
These businesses represented 2.2% of our total revenues and 3.9% of our total gross profit in 2020.
Penske Transportation Solutions. We hold a 28.9% ownership interest inPenske Truck Leasing Co., L.P ("PTL"). PTL is owned 41.1% byPenske Corporation , 28.9% by us, and 30.0% by Mitsui & Co., Ltd. ("Mitsui"). 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. Penske Transportation Solutions ("PTS") is the universal brand name for PTL's various business lines through which it 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, lead logistics provider services, and dry van truckload carrier services. We recorded$164.5 million in equity earnings from this investment in 2020. Outlook
Please see the discussion provided under "Outlook" in Part I, Item 1 for a discussion of our outlook in our markets.
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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, fleet customers, and 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 Australia and New
Zealand are principally driven by the number and types of products and vehicles
ordered by our customers.
Aggregate revenue and gross profit decreased
As exchange rates fluctuate, our revenue and results of operations as reported inU.S. Dollars fluctuate. For example, if the British Pound were to weaken against theU.S. Dollar, ourU.K. results of operations would translate into lessU.S. Dollar reported results. Foreign currency average rate fluctuations increased revenue and gross profit by$118.6 million and$16.9 million , respectively, in 2020. Foreign currency average rate fluctuations increased earnings per share from continuing operations by approximately$0.03 per share in 2020. Excluding the impact of foreign currency average rate fluctuations, revenue and gross profit decreased 12.3% and 8.3%, respectively, in 2020. 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 are secured by those vehicles. Other interest expense consists of interest charges on all of our interest-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"), theBank of England Base Rate , the Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, the AustralianBank Bill Swap Rate , or the New Zealand Bank Bill Benchmark Rate. Regulatory authorities in both theU.S. andU.K. have announced their intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In theU.S. , we expect the Secured Overnight Financing Rate ("SOFR") will be adopted in lieu of LIBOR. In theU.K. , we expect the Sterling Overnight Indexed Average (SONIA) to be adopted. Our senior secured revolving credit facilities in theU.S. andU.K. , and many of our floorplan arrangements, utilize LIBOR as a benchmark for calculating the applicable interest rate. We cannot predict the effect of the potential changes to or elimination of LIBOR or the establishment and use of alternative rates or benchmarks and the corresponding effects on our cost of capital.
Equity in earnings of affiliates principally represents our share of the earnings from PTS, along with our investments in joint ventures and other non-consolidated investments.
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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 the COVID-19 pandemic; our ability to react
effectively to changing business conditions in light of the COVID-19 pandemic;
our ability to consummate and integrate acquisitions; the level of vehicle sales
in the markets where we operate; our ability to obtain vehicles from our
manufacturers, especially in light of the COVID-19 pandemic; 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 "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 inthe United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues, and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.
The following are the accounting policies applied in the preparation of our financial statements that management believes are most dependent upon the use of estimates and assumptions.
Revenue Recognition
Dealership Vehicle, Parts, and Service Sales. We record revenue for vehicle sales at a point in time when vehicles are delivered, which is when the transfer of title, risks, and rewards of ownership and control are considered passed to the customer. We record revenue for vehicle service and collision work over time as work is completed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general, and administrative expenses. The amounts received under certain manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received or upon attainment of the particular program goals if not associated with individual vehicles. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). During 2020, 2019, and 2018, we earned$588.7 million ,$698.4 million , and$699.4 million , respectively, of rebates, incentives, and reimbursements from manufacturers, of which$575.4 million ,$679.2 million , and$680.0 million , respectively, was recorded as a reduction of cost of sales. The remaining$13.3 million ,$19.2 million , and$19.4 million was recorded as a reduction of selling, general, and administrative expenses during 2020, 2019, and 2018, respectively. Dealership Finance and Insurance Sales. Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including guaranteed vehicle protection insurance, vehicle theft protection, and extended service contracts. These commissions are recorded as revenue at a point in time when the customer enters into the contract. Payment is typically due and collected within 30 days subsequent to the execution of the contract with the customer. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts and other insurance products, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we received may be charged back based on the terms of the contracts. The revenue we record relating to these transactions is net of an estimate of the amount of chargebacks we will be required to pay. Our estimate is based upon our historical experience with similar contracts, including the impact of refinance and default rates on retail finance contracts and 40
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cancellation rates on extended service contracts and other insurance products. Aggregate reserves relating to chargeback activity were$28.7 million and$26.6 million as ofDecember 31, 2020 , andDecember 31, 2019 , respectively. Commercial Vehicle Distribution. We record revenue from the distribution of vehicles, engines, and other products at a point in time when delivered, which is when the transfer of title, risks, and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed and when parts are delivered to our customers. For our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones.
Refer to the disclosures provided in Part II, Item 8, Note 2 of the Notes to our Consolidated Financial Statements for additional detail on revenue recognition.
Impairment Testing Other indefinite-lived intangible assets are assessed for impairment annually onOctober 1 and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. These indefinite-lived intangible assets relate to franchise agreements with vehicle manufacturers and distributors, which represent the estimated value of franchises acquired in business combinations, and distribution agreements with commercial vehicle manufacturers, which represent the estimated value for distribution rights acquired in business combinations. An indicator of impairment exists if the carrying value exceeds its estimated fair value, and an impairment loss may be recognized up to that excess. The fair value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, profit margins, and the cost of capital. We also evaluate, in connection with the annual impairment testing, whether events and circumstances continue to support our assessment that the other indefinite-lived intangible assets continue to have an indefinite life.Goodwill impairment is assessed at the reporting unit level annually onOctober 1 and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined that we have four reportable segments as defined in generally accepted accounting principles for segment reporting: (i)Retail Automotive , consisting of our retail automotive dealership operations; (ii) Retail Commercial Truck, consisting of our retail commercial truck dealership operations in theU.S. andCanada ; (iii) Other, consisting of our commercial vehicle and power systems distribution operations and other non-automotive consolidated operations; and (iv) Non-Automotive Investments, consisting of our equity method investments in non-automotive operations which includes our investment in PTS. We have determined that the dealerships in each of our operating segments within theRetail Automotive reportable segment are components that are aggregated into six reporting units for the purpose of goodwill impairment testing as they (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and/or used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals), and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). The reporting units are Eastern, Central, andWestern United States , Stand-Alone Used United States, International, andStand-Alone Used International . Our Retail Commercial Truck reportable segment has been determined to represent one operating segment and reporting unit. The goodwill included in our Other reportable segment relates to our commercial vehicle distribution operating segment. There is no goodwill recorded in our Non-Automotive Investments reportable segment. For ourRetail Automotive , Retail Commercial Truck, and Other reporting units, we prepared a quantitative assessment of the carrying value of goodwill. We estimated the fair value of our reporting units using an "income" valuation approach. The "income" valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using the weighted average cost of capital as the discount rate. We also validate the fair value for each reporting unit using the income approach by calculating a cash earnings multiple and determining whether the multiple was reasonable compared to recent market transactions completed by the Company or in the industry. As part of that assessment, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization. We believe this reconciliation process is consistent with a market participant perspective. This consideration would also include a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest and other significant assumptions, including revenue and profitability growth, franchise profit margins, residual values, and the cost of capital. During 2020, we concluded 41
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that for the retail automotive, retail commercial truck, and other reporting units that their fair values exceeded its carrying value.
Investments
We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investee's income each period. The net book value of our investments was$1,500.3 million and$1,399.0 million as ofDecember 31, 2020 , and 2019, respectively, including$1,419.2 million and$1,323.2 million relating to PTS as ofDecember 31, 2020 , and 2019, respectively. We currently hold a 28.9% ownership interest in PTS. Investments for which there is not a liquid, actively traded market are reviewed periodically by management for indicators of impairment. If an indicator of impairment is identified, management estimates the fair value of the investment using a discounted cash flow approach, which includes assumptions relating to revenue and profitability growth, profit margins, residual values, and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments' carrying value to fair value.Self-Insurance We retain risk relating to certain of our general liability insurance, workers' compensation insurance, vehicle physical damage insurance, property insurance, employment practices liability insurance, information security risk insurance, directors and officers' insurance, and employee medical benefits in theU.S. As a result, we are likely to be responsible for a significant portion of the claims and losses incurred under these programs. The amount of risk we retain varies by program, and for certain exposures, we have pre-determined maximum loss limits for certain individual claims and/or insurance periods. Losses, if any, above the pre-determined loss limits are paid by third-party insurance carriers. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. Our estimate of future losses is prepared by management using our historical loss experience and industry-based development factors. Aggregate reserves relating to retained risk were$29.7 million and$28.6 million as ofDecember 31, 2020 , and 2019, respectively. Income Taxes Tax regulations may require items to be included in our tax returns at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax returns in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax returns that have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes various income and payroll tax provisions, modifications to federal net operating loss rules, business interest deduction limitations, and bonus depreciation eligibility for qualified improvement property. As a result of the net operating loss carryback provision of the CARES Act and various otherU.S. and foreign tax legislation changes, we recorded an income tax benefit of$11.4 million for the year endedDecember 31, 2020 . Additionally, we received payroll tax deferrals and benefits from the employee retention tax credit.
Refer to the disclosures provided in Part II, Item 8, Note 17 of the Notes to
our Consolidated Financial Statements for additional detail on our accounting
for income taxes, including additional discussion on the enactment of the Act
and the resulting impact on our financial statements.
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Leases
We determine if an arrangement is a lease at inception. Our operating leases
primarily consist of land and facilities, including certain dealerships and
office space. We also have equipment leases that primarily relate to office and
computer equipment, service and shop equipment, company vehicles, and other
miscellaneous items. We do not have any material leases, individually or in the
aggregate, classified as a finance leasing arrangement.
Operating leases are included in "operating lease right-of-use assets," "accrued
expenses and other current liabilities," and "long-term operating lease
liabilities" on our Consolidated Balance Sheet. Operating lease right-of-use
assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. Our property leases are generally
for an initial period between 5 and 20 years and are typically structured to
include renewal options at our election. We include renewal options that we are
reasonably certain to exercise in the measurement our lease liabilities and
right-of-use assets. As the rate implicit in the lease is generally not readily
determinable for our operating leases, the discount rates used to determine the
present value of our lease liability are based on our incremental borrowing rate
at the lease commencement date and commensurate with the remaining lease term.
Our incremental borrowing rate for a lease is the rate of interest we would have
to pay to borrow on a collateralized basis over a similar term for an amount
equal to the lease payments in a similar economic environment. Lease expense is
recognized on a straight-line basis over the lease term.
Refer to the disclosures provided in Part II, Item 8, Note 3 and Note 12 of the Notes to our Consolidated Financial Statements for a description of our operating leases.
Recent Accounting Pronouncements
Please see the disclosures provided under "Recent Accounting Pronouncements" in Part II, Item 8, Note 1 of the Notes to our Consolidated Financial Statements set forth below which are incorporated by reference herein. 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 onJanuary 15, 2018 , the results of the acquired entity would be included in annual same-store comparisons beginning with the year endedDecember 31, 2020 , and in quarterly same-store comparisons beginning with the quarter endedJune 30, 2019 . The results for 2020 have been impacted by the COVID-19 pandemic, and each of the items mentioned below should be reviewed in light of our discussion under "COVID-19 Disclosure" and "Item 1A. Risk Factors" which are incorporated herein. The results for 2020 include a net income tax benefit of$11.4 million , or$0.14 per share, related to the CARES Act and various otherU.S. and foreign tax legislation changes. The results for 2020 also include a net benefit of$3.3 million , or$0.04 per share, related to a gain on the sale of retail automotive dealerships, partially offset by a loss on debt extinguishment of$6.4 million , or$0.08 per share. For the discussion and analysis comparing the results of operations for 2018 to 2019, we refer you to Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results in the 2019 Form 10-K filed onFebruary 21 ,
2020.
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Retail Automotive Dealership New Vehicle Data
(In millions, except unit and per unit amounts)
2020 vs. 2019 2019 vs. 2018
New Vehicle Data 2020 2019 Change % Change 2019 2018 Change % Change
New retail unit
sales 178,437 222,704 (44,267) (19.9) % 222,704 235,964 (13,260) (5.6) %
Same-store new
retail unit
sales 176,153 212,848 (36,695) (17.2) % 214,389 225,513 (11,124) (4.9) %
New retail sales
revenue $ 8,080.5 $ 9,329.5 $ (1,249.0) (13.4) % $ 9,329.5 $ 9,666.4 $ (336.9) (3.5) %
Same-store new
retail sales
revenue $ 8,007.2 $ 9,013.4 $ (1,006.2) (11.2) % $ 9,000.7 $ 9,291.4 $ (290.7) (3.1) %
New retail sales
revenue per unit $ 45,285 $ 41,892 $ 3,393 8.1 % $ 41,892 $ 40,966 $ 926 2.3 %
Same-store new
retail sales
revenue per unit $ 45,456 $ 42,347 $ 3,109 7.3 % $ 41,983 $ 41,201 $ 782 1.9 %
Gross profit -
new $ 652.8 $ 695.6 $ (42.8) (6.2) % $ 695.6 $ 724.6 $ (29.0) (4.0) %
Same-store gross
profit - new $ 648.7 $ 676.2 $ (27.5) (4.1) % $ 666.7 $ 693.5 $ (26.8) (3.9) %
Average gross
profit per new
vehicle retailed $ 3,659 $ 3,124 $ 535 17.1 % $ 3,124 $ 3,070 $ 54 1.8 %
Same-store
average gross
profit per new
vehicle retailed $ 3,683 $ 3,177 $ 506 15.9 % $ 3,110$ 3,075 $ 35 1.1 % Gross margin % - new 8.1 % 7.5 % 0.6 % 8.0 % 7.5 % 7.5 % - % - % Same-store gross margin % - new 8.1 % 7.5 % 0.6 % 8.0 %
7.4 % 7.5 % (0.1) % (1.3) %
Units Retail unit sales of new vehicles decreased from 2019 to 2020 due to a 36,695 unit, or 17.2%, decrease in same-store new retail unit sales, coupled with a 7,572 unit decrease from net dealership dispositions. Same-store units decreased 14.0% in theU.S. and decreased 22.6% internationally. Overall, new units decreased 14.8% in theU.S. and decreased 27.8% internationally. The decrease in units is primarily due to the decline in our retail automotive business resulting from the COVID-19 pandemic, as well as the limited availability of inventory from our manufacturers as discussed above. Revenues New vehicle retail sales revenue decreased from 2019 to 2020 due to a$1,006.2 million , or 11.2%, decrease in same-store revenues, coupled with a$242.8 million decrease from net dealership dispositions. Excluding$40.0 million of favorable foreign currency fluctuations, same-store new retail revenue decreased 11.6%. The same-store revenue decrease is due to the decrease in same-store new retail unit sales, which decreased revenue by$1,553.9 million , partially offset by the$3,109 per unit increase in comparative average selling prices (including a$227 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by$547.7 million . Gross Profit
Retail gross profit from new vehicle sales decreased from 2019 to 2020 due to a$27.5 million , or 4.1%, decrease in same-store gross profit, coupled with a$15.3 million decrease from net dealership dispositions. Excluding$3.9 million of favorable foreign currency fluctuations, same-store gross profit decreased 4.6%. The decrease in same-store gross profit is due to the decrease in same-store new retail unit sales, which decreased gross profit by$116.6 million , partially offset by a$506 per unit increase in the average gross profit per new vehicle retailed (including a$22 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by$89.1 million . The increase in average gross profit per new vehicle retailed is partially attributed to limited availability of inventory from our manufacturers as discussed above. 44 Table of Contents
Retail Automotive Dealership Used Vehicle Data
(In millions, except unit and per unit amounts)
2020 vs. 2019 2019 vs. 2018
Used Vehicle Data 2020 2019 Change % Change 2019 2018 Change % Change
Used retail unit
sales 233,469 284,190 (50,721) (17.8) % 284,190 282,542 1,648 0.6 %
Same-store used
retail unit sales 226,920 273,732 (46,812) (17.1) % 275,123 272,086 3,037 1.1 %
Used retail sales
revenue $ 6,414.7 $ 7,241.2 $ (826.5) (11.4) % $ 7,241.2 $ 7,252.1 $ (10.9) (0.2) %
Same-store used
retail sales
revenue $ 6,289.4 $ 7,015.2 $ (725.8) (10.3) % $ 7,029.3 $ 7,028.3 $ 1.0 0.0 %
Used retail sales
revenue per unit $ 27,476 $ 25,480 $ 1,996 7.8 % $ 25,480 $ 25,667 $ (187) (0.7) %
Same-store used
retail sales
revenue per unit $ 27,716 $ 25,628 $ 2,088 8.1 % $ 25,550 $ 25,831 $ (281) (1.1) %
Gross profit -
used $ 388.9 $ 366.1 $ 22.8 6.2 % $ 366.1 $ 409.1 $ (43.0) (10.5) %
Same-store gross
profit - used $ 382.4 $ 359.8 $ 22.6 6.3 % $ 359.3 $ 399.0 $ (39.7) (9.9) %
Average gross
profit per used
vehicle retailed $ 1,666 $ 1,288 $ 378 29.3 % $ 1,288 $ 1,448 $ (160) (11.0) %
Same-store
average gross
profit per used
vehicle retailed $ 1,685 $ 1,314 $ 371 28.2 % $ 1,306 $ 1,466 $ (160) (10.9) %
Gross margin % -
used 6.1 % 5.1 % 1.0 % 19.6 % 5.1 % 5.6 % (0.5) % (8.9) %
Same-store gross
margin % - used 6.1 % 5.1 % 1.0 % 19.6 % 5.1 % 5.7 % (0.6) % (10.5) %
Units Retail unit sales of used vehicles decreased from 2019 to 2020 due to a 46,812 unit, or 17.1%, decrease in same-store used retail unit sales, coupled with a 3,909 unit decrease from net dealership dispositions. Same-store units decreased 14.8% in theU.S. and decreased 19.1% internationally. Same-store retail units for ourU.S. andU.K. Used Vehicle SuperCenters decreased 26.9% and 31.3%, respectively. Overall, used units decreased 14.5% in theU.S. and decreased 20.7% internationally. The decrease in units is primarily due to the decline in our retail automotive business resulting from the COVID-19 pandemic. Revenues Used vehicle retail sales revenue decreased from 2019 to 2020 due to a$725.8 million decrease in same-store revenues, coupled with a$100.7 million decrease from net dealership dispositions. Excluding$58.9 million of favorable foreign currency fluctuations, same-store used retail revenue decreased 11.2%. The same-store revenue decrease is primarily due to the decrease in same-store used retail unit sales, which decreased revenue by$1,199.6 million , partially offset by a$2,088 per unit increase in comparative average selling prices (including a$259 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by$473.8 million . The average sales price per unit for our Used Vehicle SuperCenters increased 7.8% to$15,901 . Gross Profit Retail gross profit from used vehicle sales increased$22.8 million , or 6.2%, from 2019 to 2020, including a$22.6 million , or 6.3%, increase in same-store gross profit. Excluding$4.1 million of favorable foreign currency fluctuations, same-store gross profit increased 5.1%. The increase in same-store gross profit is due to a$371 per unit increase in average gross profit per used vehicle retailed (including an$18 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by$84.1 million , partially offset by the decrease in same-store used retail unit sales, which decreased gross profit by$61.5 million . The average gross profit per unit for our Used Vehicle SuperCenters increased 16.2% to$924 . The increase in average gross profit per used vehicle retailed is primarily due to 45
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lower inventory availability of new vehicles and greater affordability of used vehicles as compared to new, which increased demand for used vehicles, and improved vehicle sourcing particularly in our Used Vehicle SuperCenters.
Retail Automotive Dealership Finance and Insurance Data
(In millions, except unit and per unit amounts)
2020 vs. 2019 2019 vs. 2018
Finance and Insurance Data 2020 2019 Change % Change 2019 2018 Change % Change
Total retail unit sales 411,906 506,894 (94,988) (18.7) % 506,894 518,506 (11,612) (2.2) %
Total same-store retail
unit sales 403,073 486,580 (83,507) (17.2) % 489,512 497,599 (8,087) (1.6) %
Finance and insurance
revenue $ 576.3 $ 652.1 $ (75.8) (11.6) % $ 652.1 $ 629.6 $ 22.5 3.6 %
Same-store finance and
insurance revenue $ 566.1 $ 634.0 $ (67.9) (10.7) % $ 635.9 $ 611.7 $ 24.2 4.0 %
Finance and insurance
revenue per unit $ 1,399 $ 1,287 $ 112 8.7 % $ 1,287 $ 1,214 $ 73 6.0 %
Same-store finance and
insurance revenue per unit $ 1,404 $ 1,303 $ 101 7.8 % $ 1,299 $ 1,229 $ 70 5.7 %
Finance and insurance revenue decreased from 2019 to 2020 due to a $67.9
million , or 10.7%, decrease in same-store revenues, coupled with a $7.9 million
decrease from net dealership dispositions. Excluding $3.6 million of favorable
foreign currency fluctuations, same-store finance and insurance revenue
decreased 11.3%. The same-store revenue decrease is due to the decrease in
same-store retail unit sales, which decreased revenue by $108.7 million ,
partially offset by a $101 per unit increase in comparative average finance and
insurance revenue per unit (including an $8 per unit increase attributable to
favorable foreign currency fluctuations), which increased revenue by $40.8
million . Finance and insurance revenue per unit increased 9.1% in the U.S. and
6.5% in the U.K. We believe the increase in same-store finance and insurance
revenue per unit is primarily due to our efforts to increase finance and
insurance penetration, which include implementing interactive digital customer
sales platforms, additional training, and targeting underperforming locations.
Retail Automotive Dealership Service and Parts Data
(In millions)
2020 vs. 2019 2019 vs. 2018
Service and Parts Data 2020 2019 Change % Change 2019 2018 Change % Change
Service and parts
revenue $ 1,883.7 $ 2,195.9 $ (312.2) (14.2) % $ 2,195.9 $ 2,151.4 $ 44.5 2.1 %
Same-store service and
parts revenue $ 1,867.4 $ 2,134.3 $ (266.9) (12.5) % $ 2,134.0 $ 2,079.9 $ 54.1 2.6 %
Gross profit - service
and parts $ 1,127.4 $ 1,305.8 $ (178.4) (13.7) % $ 1,305.8 $ 1,277.3 $ 28.5 2.2 %
Same-store service and
parts gross profit $ 1,115.7 $ 1,266.3 $ (150.6) (11.9) % $ 1,266.4 $ 1,234.5 $ 31.9 2.6 %
Gross margin % -
service and parts 59.9 % 59.5 % 0.4 % 0.7 % 59.5 % 59.4 % 0.1 % 0.2 %
Same-store service and
parts gross margin % 59.7 % 59.3 % 0.4 % 0.7 %
59.3 % 59.4 % (0.1) % (0.2) %
Revenues
Service and parts revenue decreased from 2019 to 2020 with a decrease of 13.3%
in the U.S. and 15.9% internationally. The overall decrease in service and parts
revenue is due to a $266.9 million , or 12.5%, decrease in same-store revenues,
coupled with a $45.3 million decrease from net dealership dispositions.
Excluding $10.1 million of favorable foreign currency fluctuations, same-store
revenue decreased 13.0%. The decrease in same-store revenue is due to a $161.7
million , or 11.2%, decrease in customer pay revenue, a $77.8 million , or 14.3%
decrease in warranty revenue, and a $27.4 million , or 18.6%, decrease in vehicle
preparation and body shop revenue. We believe the decrease
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in service and parts revenue is related to the COVID-19 pandemic discussed above as changes in vehicle use patterns such as working from home resulted in lower vehicle miles traveled, coupled with lower vehicle recall activity. Gross Profit
Service and parts gross profit decreased from 2019 to 2020 due to a$150.6 million , or 11.9%, decrease in same-store gross profit, coupled with a$27.8 million decrease from net dispositions. Excluding$5.7 million of favorable foreign currency fluctuations, same-store gross profit decreased 12.3%. The same-store gross profit decrease is due to the decrease in same-store revenues, which decreased gross profit by$159.4 million , partially offset by a 0.4% increase in same-store gross margin, which increased gross profit by$8.8 million . The same-store gross profit decrease is due to a$73.7 million , or 10.7%, decrease in customer pay gross profit, a$41.5 million , or 14.6%, decrease in vehicle preparation and body shop gross profit, and a$35.4 million , or 12.2%, decrease in warranty gross profit.
Retail Commercial Truck Dealership Data
(In millions, except unit and per unit amounts)
2020 vs. 2019 2019 vs. 2018
New Commercial Truck Data 2020 2019 Change % Change 2019 2018 Change % Change
New retail unit sales 11,324 11,897 (573) (4.8) % 11,897 8,291 3,606 43.5 %
Same-store new retail
unit sales 7,577 8,415 (838) (10.0) % 8,306 8,200 106 1.3 %
New retail sales revenue $ 1,315.9 $ 1,347.2 $ (31.3) (2.3) % $ 1,347.2 $ 866.9 $ 480.3 55.4 %
Same-store new retail
sales revenue $ 885.9 $ 934.3 $ (48.4) (5.2) % $ 921.0 $ 854.3 $ 66.7 7.8 %
New retail sales revenue
per unit $ 116,201 $ 113,239 $ 2,962 2.6 % $ 113,239 $ 104,563 $ 8,676 8.3 %
Same-store new retail
sales revenue per unit $ 116,915 $ 111,024 $ 5,891 5.3 % $ 110,883 $ 104,179 $ 6,704 6.4 %
Gross profit - new $ 50.4 $ 61.4 $ (11.0) (17.9) % $ 61.4 $ 40.8 $ 20.6 50.5 %
Same-store gross profit -
new $ 34.2 $ 40.1 $ (5.9) (14.7) % $ 39.1 $ 40.0 $ (0.9) (2.3) %
Average gross profit per
new truck retailed $ 4,451 $ 5,164 $ (713) (13.8) % $ 5,164 $ 4,916 $ 248 5.0 %
Same-store average gross
profit per new truck
retailed $ 4,513 $ 4,762 $ (249) (5.2) % $ 4,708 $ 4,873 $ (165) (3.4) %
Gross margin % - new 3.8 % 4.6 % (0.8) % (17.4) % 4.6 % 4.7 % (0.1) % (2.1) %
Same-store gross margin
% - new 3.9 % 4.3 % (0.4) % (9.3) % 4.2 % 4.7 % (0.5) % (10.6) %
Units
Retail unit sales of new trucks decreased from 2019 to 2020 primarily due to
an 838 unit, or 10.0%, decrease in same-store retail unit sales, partially
offset by a 265 unit increase from net dealership acquisitions. Same-store new
truck units decreased largely due to the expected decline from cyclicality as
the North American Class 6-8 heavy-duty truck sales decreased 29.6% during 2020,
coupled with challenging business conditions related to the COVID-19 pandemic.
Revenues
New commercial truck retail sales revenue decreased from 2019 to 2020 due to a
$48.4 million , or 5.2%, decrease in same-store revenues, partially offset by a
$17.1 million increase from net dealership acquisitions. The same-store revenue
decrease is due to the decrease in same-store new retail unit sales, which
decreased revenue by $93.0 million , partially offset by a $5,891 per unit
increase in comparative average selling prices, which increased revenue by$44.6 million . Gross Profit
New commercial truck retail gross profit decreased$11.0 million , or 17.9%, from 2019 to 2020, including a$5.9 million , or 14.7%, decrease in same-store gross profit. The decrease in same-store gross profit is due to the decrease in same-store new retail unit sales, which decreased gross profit by$4.0 million , coupled with a$249 per unit decrease in average gross profit per new truck retailed, which decreased gross profit by$1.9 million . 47 Table of Contents 2020 vs. 2019 2019 vs. 2018
Used Commercial Truck Data 2020 2019 Change % Change
2019 2018 Change % Change
Used retail unit sales 3,826 1,954 1,872 95.8 % 1,954 1,973 (19) (1.0) %
Same-store used retail
unit sales 2,530 1,644 886 53.9 % 1,633 1,971 (338) (17.1) %Used retail sales revenue$ 194.2 $ 117.0 $ 77.2 66.0 %$ 117.0 $ 112.0 $ 5.0 4.5 % Same-store used retail sales revenue$ 129.7 $ 97.8 $ 31.9 32.6 %$ 97.4 $ 111.9 $ (14.5) (13.0) % Used retail sales revenue per unit$ 50,747 $ 59,865 $ (9,118) (15.2) %$ 59,865 $ 56,767 $ 3,098 5.5 % Same-store used retail sales revenue per unit$ 51,279 $ 59,510 $ (8,231) (13.8) %$ 59,654 $ 56,782 $ 2,872 5.1 % Gross profit - used$ 0.4 $ 9.2 $ (8.8) (95.7) %$ 9.2 $ 12.7 $ (3.5) (27.6) % Same-store gross profit - used$ 5.2 $ 7.9 $ (2.7) (34.2) %$ 7.9 $ 12.7 $ (4.8) (37.8) % Average gross profit per used truck retailed$ 97 $ 4,706 $ (4,609) (97.9) %$ 4,706 $ 6,422 $ (1,716) (26.7) % Same-store average gross profit per used truck retailed$ 2,073 $ 4,836 $ (2,763) (57.1) %$ 4,834 $ 6,419 $ (1,585) (24.7) % Gross margin % - used 0.2 % 7.9 % (7.7) % (97.5) % 7.9 % 11.3 % (3.4) % (30.1) % Same-store gross margin % - used 4.0 % 8.1 % (4.1) % (50.6) % 8.1 % 11.3 % (3.2) % (28.3) % Units Retail unit sales of used trucks increased from 2019 to 2020 due to a 986 unit increase from net dealership acquisitions, coupled with an 886 unit, or 53.9%, increase in same-store retail unit sales. We believe the increase in used truck unit sales is attributable to our marketing efforts to retail an oversupply of used inventory earlier in 2020, coupled with higher demand for used vehicles later in the year as higher freight rates increased demand for used units.
Revenues
Used commercial truck retail sales revenue increased from 2019 to 2020 due to a$45.3 million increase from net dealership acquisitions, coupled with a$31.9 million , or 32.6%, increase in same-store revenues. The same-store revenue increase is due to the increase in same-store used retail unit sales, which increased revenue by$45.4 million , partially offset by an$8,231 per unit decrease in comparative average selling prices, which decreased revenue by$13.5 million . The decline in used retail sales revenue per unit is attributable to an oversupply of used trucks in the market when compared to 2019. Gross Profit
Used commercial truck retail gross profit decreased$8.8 million , or 95.7%, from 2019 to 2020, including a$2.7 million , or 34.2%, decrease in same-store gross profit. The decrease in same-store gross profit is due to a$2,763 per unit decrease in average gross profit per used truck retailed, which decreased gross profit by$4.5 million , partially offset by the increase in same-store used retail unit sales, which increased gross profit by$1.8 million . The decline in average gross profit per used truck retailed is attributable to an oversupply of used trucks in the market when compared to 2019, combined with greater availability of new heavy-duty trucks. 2020 vs. 2019 2019 vs. 2018
Service and Parts Data 2020 2019 Change % Change 2019 2018 Change % Change Service and parts revenue$ 478.1 $ 503.3 $ (25.2) (5.0) %$ 503.3 $ 364.5 $ 138.8 38.1 % Same-store service and parts revenue$ 335.4 $ 371.9 $ (36.5) (9.8) %$ 368.5 $ 360.1 $ 8.4 2.3 % Gross profit - service and parts$ 207.3 $ 182.4 $ 24.9 13.7 %$ 182.4 $ 140.8 $ 41.6 29.5 % Same-store service and parts gross profit$ 135.9 $ 146.8 $ (10.9) (7.4) %$ 145.4 $ 139.1 $ 6.3 4.5 % Gross margin % - service and parts 43.4 % 36.2 % 7.2 % 19.9 % 36.2 % 38.6 % (2.4) % (6.2) % Same-store service and parts gross margin % 40.5 % 39.5 % 1.0 % 2.5 % 39.5 % 38.6 % 0.9 % 2.3 % Revenues
Service and parts revenue decreased from 2019 to 2020 due to a
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and accessories. The decrease in same-store revenue is due to a$33.3 million , or 10.7%, decrease in customer pay revenue, a$2.0 million , or 4.2%, decrease in warranty revenue, and a$1.2 million , or 8.2%, decrease in body shop revenue. The same-store decrease in service and parts revenue is primarily due to the decline in new retail truck sales which correlates to service for certain customers, a change in fleet services revenue, and the COVID-19 pandemic as
discussed above. Gross Profit Service and parts gross profit increased from 2019 to 2020 due to a$35.8 million increase from net dealership acquisitions, partially offset by a$10.9 million , or 7.4%, decrease in same-store gross profit. The same-store gross profit decrease is due to the decrease in same-store revenues, which decreased gross profit by$14.9 million , partially offset by a 1.0% increase in gross margin, which increased gross profit by$4.0 million . The same-store gross profit decrease is due to an$11.1 million , or 10.3%, decrease in customer pay gross profit, a$0.1 million , or 0.4%, decrease in warranty gross profit, partially offset by a$0.3 million , or 2.5%, increase in body shop gross profit.
Commercial Vehicle Distribution Data
(In millions, except unit amounts)
2020 vs. 2019 2019 vs. 2018
Penske Australia Data 2020 2019 Change % Change 2019 2018 Change % Change
Units 966 1,569 (603) (38.4) % 1,569 1,345 224 16.7 %
Sales revenue $ 454.2 $ 513.1 $ (58.9) (11.5) % $ 513.1 $ 558.5 $ (45.4) (8.1) %
Gross profit $ 122.3 $ 138.8 $ (16.5) (11.9) % $ 138.8 $ 144.6 $ (5.8) (4.0) %
Our Penske Australia operations are primarily comprised of commercial vehicle,
engine, and power systems distribution. This business generated $454.2 million
of revenue during 2020 compared to $513.1 million of revenue during 2019, a
decrease of 11.5%. These businesses generated $122.3 million of gross profit
during 2020 compared to $138.8 million of gross profit during 2019, a decrease
of 11.9%.
The decrease in units from 2019 to 2020 is primarily due to the decline in the Australian heavy-duty truck market, including significant declines due to the COVID-19 pandemic as discussed above. Excluding$1.5 million of unfavorable foreign currency fluctuations, revenues decreased 11.2%. Excluding$0.8 million of unfavorable foreign currency fluctuations, gross profit decreased 11.3%.
Selling, General and Administrative Data
(In millions)
2020 vs. 2019 2019 vs. 2018Selling, General, and Administrative Data 2020 2019 Change
% Change 2019 2018 Change % Change Personnel expense
$ 1,402.4 $ 1,570.8 $
(168.4) (10.7) %
$ 81.1 $ 112.6 $
(31.5) (28.0) %
$ 316.6 $ 339.9 $
(23.3) (6.9) %
$ 564.4 $ 669.9 $
(105.5) (15.7) %
$ 2,364.5 $ 2,693.2 $
(328.7) (12.2) %
$ 2,265.5 $ 2,578.0 $
(312.5) (12.1) %
Personnel expense as % of gross profit 44.0 % 45.5 %
(1.5) % (3.3) % 45.5 % 45.2 % 0.3 % 0.7 % Advertising expense as % of gross profit 2.5 % 3.3 % (0.8) % (24.2) % 3.3 % 3.4 % (0.1) % (2.9) % Rent & related expense as % of gross profit
9.9 % 9.8 % 0.1 % 1.0 % 9.8 % 9.9 % (0.1) % (1.0) % Other expense as % of gross profit
17.9 % 19.3 % (1.4) % (7.3) % 19.3 % 19.1 % 0.2 % 1.0 % Total SG&A expenses as % of gross profit 74.3 % 77.9 % (3.6) % (4.6) % 77.9 % 77.5 % 0.4 % 0.5 % Same-store SG&A expenses as % of same-store gross profit
73.8 % 77.8 % (4.0) % (5.1) % 78.1 % 77.0 % 1.1 % 1.4 %
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Selling, general, and administrative expenses ("SG&A") decreased from 2019 to
2020 due to a $312.5 million , or 12.1%, decrease in same-store SG&A, coupled
with a $16.2 million decrease from net dispositions. Excluding the $10.6 million
increase related to foreign currency fluctuations, same-store SG&A decreased
12.5%. The decrease in SG&A is primarily due to employee reductions, temporary
compensation reductions, government assistance, a reduction of travel and
entertainment expenses, and other expense reductions as discussed above under
"COVID-19 Disclosure."
SG&A expenses as a percentage of total revenue were 11.6%, 11.6%, and 11.6% in
2020, 2019, and 2018, respectively, and as a percentage of gross profit were
74.3%, 77.9%, and 77.5%, in 2020, 2019, and 2018, respectively.
Depreciation
(In millions)
2020 vs. 2019 2019 vs. 2018
2020 2019 Change % Change 2019
2018 Change % Change
Depreciation
The increase in depreciation from 2019 to 2020 is primarily due to a$6.7 million , or 6.4%, increase in same-store depreciation, partially offset by a$0.8 million decrease from net dispositions. The overall increase is primarily related to our ongoing facility improvements and expansion programs. Floor Plan Interest Expense (In millions) 2020 vs. 2019 2019 vs. 2018 2020 2019 Change % Change 2019 2018 Change % Change Floor plan interest expense$ 46.3 $ 84.5 $ (38.2) (45.2) %$ 84.5 $ 80.9 $ 3.6 4.4 % Floor plan interest expense, including the impact of swap transactions, decreased$38.2 million from 2019 to 2020 primarily due to a$36.0 million decrease in same-store floor plan interest expense, coupled with$2.2 million decrease from net dealership dispositions. The overall decrease is primarily due to decreases in amounts outstanding under floor plan arrangements and decreases in applicable rates. Other Interest Expense (In millions) 2020 vs. 2019 2019 vs. 2018 2020 2019 Change % Change
2019 2018 Change % Change
Other interest expense
The decrease in other interest expense from 2019 to 2020 is primarily due to the
decrease in outstanding revolver borrowings under the
Equity in Earnings of Affiliates
(In millions)
2020 vs. 2019 2019 vs. 2018
2020 2019 Change % Change 2019 2018 Change % Change
Equity in earnings
of affiliates $ 169.0 $ 147.5 $ 21.5 14.6 % $ 147.5 $ 134.8 $ 12.7 9.4 % The increase in equity in earnings of affiliates from 2019 to 2020 is primarily due to a$22.1 million , or 15.5%, increase in earnings from our investment in PTS, partially offset by the decrease in earnings from our retail automotive joint ventures. The increase in our PTS equity earnings is primarily attributed to increases in full service lease demand, 50
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strong consumer rental demand, higher vehicle utilization rates in commercial
rental, and cost reduction efforts in the logistics operations, partially offset
by lower gains on sale from remarketing activities.
Income Taxes
(In millions)
2020 vs. 2019 2019 vs. 2018
2020 2019 Change % Change 2019 2018 Change % ChangeIncome taxes$ 162.7 $ 156.7 $ 6.0 3.8 %$ 156.7 $ 134.3 $ 22.4 16.7 %
Income taxes increased from 2019 to 2020 primarily due to a$116.1 million increase in our pre-tax income compared to the prior year, partially offset by a net income tax benefit of$11.4 million from variousU.S. and foreign tax legislation changes. Our effective tax rate was 23.0% during 2020 compared to 26.5% during 2019 primarily due to the income tax benefit discussed above as well as the fluctuations in our geographic pre-tax income mix.
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, building additional Used Vehicle SuperCenters (including five additional sites currently under development), 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. Future events, including acquisitions, divestitures, new or revised operating lease agreements, borrowings or repayments under our credit agreements and our floor plan arrangements, raising capital, and purchases or refinancing of our securities, may also impact our liquidity. We expect that scheduled payments of our debt instruments will be funded through cash flows from operations or borrowings under our credit agreements. In the case of payments upon the maturity or termination dates of our debt instruments, we currently expect to be able to refinance such instruments in the normal course of business or otherwise fund them from cash flows from operations or borrowings under our credit agreements. Refer to the disclosures provided in Part II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements set forth below for a detailed description of our long-term debt obligations and scheduled interest payments. Floor plan notes payable are revolving financing arrangements. Payments are generally made as required pursuant to the floor plan borrowing agreements. Refer to the disclosures provided in Part II, Item 8, Note 9 of the Notes to our Consolidated Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other revolving arrangements. Refer to the disclosures provided in Part II, Item 8, Note 12 of the Notes to our Consolidated Financial Statements for a description of our off-balance sheet arrangements which includes a repurchase commitment related to our floor plan credit agreement withMercedes Benz Financial Services Australia . 51 Table of Contents
As ofDecember 31, 2020 , we had$49.5 million of cash available to fund our operations and capital commitments. In addition, we had$692.0 million , £162.0 million ($221.4 million ), and AU$50.0 million ($38.5 million ) available for borrowing under ourU.S. credit agreement,U.K. credit agreement, and Australian working capital loan agreement, respectively. 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 ourU.S. credit agreement, and borrowings under ourU.S. floor plan arrangements. The decision to make repurchases will be based on factors such as the market price of the relevant security versus our view of its intrinsic value, the potential impact of such repurchases on our capital structure, and our consideration of any alternative uses of our capital, such as for acquisitions and strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy. As ofDecember 31, 2020 , we had$170.6 million in repurchase authorization remaining under the securities repurchase program. Refer to the disclosures provided in Part II, Item 8, Note 15 of the Notes to our Consolidated Financial Statements for a summary of shares repurchased during 2020. 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
Second Quarter $ -
Third Quarter $ -
Fourth Quarter $ 0.42 InMay 2020 , our Board of Directors suspended our cash dividend. OnOctober 14, 2020 , we announced the reinstatement of our cash dividend in the amount of$0.42 per share. We also announced a cash dividend of$0.43 per share payable onMarch 1, 2021 , to stockholders of record as ofFebruary 10, 2021 , which represents a dividend yield of 2.7% using ourJanuary 25, 2021 , closing stock price. Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors, which may include our expectations regarding the severity and duration of the COVID-19 pandemic, earnings, cash flow, capital requirements, restrictions relating to any then-existing indebtedness, financial condition and other factors. Vehicle Financing Refer to the disclosures provided in Part II, Item 8, Note 9 of the Notes to our Consolidated Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other
revolving arrangements.
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Long-Term Debt Obligations
As of December 31, 2020 , we had the following long-term debt obligations
outstanding:
December 31 ,
(In millions) 2020
-
U.K. credit agreement - overdraft line of credit -
3.50% senior subordinated notes due 2025 543.2
5.50% senior subordinated notes due 2026 496.4
Australia capital loan agreement 32.1
Australia working capital loan agreement -
Mortgage facilities 458.1
Other 51.8
Total long-term debt $ 1,689.6
During the third quarter of 2020, we repaid in full at scheduled maturity our
$300 million 3.75% senior subordinated notes due August 15, 2020 . We also issued
$550 million in aggregate principal amount of 3.50% senior subordinated notes
due 2025 in August 2020 , the proceeds of which were used to redeem our
$550 million in aggregate principal amount of 5.75% senior subordinated notes
due 2022 on October 1, 2020 . During the fourth quarter of 2020, we also redeemed
our $300 million 5.375% senior subordinated notes due 2024 at a redemption price
equal to 101.792% of the principal amount together with accrued and unpaid
interest, using availability under our U.S. revolving credit facility and cash
flow from operations.
As ofDecember 31, 2020 , we were in compliance with all covenants under our credit agreements, and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements set forth below for a detailed description of our long-term debt obligations. Short-Term Borrowings We have four principal sources of short-term borrowings: the revolving portion of theU.S. credit agreement, the revolving portion of theU.K. credit agreement, our Australian working capital loan agreement, and the floor plan agreements that we utilize to finance our vehicle inventories. We are also able to access availability under the floor plan agreements to fund our cash needs, including payments made relating to our higher interest rate revolving credit agreements.
During 2020, outstanding revolving commitments varied between$0.0 million and$525.0 million under theU.S. credit agreement, between £0.0 million and £140.0 million ($0.0 million and$191.3 million ) under theU.K. credit agreement's revolving credit line (excluding the overdraft facility), and between AU$0.0 million and AU$20.0 million ($0.0 million and$15.4 million ) under theAustralia working capital loan agreement. The amounts outstanding under our floor plan agreements varied based on the timing of the receipt and expenditure of cash in our operations, driven principally by the levels of our vehicle
inventories. 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. InApril 2020 , we entered into a new five-year interest rate swap agreement pursuant to which the LIBOR portion of$300.0 million of ourU.S. floating rate floor plan debt is fixed at 0.5875%. This arrangement is in effect throughApril 2025 . We may terminate this arrangement at any time, subject to the settlement at that time of the fair value of the swap arrangement. As ofDecember 31, 2020 , the fair value of the swap designated as hedging instruments was estimated to be a net liability of$4.3 million . 53 Table of Contents 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 byApril 15 of the following year. PTS' principal debt agreements allow partner distributions only as long as they are not in default under that agreement and the amount they pay does not exceed 50% of its consolidated net income. We receive pro rata cash distributions relating to this investment, typically in April, May, August, and November of each year. During 2020, 2019, and 2018, we received$72.2 million ,$71.9 million , and$63.2 million , respectively, of pro rata cash distributions relating to this investment. We currently expect to continue to receive future distributions from PTS quarterly, subject to its financial performance.
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 We estimate the total rent obligations under our operating leases, including any extension periods that we are reasonably certain to exercise at our discretion and assuming constant consumer price indices, to be$5.4 billion . As ofDecember 31, 2020 , we were in compliance with all financial covenants under these leases consisting principally of leases for dealership and other properties, and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part II, Item 8, Note 3 and Note 12 of the Notes to our Consolidated Financial Statements for a description of
our operating leases. Discontinued Operations
We had no entities newly classified as held for sale in 2020, 2019, or 2018 that met the criteria to be classified as discontinued operations. As such, results from discontinued operations represent only retail automotive dealerships and our car rental business that were classified as discontinued operations prior to the adoption of ASU No. 2014-08 onJanuary 1, 2015 .
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to senior subordinated notes ofPenske Automotive Group, Inc. ("PAG") as the issuer of the 3.50% Notes and the 5.50% Notes (collectively
the "Senior Subordinated Notes"). Each of the Senior Subordinated Notes are unsecured, senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% ownedU.S. subsidiaries. Each of the Senior Subordinated Notes also contain customary negative covenants and events of default. If we experience certain "change of control" events specified in their respective indentures, holders of these Senior Subordinated Notes will have the option to require us to purchase for cash all or a portion of their Senior Subordinated Notes at a price equal to 101% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Subordinated Notes at a price equal to 100% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest. 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 54
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Subsidiaries"). The following tables present summarized financial information for PAG and the Guarantor Subsidiaries on a combined basis. The financial information of PAG and Guarantor Subsidiaries is presented on a combined basis; intercompany balances and transactions between PAG and Guarantor Subsidiaries have been eliminated; PAG's or Guarantor Subsidiaries' 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
Year Ended Year Ended
December 31, 2020 December 31, 2019
Revenues $ 11,576.7 $ 12,928.8
Gross profit 1,908.9 2,019.2Equity in earnings of affiliates 164.5 142.4 Income from continuing operations 400.1 318.8 Net income 400.4 319.2 Net income attributable to Penske Automotive Group 400.4
319.2
Condensed balance sheet information:
PAG and Guarantor Subsidiaries
December 31, 2020 December 31, 2019
Current assets (1) $ 2,627.3 $ 3,157.5
Property and equipment, net 1,128.8 1,104.9
Equity method investments 1,424.7 1,328.8
Other noncurrent assets 3,173.6 3,230.9
Current liabilities 2,156.3 2,684.2
Noncurrent liabilities 3,848.5 4,175.3
(1) Includes
respectively, due from Non-Guarantors.
During the year ended
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.
Year Ended December 31,
(In millions) 2020 2019 2018Net cash provided by continuing operating activities$ 1,201.5 $ 518.3 $ 614.2 Net cash used in continuing investing activities (136.5)
(532.7) (525.2) Net cash (used in) provided by continuing financing activities
(1,053.9) 2.6 (94.3)
Net cash provided by discontinued operations 0.3 0.3 0.5
Effect of exchange rate changes on cash and cash
equivalents 10.0 0.2 (1.5)
Net change in cash and cash equivalents $ 21.4 $ (11.3)$ (6.3)
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. Our cash flows from continuing operating activities were positively impacted during the year endedDecember 31, 2020 , due to deferrals of floorplan interest, sales and use tax, and mortgage interest resulting from COVID-19-related relief provided by our lenders and government jurisdictions. 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 55 Table of Contents
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 we report 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 inAustralia and New Zealand as a financing activity in our statement of cash flows. Currently, the majority of our non-trade vehicle financing is with other manufacturer captive lenders. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing. 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: Year Ended December 31, (In millions) 2020 2019 2018 Net cash from continuing operating activities as reported$ 1,201.5 $ 518.3 $ 614.2 Floor plan notes payable - non-trade as reported (230.2)
177.5 10.0 Net cash from continuing operating activities including all floor plan notes payable
$ 971.3 $ 695.8 $ 624.2
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, proceeds from the sale of equipment and improvements, net expenditures for acquisitions and other investments, and proceeds from sale-leaseback transactions. Capital expenditures were$185.9 million ,$245.3 million , and$305.6 million during 2020, 2019, and 2018, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities, the construction of new facilities, the acquisition of the property or buildings associated with existing leased facilities, and the acquisition of land for future development. We currently expect to finance our retail automotive segment and retail commercial truck segment capital expenditures with operating cash flows or borrowings under ourU.S. orU.K. credit agreements. Proceeds from the sale of dealerships were$40.6 million ,$22.8 million , and$84.5 million during 2020, 2019, and 2018, respectively. Proceeds from the sale of equipment and improvements were$19.8 million ,$8.6 million , and$5.1 million during 2020, 2019, and 2018, respectively. We had no cash used in acquisitions and other investments, net of cash acquired, during 2020, compared to$326.9 million and$309.1 million during 2019 and 2018, respectively, and included cash used to repay sellers' floor plan liabilities in such business acquisitions of$138.5 million , and$58.2 million , respectively. We had no proceeds from sale-leaseback transactions during 2020, compared to$18.9 million and$10.7 million during 2019 and 2018, respectively.
Cash Flows from Continuing Financing Activities
Cash flows from continuing financing activities include issuance and net borrowings or repayments of long-term debt, net borrowings or repayments of floor plan notes payable non-trade, repurchases of common stock, dividends, payments for contingent consideration, and payments for deferred financing fees.
We issued$550.0 million of senior subordinated notes due 2025 inAugust 2020 and repaid at scheduled maturity$300.0 million of senior subordinated notes dueAugust 15, 2020 ,$550.0 million of senior subordinated notes due 2022, and$300.0 million of senior subordinated notes due 2024, respectively, during 2020. We had net repayments of other long-term debt of$81.4 million during 2020 and net borrowings of other long-term debt of$130.4 million and$93.5 million during 2019 and 2018, respectively. We had net repayments of floor plan notes payable non-trade of$230.2 million during 2020 and net borrowings of floor plan notes payable non-trade of$177.5 million and$10.0 million during 56
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2019 and 2018, respectively. In 2020, 2019, and 2018, we repurchased$0.9 million , 3.9 million, and 1.5 million shares of common stock under our securities repurchase program for$29.4 million ,$169.2 million , and$68.9 million , respectively. In 2020, 2019, and 2018, we repurchased$0.1 million , 0.1 million, and 0.1 million shares from employees in connection with a net share settlement feature of employee equity awards for$5.0 million ,$4.9 million , and$5.8 million , respectively. We also paid$68.1 million ,$130.8 million , and$121.2 million of cash dividends to our stockholders during 2020, 2019, and 2018, respectively. We made payments of$31.6 million to settle contingent consideration to sellers related to previous acquisitions during 2020 and made payments of$8.1 million ,$0.4 million , and$1.9 million for debt issuance costs during 2020, 2019, and 2018, respectively. Related Party Transactions Stockholders Agreement Several of our directors and officers are affiliated withPenske Corporation or related entities.Roger S. Penske , our Chair of the Board and Chief Executive Officer, is also Chair of the Board and Chief Executive Officer ofPenske Corporation and through entities affiliated withPenske Corporation , our largest stockholder owning approximately 44% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, "Mitsui") own approximately 17% of our outstanding common stock. Mitsui,Penske Corporation , and certain other affiliates ofPenske Corporation are parties to a stockholders agreement pursuant to which the Penske affiliated companies agreed to vote their shares for up to two directors who are representatives of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates inMarch 2030 , upon the mutual consent of the parties, or when either party no longer owns any of our common stock.
Other Related Party Interests and Transactions
Robert Kurnick , Jr., our President and a director, is also the Vice Chair and a director ofPenske Corporation .Bud Denker , our Executive Vice President, Human Resources, is also the President ofPenske Corporation .Greg Penske , one of our directors, is the son of our chair and is also a director ofPenske Corporation .Michael Eisenson , one of our directors, is also a director ofPenske Corporation .Masashi Yamanaka , one of our directors, is also an employee of Mitsui & Co. We sometimes pay to and/or receive fees fromPenske Corporation , its subsidiaries, and its affiliates for services rendered in the ordinary course of business or to reimburse payments made to third parties on each other's behalf. These transactions are reviewed periodically by our Audit Committee and reflect the provider's cost or an amount mutually agreed upon by both parties. We own a 28.9% interest in PTS. PTS, discussed previously, is owned 41.1% byPenske Corporation , 28.9% by us, and 30.0% by Mitsui. We have also entered into other joint ventures with certain related parties as more fully discussed in Part II, Item 8, Note 13 of the Notes to our Consolidated Financial Statements. 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.U.S. light vehicle sales have ranged from a low of 10.4 million units in 2009 to a high of 17.5 million units in 2016. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions. According to data published byACT Research , in recent years, totalU.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 97,000 in 2009, to high of approximately 334,000 in 2019. Through geographic expansion, concentration on higher margin regular service and parts revenues, and 57
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diversification of our customer base, we have attempted to reduce the negative impact of adverse general economic conditions or cyclical trends affecting any one industry or geographic area on our earnings. Seasonality
Dealership. Our business is modestly seasonal overall. OurU.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, vehicle demand, and to a lesser extent demand for service and parts, is generally lower during the winter months than in other seasons, particularly in regions of theU.S. where dealerships may be subject to severe winters. OurU.K. operations generally experience higher volumes of new vehicle sales in the first and third quarters of each year, due primarily to new vehicle registration practices in theU.K. 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 typicallyJune 30 inAustralia . 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 Annual Report on Form 10-K 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;
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? 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. 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 under "Item 1A. Risk Factors." Important factors that could cause actual results to differ materially from our expectations include those mentioned in "Item 1A. Risk Factors" such as the following:
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 Item 7, Management's Discussion
and Analysis of Financial Condition and Results of Operations and Part I, Item
1A. Risk Factors);
? increased tariffs, import product restrictions, and foreign trade risks that
may impair our ability to sell foreign vehicles profitably;
? 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 shortage of automotive
microchips or the COVID-19 pandemic discussed Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations and Part I, 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;
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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;
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;
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 regard 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
recently enacted by the
? certain compensation we receive relating to automotive financing in the
and those enacted in certain European countries and
as 2030;
? 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
such as those selling electric vehicles are able to conduct significant vehicle
? sales outside of the franchised automotive system, our automotive 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 theSecurities and Exchange Commission's rules and regulations, we have no intention or obligation to update publicly 60
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any forward-looking statements whether as a result of new information, future events, or otherwise.
Additional Information Investors and others should note that we may announce material financial information using our company website (www.penskeautomotive.com), our investor relations website (investors.penskeautomotive.com),SEC filings, press releases, public conference calls, and webcasts. Information aboutPenske Automotive Group , its business, and its results of operations may also be announced by posts on the following social media channels from time to time: ?Penske Automotive Group's Twitter feed (www.twitter.com/penskecarscorp)
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The information that we post on these social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested inPenske Automotive Group to review the information that we post on these social media channels. These channels may be updated from time to time onPenske Automotive Group's investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Annual Report on Form 10-K, and our references to such content are intended to be inactive textual or oral references only.
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