Form 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2010
or
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission file number 1-12297
Penske Automotive Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3086739
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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2555 Telegraph Road,
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48302-0954
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Bloomfield Hills, Michigan
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(Zip Code)
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(Address of principal executive offices)
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Registrant’s telephone number, including area code:
(248) 648-2500
Indicate by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit and post
such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definition
of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act
(Check one):
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Large accelerated filer
þ
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Accelerated filer
o
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Non-accelerated filer
o
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Smaller reporting company
o
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
þ
As of May 1, 2010, there were 92,142,497 shares of voting common stock outstanding.
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
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March 31,
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December 31,
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2010
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2009
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(Unaudited)
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(In thousands, except
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per share amounts)
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ASSETS
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Cash and cash equivalents
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$
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23,543
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$
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13,769
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Accounts receivable, net of allowance for doubtful accounts of $1,620 and $1,694
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378,395
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322,598
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Inventories
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1,384,231
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1,306,532
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Other current assets
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103,821
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95,560
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Assets held for sale
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6,302
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5,005
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Total current assets
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1,896,292
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1,743,464
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Property and equipment, net
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720,575
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726,835
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Goodwill
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802,833
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810,323
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Franchise value
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201,534
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201,756
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Equity method investments
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276,055
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295,473
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Other long-term assets
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18,886
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18,156
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Total assets
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$
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3,916,175
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$
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3,796,007
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LIABILITIES AND EQUITY
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Floor plan notes payable
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$
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868,226
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$
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772,926
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Floor plan notes payable — non-trade
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488,362
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423,316
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Accounts payable
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213,541
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190,325
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Accrued expenses
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235,114
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227,725
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Current portion of long-term debt
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16,611
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12,442
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Liabilities held for sale
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4,616
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3,083
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Total current liabilities
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1,826,470
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1,629,817
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Long-term debt
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862,785
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933,966
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Deferred tax liability
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156,178
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157,500
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Other long-term liabilities
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127,713
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128,685
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Total liabilities
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2,973,146
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2,849,968
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Commitments and contingent liabilities
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Equity
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Penske Automotive Group stockholders’ equity:
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Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and
outstanding
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—
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—
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Common Stock, $0.0001 par value, 240,000 shares authorized; 92,142 shares
issued and outstanding at March 31, 2010; 91,618 shares issued and
outstanding at December 31, 2009
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9
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9
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Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none
issued and outstanding
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—
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—
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Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none
issued and outstanding
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—
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—
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Additional paid-in-capital
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738,449
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737,198
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Retained earnings
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216,559
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196,205
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Accumulated other comprehensive (loss) income
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(15,473
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)
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9,049
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Total Penske Automotive Group stockholders’ equity
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939,544
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942,461
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Non-controlling interest
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3,485
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3,578
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Total equity
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943,029
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946,039
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Total liabilities and equity
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$
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3,916,175
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$
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3,796,007
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See Notes to Consolidated Condensed Financial Statements
3
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
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Three Months Ended March 31,
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2010
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2009
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(Unaudited)
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(In thousands, except per share amounts)
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Revenue:
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New vehicle
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$
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1,234,705
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$
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971,814
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Used vehicle
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698,771
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616,727
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Finance and insurance, net
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59,592
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48,497
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Service and parts
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335,207
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327,526
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Distribution
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7,936
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80,113
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Fleet and wholesale
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156,163
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115,222
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Total revenues
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2,492,374
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2,159,899
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Cost of sales:
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New vehicle
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1,132,996
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900,409
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Used vehicle
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641,872
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560,629
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Service and parts
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146,167
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150,392
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Distribution
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7,722
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68,314
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Fleet and wholesale
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152,387
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111,547
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Total cost of sales
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2,081,144
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1,791,291
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Gross profit
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411,230
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368,608
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Selling, general and administrative expenses
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341,644
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312,941
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Depreciation and amortization
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12,374
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12,881
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Operating income
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57,212
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42,786
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Floor plan interest expense
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(8,570
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(9,474
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)
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Other interest expense
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(12,720
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(14,500
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Debt discount amortization
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(2,915
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)
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(3,638
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)
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Equity in earnings of affiliates
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(429
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)
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714
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Gain on debt repurchase
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605
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10,429
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Income from continuing operations before income taxes
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33,183
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26,317
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Income taxes
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(12,444
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)
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(9,857
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)
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Income from continuing operations
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20,739
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16,460
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Loss from discontinued operations, net of tax
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(407
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)
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(258
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)
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Net income
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20,332
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16,202
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Less: Loss attributable to non-controlling interests
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(22
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(80
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)
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Net income attributable to Penske Automotive Group common stockholders
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$
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20,354
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$
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16,282
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Basic earnings per share attributable to Penske Automotive Group common
stockholders:
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Continuing operations
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$
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0.23
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$
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0.18
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Discontinued operations
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0.00
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0.00
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Net income
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$
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0.22
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$
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0.18
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Shares used in determining basic earnings per share
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91,890
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91,481
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Diluted earnings per share attributable to Penske Automotive Group common
stockholders:
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Continuing operations
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$
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0.23
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$
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0.18
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Discontinued operations
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0.00
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0.00
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Net income
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$
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0.22
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$
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0.18
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Shares used in determining diluted earnings per share
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91,961
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91,501
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Amounts attributable to Penske Automotive Group common stockholders:
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Income from continuing operations
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$
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20,739
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$
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16,460
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Less: Loss attributable to non-controlling interests
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(22
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)
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(80
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)
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Income from continuing operations, net of tax
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20,761
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16,540
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Loss from discontinued operations, net of tax
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(407
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)
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(258
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)
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Net income
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$
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20,354
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$
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16,282
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Cash dividends per share
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$
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—
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$
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—
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See Notes to Consolidated Condensed Financial Statements
4
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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Three Months Ended March 31,
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2010
|
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2009
|
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(Unaudited)
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(In thousands)
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Operating Activities:
|
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|
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Net income
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$
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20,332
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$
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16,202
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Adjustments to reconcile net income to net cash from continuing operating activities:
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Depreciation and amortization
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12,374
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|
|
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12,881
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|
|
Debt discount amortization
|
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|
2,915
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|
|
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3,638
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|
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Undistributed earnings of equity method investments
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|
429
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|
|
|
(714
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)
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Loss from discontinued operations, net of tax
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|
407
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|
|
|
258
|
|
|
Deferred income taxes
|
|
|
8,325
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|
|
|
12,191
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|
|
Gain on debt repurchase
|
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(605
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)
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|
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(10,733
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)
|
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Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
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Accounts receivable
|
|
|
(52,050
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)
|
|
|
(18,202
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)
|
|
Inventories
|
|
|
(49,332
|
)
|
|
|
248,938
|
|
|
Floor plan notes payable
|
|
|
73,675
|
|
|
|
(120,776
|
)
|
|
Accounts payable and accrued expenses
|
|
|
30,226
|
|
|
|
24,922
|
|
|
Other
|
|
|
3,126
|
|
|
|
7,452
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities
|
|
|
49,822
|
|
|
|
176,057
|
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
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Purchase of equipment and improvements
|
|
|
(19,297
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)
|
|
|
(27,555
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)
|
|
Dealership acquisitions net, including repayment of sellers’ floor plan notes
payable of $7,231 and $5,784, respectively
|
|
|
(12,277
|
)
|
|
|
(11,476
|
)
|
|
Other
|
|
|
—
|
|
|
|
12,679
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities
|
|
|
(31,574
|
)
|
|
|
(26,352
|
)
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under U.S. credit agreement revolving credit line
|
|
|
164,000
|
|
|
|
147,000
|
|
|
Repayments under U.S. credit agreement revolving credit line
|
|
|
(164,000
|
)
|
|
|
(77,000
|
)
|
|
Repayments under U.S. credit agreement term loan
|
|
|
—
|
|
|
|
(10,000
|
)
|
|
Repurchase 3.5% senior subordinated convertible notes
|
|
|
(71,744
|
)
|
|
|
(51,425
|
)
|
|
Net repayments of other long-term debt
|
|
|
(1,816
|
)
|
|
|
(43,333
|
)
|
|
Net borrowings (repayments) of floor plan notes payable — non-trade
|
|
|
65,046
|
|
|
|
(117,201
|
)
|
|
Proceeds from exercises of options, including excess tax benefit
|
|
|
211
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities
|
|
|
(8,303
|
)
|
|
|
(151,959
|
)
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operating activities
|
|
|
(150
|
)
|
|
|
3,082
|
|
|
Net cash from discontinued investing activities
|
|
|
—
|
|
|
|
(493
|
)
|
|
Net cash from discontinued financing activities
|
|
|
(21
|
)
|
|
|
(7,382
|
)
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations
|
|
|
(171
|
)
|
|
|
(4,793
|
)
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
9,774
|
|
|
|
(7,047
|
)
|
|
Cash and cash equivalents, beginning of period
|
|
|
13,769
|
|
|
|
17,108
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
23,543
|
|
|
$
|
10,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
13,408
|
|
|
$
|
16,416
|
|
|
Income taxes
|
|
|
7,441
|
|
|
|
533
|
|
See Notes to Consolidated Condensed Financial Statements
5
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Attributable to Penske
|
|
|
Non-controlling
|
|
|
Total
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Automotive Group
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
(Unaudited)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2010
|
|
|
91,617,746
|
|
|
$
|
9
|
|
|
$
|
737,198
|
|
|
$
|
196,205
|
|
|
$
|
9,049
|
|
|
$
|
942,461
|
|
|
$
|
3,578
|
|
|
$
|
946,039
|
|
|
Equity compensation
|
|
|
499,751
|
|
|
|
—
|
|
|
|
4,200
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,200
|
|
|
|
—
|
|
|
|
4,200
|
|
|
Exercise of options,
including tax benefit
of $108
|
|
|
25,000
|
|
|
|
—
|
|
|
|
211
|
|
|
|
—
|
|
|
|
—
|
|
|
|
211
|
|
|
|
—
|
|
|
|
211
|
|
|
Repurchase of 3.5%
senior subordinated
convertible notes
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,160
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,160
|
)
|
|
|
—
|
|
|
|
(3,160
|
)
|
|
Distributions to
non-controlling
interests
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(71
|
)
|
|
|
(71
|
)
|
|
Foreign currency
translation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(27,708
|
)
|
|
|
(27,708
|
)
|
|
|
—
|
|
|
|
(27,708
|
)
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,186
|
|
|
|
3,186
|
|
|
|
—
|
|
|
|
3,186
|
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
20,354
|
|
|
|
—
|
|
|
|
20,354
|
|
|
|
(22
|
)
|
|
|
20,332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2010
|
|
|
92,142,497
|
|
|
$
|
9
|
|
|
$
|
738,449
|
|
|
$
|
216,559
|
|
|
$
|
(15,473
|
)
|
|
$
|
939,544
|
|
|
$
|
3,485
|
|
|
$
|
943,029
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Condensed Financial Statements
6
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Interim Financial Statements
Basis of Presentation
The following unaudited consolidated condensed financial statements of Penske
Automotive Group, Inc. (the “Company”) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”). Certain information and
disclosures normally included in the Company’s annual financial statements prepared in
accordance with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to the SEC rules and regulations. The information presented
as of March 31, 2010 and December 31, 2009 and for the three month periods ended
March 31, 2010 and 2009 is unaudited, but includes all adjustments which management of
the Company believes to be necessary for the fair presentation of results for the periods
presented. The consolidated condensed financial statements for prior periods have been
revised for entities which have been treated as discontinued operations through March 31,
2010, and the results for interim periods are not necessarily indicative of results to be
expected for the year. These consolidated condensed financial statements should be read
in conjunction with the Company’s audited financial statements for the year ended
December 31, 2009, which are included as part of the Company’s Annual Report on Form
10-K.
Results for the quarter ended March 31, 2010 include a $605 pre-tax gain relating to
the repurchase of $71,110 aggregate principal amount of the Company’s 3.5% senior
subordinated convertible notes. Results for the quarter ended March 31, 2009 include a
$10,429 pre-tax gain relating to the repurchase of $68,740 aggregate principal amount of
the Company’s 3.5% senior subordinated convertible notes.
Discontinued Operations
The Company accounts for dispositions as discontinued operations when it is evident
that the operations and cash flows of the business being disposed of will be eliminated
from on-going operations and that the Company will not have any significant continuing
involvement in its operations.
In evaluating whether the cash flows of a dealership in its Retail reportable
segment will be eliminated from ongoing operations, the Company considers whether it is
likely that customers will migrate to similar franchises that it owns in the same
geographic market. The Company’s consideration includes an evaluation of the brands sold
at other dealerships it operates in the market and their proximity to the disposed
dealership. When the Company disposes of franchises, it typically does not have
continuing brand representation in that market. If the franchise being disposed of is
located in a complex of Company owned dealerships, the Company does not treat the
disposition as a discontinued operation if it believes that the cash flows previously
generated by the disposed franchise will be replaced by expanded operations of the
remaining franchises. The results of operations during the three months ended March 31,
2010 and 2009 and the net assets as of March 31, 2010 and December 31, 2009 of
dealerships accounted for as discontinued operations were immaterial.
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. The accounts requiring the use of significant
estimates include accounts receivable, inventories, income taxes, intangible assets and
certain reserves.
Estimated Useful Lives of Assets
The Company changed the useful lives of certain fixed assets during the first
quarter of 2010 as part of a review of assumptions related to the expected utilization of
those assets by the Company. The Company accounted for the change in useful lives as a
change in estimate prospectively effective January 1, 2010, which resulted in a reduction
of depreciation expense of $1,410 for the three months ended March 31, 2010.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, debt, floor plan notes payable, and interest rate swaps used to hedge
future cash flows. Other than our subordinated notes, the carrying amount of all
significant financial instruments approximates fair value due either to length of
maturity, the existence of variable interest rates that approximate prevailing market
rates, or as a result of mark to market accounting. A summary of the fair value of the
subordinated notes as of March 31, 2010, based on quoted, level one market data, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
7.75% senior subordinated notes due 2016
|
|
$
|
375,000
|
|
|
$
|
361,875
|
|
|
3.5% senior subordinated convertible notes due 2026
|
|
|
224,742
|
|
|
|
236,032
|
|
7
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
New Accounting Pronouncement
The Company adopted a new accounting pronouncement amending the consolidation
guidance relating to variable interest entities (“VIE”) on January 1, 2010. The new
guidance replaced the quantitative model for determining the primary beneficiary of a
variable interest entity with a qualitative approach that considers which entity has the
power to direct activities that most significantly impact the variable interest entity’s
performance and whether the entity has an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the variable interest entity.
The new guidance also requires: an additional reconsideration event for determining
whether an entity is a VIE when holders of an at risk equity investment lose voting or
similar rights to direct the activities that most significantly impact the entities
economic performance; ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE; separate presentation of the assets and liabilities of the VIE on
the balance sheet; and additional disclosures about an entity’s involvement with a VIE.
The adoption of the new accounting pronouncement did not have an effect on the Company’s
operating results, financial position or cash flows during the period.
2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
New vehicles
|
|
$
|
966,724
|
|
|
$
|
901,222
|
|
|
Used vehicles
|
|
|
339,576
|
|
|
|
326,376
|
|
|
Parts, accessories and other
|
|
|
77,931
|
|
|
|
78,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
1,384,231
|
|
|
$
|
1,306,532
|
|
|
|
|
|
|
|
|
|
The Company receives non-refundable credits from certain vehicle manufacturers that
reduce cost of sales when the vehicles are sold. Such credits amounted to $5,783 and
$4,193 during the three months ended March 31, 2010 and 2009, respectively.
3. Business Combinations
The Company’s retail operations acquired three and five franchises during the three
months ended March 31, 2010 and 2009, respectively. The Company’s financial statements
include the results of operations of the acquired dealerships from the date of
acquisition. The fair value of the assets acquired and liabilities assumed have been
recorded in the Company’s consolidated condensed financial statements, and may be subject
to adjustment pending completion of final valuation. A summary of the aggregate
consideration paid and the aggregate amounts of the assets acquired and liabilities
assumed for the three months ended March 31, 2010 and 2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Inventory
|
|
$
|
8,595
|
|
|
$
|
5,815
|
|
|
Other current assets
|
|
|
17
|
|
|
|
129
|
|
|
Property and equipment
|
|
|
187
|
|
|
|
4,367
|
|
|
Goodwill
|
|
|
3,510
|
|
|
|
1,657
|
|
|
Franchise value
|
|
|
—
|
|
|
|
749
|
|
|
Current liabilities
|
|
|
(32
|
)
|
|
|
(1,241
|
)
|
|
|
|
|
|
|
|
|
|
Cash used in dealership acquisitions
|
|
$
|
12,277
|
|
|
$
|
11,476
|
|
|
|
|
|
|
|
|
|
In the first quarter of 2010, the Company exited one of its German joint ventures by
exchanging its 50% interest in the joint venture for 100% ownership in three BMW
franchises previously held by the joint venture. The Company recorded $13,615 of
intangible assets in connection with this transaction.
8
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. Intangible Assets
The following is a summary of the changes in the carrying amount of goodwill and
franchise value during the three months ended March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise
|
|
|
|
|
Goodwill
|
|
|
Value
|
|
|
Balance — January 1, 2010
|
|
$
|
810,323
|
|
|
$
|
201,756
|
|
|
Additions
|
|
|
13,397
|
|
|
|
3,703
|
|
|
Foreign currency translation
|
|
|
(20,887
|
)
|
|
|
(3,925
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance — March 31, 2010
|
|
$
|
802,833
|
|
|
$
|
201,534
|
|
|
|
|
|
|
|
|
|
5. Floor Plan Notes Payable — Trade and Non-trade
The Company finances substantially all of its new and a portion of its used vehicle
inventories under revolving floor plan arrangements with various lenders, primarily
through captive finance companies associated with automotive manufacturers. In the U.S.,
the floor plan arrangements are due on demand; however, the Company has not historically
been required to repay floor plan advances prior to the sale of the vehicles that have
been financed. The Company typically makes monthly interest payments on the amount
financed. Outside the U.S., substantially all of the floor plan arrangements are payable
on demand or have an original maturity of 90 days or less and the Company is generally
required to repay floor plan advances at the earlier of the sale of the vehicles that
have been financed or the stated maturity. All of the floor plan agreements grant a
security interest in substantially all of the assets of the Company’s dealership
subsidiaries, and in the U.S. are guaranteed by the Company. Interest rates under the
floor plan arrangements are variable and increase or decrease based on changes in the
prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Base Rate,
or the Euro Interbank Offered Rate. The Company classifies floor plan notes payable to a
party other than the manufacturer of a particular new vehicle, and all floor plan notes
payable relating to pre-owned vehicles, as floor plan notes payable — non-trade on its
consolidated condensed balance sheets, and classifies related cash flows as a financing
activity on its consolidated condensed statements of cash flows.
6. Earnings Per Share
Basic earnings per share is computed using net income attributable to Penske
Automotive Group common stockholders and the number of weighted average shares of voting
common stock outstanding, including outstanding unvested restricted stock awards which
contain rights to non-forfeitable dividends. Diluted earnings per share is computed using
net income attributable to Penske Automotive Group common stockholders and the number of
weighted average shares of voting common stock outstanding, adjusted for the dilutive
effect of stock options. A reconciliation of the number of shares used in the calculation
of basic and diluted earnings per share for the three months ended March 31, 2010 and
2009 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Weighted average number of common shares outstanding
|
|
|
91,890
|
|
|
|
91,481
|
|
|
Effect of non-participatory equity compensation
|
|
|
71
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding, including effect of dilutive
securities
|
|
|
91,961
|
|
|
|
91,501
|
|
|
|
|
|
|
|
|
|
There were no anti-dilutive stock options outstanding during the three months ended
March 31, 2010 which were excluded from the calculation of diluted earnings per share. As
of March 31, 2009, 227 stock options were excluded from the calculation of diluted
earnings per share because the effect of such securities was anti-dilutive. In addition,
the Company has senior subordinated convertible notes outstanding which, under certain
circumstances discussed in Note 7, may be converted to voting common stock. As of March
31, 2010 and 2009, no shares related to the senior subordinated convertible notes were
included in the calculation of diluted earnings per share because the effect of such
securities was anti-dilutive.
9
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
U.S. credit agreement — term loan
|
|
$
|
149,000
|
|
|
$
|
149,000
|
|
|
U.K. credit agreement — revolving credit line
|
|
|
59,175
|
|
|
|
59,803
|
|
|
U.K. credit agreement — term loan
|
|
|
13,389
|
|
|
|
17,115
|
|
|
U.K. credit agreement — overdraft line of credit
|
|
|
9,398
|
|
|
|
12,048
|
|
|
7.75% senior subordinated notes due 2016
|
|
|
375,000
|
|
|
|
375,000
|
|
|
3.5% senior subordinated convertible notes due
2026, net of debt discount
|
|
|
224,742
|
|
|
|
289,344
|
|
|
Mortgage facilities
|
|
|
41,121
|
|
|
|
41,358
|
|
|
Other
|
|
|
7,571
|
|
|
|
2,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
879,396
|
|
|
|
946,408
|
|
|
Less: current portion
|
|
|
(16,611
|
)
|
|
|
(12,442
|
)
|
|
|
|
|
|
|
|
|
|
Net long-term debt
|
|
$
|
862,785
|
|
|
$
|
933,966
|
|
|
|
|
|
|
|
|
|
U.S. Credit Agreement
The Company is party to a $409,000 credit agreement with DCFS USA LLC and Toyota
Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up
to $250,000 in revolving loans for working capital, acquisitions, capital expenditures,
investments and other general corporate purposes, a non-amortizing term loan with a
remaining balance of $149,000, and for an additional $10,000 of availability for letters
of credit, through September 30, 2012. The revolving loans bear interest at a defined
LIBOR plus 2.50%, subject to an incremental 0.50% for uncollateralized borrowings in
excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR
plus 2.50%, may be prepaid at any time, but then may not be re-borrowed
The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the Company’s domestic subsidiaries and contains a number of significant
covenants that, among other things, restrict the Company’s ability to dispose of assets,
incur additional indebtedness, repay other indebtedness, pay dividends, create liens on
assets, make investments or acquisitions and engage in mergers or consolidations. The
Company is also required to comply with specified financial and other tests and ratios,
each as defined in the U.S. Credit Agreement, including: a ratio of current assets to
current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’
equity and a ratio of debt to EBITDA. A breach of these requirements would give rise to
certain remedies under the agreement, the most severe of which is the termination of the
agreement and acceleration of the amounts owed. As of March 31, 2010, the Company was in
compliance with all covenants under the U.S. Credit Agreement.
The U.S. Credit Agreement also contains typical events of default, including change
of control, non-payment of obligations and cross-defaults to the Company’s other material
indebtedness. Substantially all of the Company’s domestic assets are subject to security
interests granted to lenders under the U.S. Credit Agreement. As of March 31, 2010,
$149,000 of term loans, $1,250 of letters of credit, and no revolving borrowings were
outstanding under the U.S. Credit Agreement.
U.K. Credit Agreement
The Company’s subsidiaries in the U.K. (the “U.K. Subsidiaries”) are party to an
agreement, as amended, with the Royal Bank of Scotland plc, as agent for National
Westminster Bank plc, which provides for a funded term loan, a revolving credit agreement
and a seasonally adjusted overdraft line of credit (collectively, the “U.K. Credit
Agreement”) to be used for working capital, acquisitions, capital expenditures,
investments and other general corporate purposes. The U.K. Credit Agreement provides for
(1) up to £100,000 in revolving loans through August 31, 2013, which bears interest
between a defined LIBOR plus 1.1% and defined LIBOR plus 3.0%, (2) a term loan which
bears interest between 6.39% and 8.29% and is payable ratably in quarterly intervals
until fully repaid on June 30, 2011, and (3) a demand seasonally adjusted overdraft line
of credit for up to £20,000 that bears interest at the Bank of England Base Rate plus
1.75%.
The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the U.K. Subsidiaries, and contains a number of significant covenants
that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends,
dispose of assets, incur additional indebtedness, repay other indebtedness, create liens
on assets, make investments or acquisitions and engage in mergers or consolidations. In
addition, the U.K. Subsidiaries are required to comply with specified ratios and tests,
each as defined in the U.K. Credit Agreement, including: a ratio of EBITDAR to interest
plus rental payments (as defined), a measurement of maximum capital expenditures, and a
debt to EBITDA ratio (as defined). A breach of these requirements would give rise to
certain remedies under the agreement, the most severe of which is the termination of the
agreement and acceleration of the amounts owed. As of March 31, 2010, the U.K.
subsidiaries were in compliance with all covenants under the U.K. Credit Agreement.
10
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The U.K. Credit Agreement also contains typical events of default, including change
of control and non-payment of obligations and cross-defaults to other material
indebtedness of the U.K. Subsidiaries. Substantially all of the U.K. Subsidiaries’ assets
are subject to security interests granted to lenders under the U.K. Credit Agreement. As
of March 31, 2010, outstanding loans under the U.K. Credit Agreement amounted to £54,018
($81,962), including £8,824 ($13,389) under the term loan.
7.75% Senior Subordinated Notes
On December 7, 2006, the Company issued $375,000 aggregate principal amount of 7.75%
senior subordinated notes (the “7.75% Notes”) due 2016. The 7.75% Notes are unsecured
senior subordinated notes and are subordinate to all existing and future senior debt,
including debt under the Company’s credit agreements, mortgages and floor plan
indebtedness. The 7.75% Notes are guaranteed by substantially all of the Company’s
wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those
guarantees are full and unconditional and joint and several. The Company can redeem all
or some of the 7.75% Notes at its option beginning in December 2011 at specified
redemption prices, or prior to December 2011 at 100% of the principal amount of the notes
plus an applicable “make-whole” premium, as defined. Upon certain sales of assets or
specific kinds of changes of control, the Company is required to make an offer to
purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and
events of default. As of March 31, 2010, the Company was in compliance with all negative
covenants and there were no events of default.
Senior Subordinated Convertible Notes
On January 31, 2006, the Company issued $375,000 aggregate principal amount of 3.50%
senior subordinated convertible notes due 2026 (the “Convertible Notes”), of which
$235,150 were outstanding at March 31, 2010. The Convertible Notes mature on April 1,
2026, unless earlier converted, redeemed or purchased by the Company, as discussed below.
The Convertible Notes are unsecured senior subordinated obligations and are subordinate
to all future and existing debt under the Company’s credit agreements, mortgages and
floor plan indebtedness. The Convertible Notes are guaranteed on an unsecured senior
subordinated basis by substantially all of the Company’s wholly-owned domestic
subsidiaries. Those guarantees are full and unconditional and joint and several. The
Convertible Notes also contain customary negative covenants and events of default. As of
March 31, 2010, the Company was in compliance with all negative covenants and there were
no events of default.
Holders of the Convertible Notes may convert them based on a conversion rate of
42.7796 shares of common stock per $1,000 principal amount of the Convertible Notes
(which is equal to a conversion price of approximately $23.38 per share), subject to
adjustment, only under the following circumstances: (1) in any quarterly period, if the
closing price of the common stock for twenty of the last thirty trading days in the prior
quarter exceeds $28.05 (subject to adjustment), (2) for specified periods, if the trading
price of the Convertible Notes falls below specific thresholds, (3) if the Convertible
Notes are called for redemption, (4) if specified distributions to holders of common
stock are made or specified corporate transactions occur, (5) if a fundamental change (as
defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity
date.
Upon conversion of the Convertible Notes, for each $1,000 principal amount of the
Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i)
$1,000 or (ii) the conversion value, determined in the manner set forth in the related
indenture covering the Convertible Notes, of the number of shares of common stock equal
to the conversion rate. If the conversion value exceeds $1,000, the Company will also
deliver, at its election, cash, common stock or a combination of cash and common stock
with respect to the remaining value deliverable upon conversion.
In the event of a conversion due to a change of control on or before April 6, 2011,
the Company will, in certain circumstances, pay a make-whole premium by increasing the
conversion rate used in that conversion. In addition, the Company will pay additional
cash interest, commencing with six-month periods beginning on April 1, 2011, if the
average trading price of a Convertible Note for certain periods in the prior six-month
period equals 120% or more of the principal amount of the Convertible Notes. On or after
April 6, 2011, the Company may redeem the Convertible Notes, in whole at any time or in
part from time to time, for cash at a redemption price of 100% of the principal amount of
the Convertible Notes to be redeemed, plus any accrued and unpaid interest to the
applicable redemption date.
Holders of the Convertible Notes may require the Company to purchase all or a
portion of their Convertible Notes for cash on each of April 1, 2011, April 1, 2016 or
April 1, 2021 at a purchase price equal to 100% of the principal amount of the
Convertible Notes to be purchased, plus accrued and unpaid interest, if any, to the
applicable purchase date. Because the Company expects to be required to redeem the
Convertible Notes in April 2011, it is reviewing alternatives to refinance the
Convertible Notes, which may include the issuance of additional securities. In the
absence of a refinancing of the Convertible Notes, the Company expects to utilize cash
flow from operations, working capital and availability under the U.S. Credit Agreement to
repay the Convertible Notes. Based on the ability and intent to refinance the redemption
of the Convertible Notes, the Company expects to classify them as non-current in future
Consolidated Balance Sheets; however, in the event the outstanding balance of the
Convertible Notes exceeds the revolving capacity under the U.S. Credit Agreement, any
such excess will be classified as current in future Consolidated Balance Sheets.
11
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
During the three months ended March 31, 2010, the Company repurchased $71,110
principal amount of its outstanding Convertible Notes, which had a book value, net of
debt discount, of $67,517 for $71,744. The Company allocated $5,229 of the total
consideration to the reacquisition of the equity component of the Convertible Notes. In
connection with the transactions, the Company wrote off $397 of unamortized deferred
financing costs. As a result, the Company recorded a $605 pre-tax gain in connection
with the repurchases.
In the first quarter of 2009, the Company repurchased $68,740 principal amount of
its outstanding Convertible Notes, which had a book value, net of debt discount, of
$62,831 for $51,425. In connection with the transaction, the Company wrote-off $672
of unamortized deferred financing costs and incurred $305 of transaction costs. No
element of the consideration was allocated to the reacquisition of the equity component
because the consideration paid was less than the fair value of the liability component
prior to extinguishment. As a result, the Company recorded a $10,429 pre-tax gain in
connection with the repurchase.
The liability and equity components related to the Convertible Notes consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Carrying amount of the equity component
|
|
$
|
39,933
|
|
|
$
|
43,093
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal amount of the liability component
|
|
$
|
235,150
|
|
|
$
|
306,260
|
|
|
Unamortized debt discount
|
|
|
10,408
|
|
|
|
16,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net carrying amount of the liability component
|
|
$
|
224,742
|
|
|
$
|
289,344
|
|
|
|
|
|
|
|
|
|
The unamortized debt discount will be amortized as additional interest expense
through April 1, 2011, the date the Company expects to be required to redeem the
Convertible Notes. The annual effective interest rate on the liability component is
8.25%.
Mortgage Facilities
The Company is party to a $42,400 mortgage facility with respect to certain of its
dealership properties that matures on October 1, 2015. The facility bears interest at a
defined rate, requires monthly principal and interest payments, and includes the option
to extend the term for successive periods of five years up to a maximum term of
twenty-five years. In the event the Company exercises its options to extend the term, the
interest rate will be renegotiated at each renewal period. The mortgage facility also
contains typical events of default, including non-payment of obligations, cross-defaults
to the Company’s other material indebtedness, certain change of control events, and the
loss or sale of certain franchises operated at the property. Substantially all of the
buildings, improvements, fixtures and personal property of the properties under the
mortgage facility are subject to security interests granted to the lender. As of March
31, 2010, $41,121 was outstanding under this facility.
8. Interest Rate Swaps
The Company uses interest rate swaps to manage interest rate risk associated with
the Company’s variable rate floor plan debt. The Company is party to interest rate swap
agreements through January 7, 2011 pursuant to which the LIBOR portion of $300,000 of the
Company’s floating rate floor plan debt was fixed at 3.67%. We may terminate these
arrangements at any time, subject to the settlement of the then current fair value of the
swap arrangements.
Prior to the third quarter of 2009, the swaps were designated as cash flow hedges of
future interest payments of LIBOR based U.S. floor plan borrowings and the effective
portion of the gain or loss on the derivative was reported as a component of other
comprehensive income and reclassified into earnings when the hedged transaction affected
earnings. During the quarter ended September 30, 2009, the Company experienced declines
in outstanding floor plan debt balances related to certain floor plan lenders due to
significant declines in vehicle inventory levels which caused hedged floor plan balances
to fall below the notional value of the swap agreements. The Company elected to
de-designate these cash flow hedges on September 30, 2009, and as a result, recorded a
net loss of $1,057 in floor plan interest expense in the quarter ended September 30,
2009.
The Company re-designated $290,000 of the swap agreements as cash flow hedges of
future interest payments of LIBOR based U.S. floor plan borrowings and the effective
portion of the gain or loss on that $290,000 of the swap agreements is reported as a
component of other comprehensive income and reclassified into earnings when the hedged
transaction affects earnings. Future settlements and changes in the fair value related to
the undesignated $10,000 of the swap agreements will be recorded as realized and
unrealized gains/losses within interest expense.
12
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company used Level 2 inputs to estimate the fair value of the interest rate swap
agreements. As of March 31, 2010, the fair value of the swaps designated as hedging
instruments was estimated to be a liability of $8,258, which is recorded in accrued
expenses. As of December 31, 2009, the fair value of the swaps designated as hedging
instruments was estimated to be a liability of $9,963, of which $9,250 and $713 were
recorded in accrued expenses and other long-term liabilities, respectively. As of March
31, 2010, the fair value of the swaps not designated as hedging instruments was estimated
to be a liability of $285, which is recorded in accrued expenses. As of December 31,
2009, the fair value of the swaps not designated as hedging instruments was estimated to
be a liability of $344, of which $319 and $25 were recorded in accrued expenses and other
long-term liabilities, respectively.
During the three months ended March 31, 2010, the Company recognized a net gain of
$924 related to the effective portion of the interest rate swap agreements designated as
hedging instruments in accumulated other comprehensive income, and reclassified $2,306 of
the existing derivative losses from accumulated other comprehensive income into floor
plan interest expense. During the three months ended March 31, 2009, the Company
recognized a net gain of $167 related to the effective portion of the interest rate swap
agreements designated as hedging instruments in accumulated other comprehensive income,
and reclassified $2,413 of existing derivative losses from accumulated other
comprehensive income into floor plan interest expense. The Company expects approximately
$6,451 associated with the swaps to be recognized as an increase of interest expense as
the hedged interest payments become due through the swap agreement’s maturity in January
2011. During the three months ended
March 31, 2010 and 2009, the swaps increased the weighted average interest rate on
the Company’s floor plan borrowings by approximately 0.2%.
9. Commitments and Contingent Liabilities
The Company is involved in litigation which may relate to claims brought by
governmental authorities, issues with customers and employment related matters, including
class action claims and purported class action claims. As of March 31, 2010, the Company
is not party to any legal proceedings, including class action lawsuits, that,
individually or in the aggregate, are reasonably expected to have a material adverse
effect on the Company’s results of operations, financial condition or cash flows.
However, the results of these matters cannot be predicted with certainty, and an
unfavorable resolution of one or more of these matters could have a material adverse
effect on the Company’s results of operations, financial condition or cash flows.
The Company has historically structured its operations so as to minimize ownership
of real property. As a result, the Company leases or subleases substantially all of its
facilities. These leases are generally for a period between five and 20 years, and are
typically structured to include renewal options at the Company’s election. Pursuant to
the leases for some of the Company’s larger facilities, the Company is required to comply
with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA
ratio, each as defined. For these leases, non-compliance with the ratios may require the
Company to post collateral in the form of a letter of credit. A breach of the other
lease covenants give rise to certain remedies by the landlord, the most severe of which
include the termination of the applicable lease and acceleration of the total rent
payments due under the lease.
The Company has sold a number of dealerships to third parties and, as a condition to
certain of those sales, remains liable for the lease payments relating to the properties
on which those businesses operate in the event of non-payment by the buyer. The Company
is also party to lease agreements on properties that it no longer uses in its retail
operations that it has sublet to third parties. The Company relies on subtenants to pay
the associated rent and maintain the property at these locations. In the event the
subtenant does not perform as expected, the Company may not be able to recover amounts
owed to it and the Company could be required to fulfill these obligations.
The Company is potentially subject to additional purchase commitments pursuant to
its smart distribution agreement, smart franchise agreement and state franchise laws in
the event of franchise terminations, none of which have historically had a material
adverse effect on its results of operations, financial condition or cash flows. The
Company does not anticipate that the purchase commitments will have a material adverse
effect on its future results of operations, financial condition or cash flows, although
such an outcome is possible.
13
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
10. Equity
Comprehensive Income (Loss)
Other comprehensive income (loss) includes foreign currency translation gains and
losses, as well as changes relating to other immaterial items, including certain defined
benefit plans in the U.K. and changes in the fair value of interest rate swap agreements,
each of which has been excluded from net income and reflected in equity. Total
comprehensive income (loss) is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Attributable to Penske Automotive Group:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
20,354
|
|
|
$
|
16,282
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(27,708
|
)
|
|
|
2,208
|
|
|
Other
|
|
|
3,186
|
|
|
|
163
|
|
|
|
|
|
|
|
|
|
|
Total attributable to Penske Automotive Group
|
|
|
(4,168
|
)
|
|
|
18,653
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable to the non-controlling interest:
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(22
|
)
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss)
|
|
$
|
(4,190
|
)
|
|
$
|
18,573
|
|
|
|
|
|
|
|
|
|
11. Segment Information
The Company’s operations are organized by management into operating segments by line
of business and geography. The Company has determined it has three reportable segments as
defined in general accounting principles for segment reporting, including: (i) Retail,
consisting of our automotive retail operations, (ii) Distribution, consisting of our
distribution of the smart fortwo vehicle, parts and accessories in the U.S. and Puerto
Rico and (iii) PAG Investments, consisting of our investments in
non-automotive retail operations. The Retail reportable segment includes all
automotive dealerships and all departments relevant to the operation of the dealerships.
The individual dealership operations included in the Retail reportable segment have been
grouped into five geographic operating segments, which have been aggregated into one
reportable segment as their operations (A) have similar economic characteristics (all are
automotive dealerships having similar margins), (B) offer similar products and services
(all sell new and 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 following table summarizes revenues and income from continuing operations before
certain non-recurring items and income taxes, which is the measure by which management
allocates resources to its segments, and which we refer to as adjusted segment income,
for each of our reportable segments. Adjusted segment income excludes the items in the
table below in order to enhance the comparability of segment income from period to
period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAG
|
|
|
Intersegment
|
|
|
|
|
|
Three Months Ended March 31
|
|
Retail
|
|
|
Distribution
|
|
|
Investments
|
|
|
Elimination
|
|
|
Total
|
|
|
Revenues -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
2,484,750
|
|
|
$
|
15,124
|
|
|
$
|
—
|
|
|
$
|
(7,500
|
)
|
|
$
|
2,492,374
|
|
|
2009
|
|
|
2,079,786
|
|
|
|
88,631
|
|
|
|
—
|
|
|
|
(8,518
|
)
|
|
|
2,159,899
|
|
|
Adjusted segment income -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
$
|
38,758
|
|
|
$
|
(5,592
|
)
|
|
$
|
(505
|
)
|
|
$
|
(83
|
)
|
|
$
|
32,578
|
|
|
2009
|
|
|
9,141
|
|
|
|
6,305
|
|
|
|
605
|
|
|
|
(163
|
)
|
|
|
15,888
|
|
The following table reconciles total adjusted segment income to consolidated income
from continuing operations before
income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Adjusted segment income
|
|
$
|
32,578
|
|
|
$
|
15,888
|
|
|
Gain on debt repurchase
|
|
|
605
|
|
|
|
10,429
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
33,183
|
|
|
$
|
26,317
|
|
|
|
|
|
|
|
|
|
14
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
12. Consolidating Condensed Financial Information
The following tables include consolidating condensed financial information as of
March 31, 2010 and December 31, 2009 and for the three month periods ended March 31, 2010
and 2009 for Penske Automotive Group, Inc. (as the issuer of the Convertible Notes and
the 7.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily
representing foreign entities). The condensed consolidating financial information
includes certain allocations of balance sheet, income statement and cash flow items which
are not necessarily indicative of the financial position, results of operations or cash
flows of these entities on a stand-alone basis.
CONSOLIDATING CONDENSED BALANCE SHEET
March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Eliminations
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
23,543
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,590
|
|
|
$
|
4,953
|
|
|
Accounts receivable, net
|
|
|
378,395
|
|
|
|
(240,860
|
)
|
|
|
240,860
|
|
|
|
203,805
|
|
|
|
174,590
|
|
|
Inventories
|
|
|
1,384,231
|
|
|
|
—
|
|
|
|
—
|
|
|
|
851,833
|
|
|
|
532,398
|
|
|
Other current assets
|
|
|
103,821
|
|
|
|
—
|
|
|
|
1,252
|
|
|
|
65,283
|
|
|
|
37,286
|
|
|
Assets held for sale
|
|
|
6,302
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,302
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,896,292
|
|
|
|
(240,860
|
)
|
|
|
242,112
|
|
|
|
1,145,813
|
|
|
|
749,227
|
|
|
Property and equipment,
net
|
|
|
720,575
|
|
|
|
—
|
|
|
|
5,700
|
|
|
|
458,536
|
|
|
|
256,339
|
|
|
Intangible assets
|
|
|
1,004,367
|
|
|
|
—
|
|
|
|
—
|
|
|
|
574,086
|
|
|
|
430,281
|
|
|
Equity method investments
|
|
|
276,055
|
|
|
|
—
|
|
|
|
225,775
|
|
|
|
—
|
|
|
|
50,280
|
|
|
Other long-term assets
|
|
|
18,886
|
|
|
|
(1,237,618
|
)
|
|
|
1,241,905
|
|
|
|
9,252
|
|
|
|
5,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,916,175
|
|
|
$
|
(1,478,478
|
)
|
|
$
|
1,715,492
|
|
|
$
|
2,187,687
|
|
|
$
|
1,491,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable
|
|
$
|
868,226
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
513,760
|
|
|
$
|
354,466
|
|
|
Floor plan notes payable
— non-trade
|
|
|
488,362
|
|
|
|
—
|
|
|
|
21,000
|
|
|
|
292,924
|
|
|
|
174,438
|
|
|
Accounts payable
|
|
|
213,541
|
|
|
|
—
|
|
|
|
1,732
|
|
|
|
80,757
|
|
|
|
131,052
|
|
|
Accrued expenses
|
|
|
235,114
|
|
|
|
(240,860
|
)
|
|
|
989
|
|
|
|
134,952
|
|
|
|
340,033
|
|
|
Current portion of
long-term debt
|
|
|
16,611
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,045
|
|
|
|
15,566
|
|
|
Liabilities held for sale
|
|
|
4,616
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,616
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,826,470
|
|
|
|
(240,860
|
)
|
|
|
23,721
|
|
|
|
1,028,054
|
|
|
|
1,015,555
|
|
|
Long-term debt
|
|
|
862,785
|
|
|
|
(59,194
|
)
|
|
|
748,742
|
|
|
|
43,837
|
|
|
|
129,400
|
|
|
Deferred tax liability
|
|
|
156,178
|
|
|
|
—
|
|
|
|
—
|
|
|
|
144,843
|
|
|
|
11,335
|
|
|
Other long-term
liabilities
|
|
|
127,713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,575
|
|
|
|
4,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,973,146
|
|
|
|
(300,054
|
)
|
|
|
772,463
|
|
|
|
1,340,309
|
|
|
|
1,160,428
|
|
|
Total equity
|
|
|
943,029
|
|
|
|
(1,178,424
|
)
|
|
|
943,029
|
|
|
|
847,378
|
|
|
|
331,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
|
3,916,175
|
|
|
$
|
(1,478,478
|
)
|
|
$
|
1,715,492
|
|
|
$
|
2,187,687
|
|
|
$
|
1,491,474
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Eliminations
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,769
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,114
|
|
|
$
|
1,655
|
|
|
Accounts receivable, net
|
|
|
322,598
|
|
|
|
(230,299
|
)
|
|
|
230,299
|
|
|
|
197,120
|
|
|
|
125,478
|
|
|
Inventories
|
|
|
1,306,532
|
|
|
|
—
|
|
|
|
—
|
|
|
|
780,924
|
|
|
|
525,608
|
|
|
Other current assets
|
|
|
95,560
|
|
|
|
—
|
|
|
|
1,725
|
|
|
|
61,774
|
|
|
|
32,061
|
|
|
Assets held for sale
|
|
|
5,005
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,005
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,743,464
|
|
|
|
(230,299
|
)
|
|
|
232,024
|
|
|
|
1,056,937
|
|
|
|
684,802
|
|
|
Property and equipment,
net
|
|
|
726,835
|
|
|
|
—
|
|
|
|
6,007
|
|
|
|
450,143
|
|
|
|
270,685
|
|
|
Intangible assets
|
|
|
1,012,079
|
|
|
|
—
|
|
|
|
—
|
|
|
|
570,558
|
|
|
|
441,521
|
|
|
Equity method investments
|
|
|
295,473
|
|
|
|
—
|
|
|
|
231,897
|
|
|
|
—
|
|
|
|
63,576
|
|
|
Other long-term assets
|
|
|
18,156
|
|
|
|
(1,287,938
|
)
|
|
|
1,293,067
|
|
|
|
10,852
|
|
|
|
2,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,796,007
|
|
|
$
|
(1,518,237
|
)
|
|
$
|
1,762,995
|
|
|
$
|
2,088,490
|
|
|
$
|
1,462,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable
|
|
$
|
772,926
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
451,338
|
|
|
$
|
321,588
|
|
|
Floor plan notes payable
— non-trade
|
|
|
423,316
|
|
|
|
—
|
|
|
|
—
|
|
|
|
254,807
|
|
|
|
168,509
|
|
|
Accounts payable
|
|
|
190,325
|
|
|
|
—
|
|
|
|
3,268
|
|
|
|
74,946
|
|
|
|
112,111
|
|
|
Accrued expenses
|
|
|
227,725
|
|
|
|
(230,299
|
)
|
|
|
344
|
|
|
|
112,231
|
|
|
|
345,449
|
|
|
Current portion of
long-term debt
|
|
|
12,442
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,033
|
|
|
|
11,409
|
|
|
Liabilities held for sale
|
|
|
3,083
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,083
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,629,817
|
|
|
|
(230,299
|
)
|
|
|
3,612
|
|
|
|
897,438
|
|
|
|
959,066
|
|
|
Long-term debt
|
|
|
933,966
|
|
|
|
(59,706
|
)
|
|
|
813,344
|
|
|
|
43,066
|
|
|
|
137,262
|
|
|
Deferred tax liability
|
|
|
157,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
145,551
|
|
|
|
11,949
|
|
|
Other long-term
liabilities
|
|
|
128,685
|
|
|
|
—
|
|
|
|
—
|
|
|
|
123,710
|
|
|
|
4,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,849,968
|
|
|
|
(290,005
|
)
|
|
|
816,956
|
|
|
|
1,209,765
|
|
|
|
1,113,252
|
|
|
Total equity
|
|
|
946,039
|
|
|
|
(1,228,232
|
)
|
|
|
946,039
|
|
|
|
878,725
|
|
|
|
349,507
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity
|
|
$
|
3,796,007
|
|
|
$
|
(1,518,237
|
)
|
|
$
|
1,762,995
|
|
|
$
|
2,088,490
|
|
|
$
|
1,462,759
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Eliminations
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,492,374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,395,160
|
|
|
$
|
1,097,214
|
|
|
Cost of sales
|
|
|
2,081,144
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,152,108
|
|
|
|
929,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
411,230
|
|
|
|
—
|
|
|
|
—
|
|
|
|
243,052
|
|
|
|
168,178
|
|
|
Selling, general, and
administrative
expenses
|
|
|
341,644
|
|
|
|
—
|
|
|
|
4,593
|
|
|
|
208,822
|
|
|
|
128,229
|
|
|
Depreciation and
amortization
|
|
|
12,374
|
|
|
|
—
|
|
|
|
290
|
|
|
|
6,960
|
|
|
|
5,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
57,212
|
|
|
|
—
|
|
|
|
(4,883
|
)
|
|
|
27,270
|
|
|
|
34,825
|
|
|
Floor plan interest
expense
|
|
|
(8,570
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,110
|
)
|
|
|
(2,460
|
)
|
|
Other interest expense
|
|
|
(12,720
|
)
|
|
|
—
|
|
|
|
(8,047
|
)
|
|
|
(555
|
)
|
|
|
(4,118
|
)
|
|
Debt discount
amortization
|
|
|
(2,915
|
)
|
|
|
—
|
|
|
|
(2,915
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Equity in earnings of
affiliates
|
|
|
(429
|
)
|
|
|
—
|
|
|
|
347
|
|
|
|
—
|
|
|
|
(776
|
)
|
|
Gain on debt repurchase
|
|
|
605
|
|
|
|
—
|
|
|
|
605
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity in earnings of
subsidiaries
|
|
|
—
|
|
|
|
(48,098
|
)
|
|
|
48,098
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before
income taxes
|
|
|
33,183
|
|
|
|
(48,098
|
)
|
|
|
33,205
|
|
|
|
20,605
|
|
|
|
27,471
|
|
|
Income taxes
|
|
|
(12,444
|
)
|
|
|
18,025
|
|
|
|
(12,444
|
)
|
|
|
(10,519
|
)
|
|
|
(7,506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
20,739
|
|
|
|
(30,073
|
)
|
|
|
20,761
|
|
|
|
10,086
|
|
|
|
19,965
|
|
|
(Loss) from
discontinued
operations, net of tax
|
|
|
(407
|
)
|
|
|
407
|
|
|
|
(407
|
)
|
|
|
(407
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
20,332
|
|
|
|
(29,666
|
)
|
|
|
20,354
|
|
|
|
9,679
|
|
|
|
19,965
|
|
|
Less: Loss
attributable to
non-controlling
interests
|
|
|
(22
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to Penske
Automotive Group
common stockholders
|
|
$
|
20,354
|
|
|
$
|
(29,666
|
)
|
|
$
|
20,354
|
|
|
$
|
9,679
|
|
|
$
|
19,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Eliminations
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
2,159,899
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,272,670
|
|
|
$
|
887,229
|
|
|
Cost of sales
|
|
|
1,791,291
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,047,316
|
|
|
|
743,975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
368,608
|
|
|
|
—
|
|
|
|
—
|
|
|
|
225,354
|
|
|
|
143,254
|
|
|
Selling, general, and
administrative
expenses
|
|
|
312,941
|
|
|
|
—
|
|
|
|
3,318
|
|
|
|
197,317
|
|
|
|
112,306
|
|
|
Depreciation and
amortization
|
|
|
12,881
|
|
|
|
—
|
|
|
|
290
|
|
|
|
8,288
|
|
|
|
4,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
42,786
|
|
|
|
—
|
|
|
|
(3,608
|
)
|
|
|
19,749
|
|
|
|
26,645
|
|
|
Floor plan interest
expense
|
|
|
(9,474
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(6,249
|
)
|
|
|
(3,225
|
)
|
|
Other interest expense
|
|
|
(14,500
|
)
|
|
|
—
|
|
|
|
(11,472
|
)
|
|
|
(29
|
)
|
|
|
(2,999
|
)
|
|
Debt discount
amortization
|
|
|
(3,638
|
)
|
|
|
—
|
|
|
|
(3,638
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Equity in earnings of
affiliates
|
|
|
714
|
|
|
|
—
|
|
|
|
583
|
|
|
|
—
|
|
|
|
131
|
|
|
Gain on debt repurchase
|
|
|
10,429
|
|
|
|
—
|
|
|
|
10,429
|
|
|
|
—
|
|
|
|
—
|
|
|
Equity in earnings of
subsidiaries
|
|
|
—
|
|
|
|
(34,103
|
)
|
|
|
34,103
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before
income taxes
|
|
|
26,317
|
|
|
|
(34,103
|
)
|
|
|
26,397
|
|
|
|
13,471
|
|
|
|
20,552
|
|
|
Income taxes
|
|
|
(9,857
|
)
|
|
|
12,735
|
|
|
|
(9,857
|
)
|
|
|
(6,985
|
)
|
|
|
(5,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations
|
|
|
16,460
|
|
|
|
(21,368
|
)
|
|
|
16,540
|
|
|
|
6,486
|
|
|
|
14,802
|
|
|
(Loss) income from
discontinued
operations, net of tax
|
|
|
(258
|
)
|
|
|
258
|
|
|
|
(258
|
)
|
|
|
(267
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
16,202
|
|
|
|
(21,110
|
)
|
|
|
16,282
|
|
|
|
6,219
|
|
|
|
14,811
|
|
|
Less: Loss
attributable to
non-controlling
interests
|
|
|
(80
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(80
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to Penske
Automotive Group
common stockholders
|
|
$
|
16,282
|
|
|
$
|
(21,110
|
)
|
|
$
|
16,282
|
|
|
$
|
6,219
|
|
|
$
|
14,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities
|
|
$
|
49,822
|
|
|
$
|
50,516
|
|
|
$
|
(14,296
|
)
|
|
$
|
13,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(19,297
|
)
|
|
|
17
|
|
|
|
(15,000
|
)
|
|
|
(4,314
|
)
|
|
Dealership acquisitions, net
|
|
|
(12,277
|
)
|
|
|
—
|
|
|
|
(12,277
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities
|
|
|
(31,574
|
)
|
|
|
17
|
|
|
|
(27,277
|
)
|
|
|
(4,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under U.S. credit agreement revolving
credit line
|
|
|
164,000
|
|
|
|
164,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Repayments under U.S. credit agreement revolving credit line
|
|
|
(164,000
|
)
|
|
|
(164,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase 3.5% senior subordinated convertible notes
|
|
|
(71,744
|
)
|
|
|
(71,744
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Net (repayments) borrowings of other long-term debt
|
|
|
(1,816
|
)
|
|
|
—
|
|
|
|
1,296
|
|
|
|
(3,112
|
)
|
|
Net borrowings of floor plan notes payable — non-trade
|
|
|
65,046
|
|
|
|
21,000
|
|
|
|
46,641
|
|
|
|
(2,595
|
)
|
|
Proceeds from exercised of options, including excess tax benefit
|
|
|
211
|
|
|
|
211
|
|
|
|
—
|
|
|
|
—
|
|
|
Distributions from (to) parent
|
|
|
—
|
|
|
|
—
|
|
|
|
283
|
|
|
|
(283
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities
|
|
|
(8,303
|
)
|
|
|
(50,533
|
)
|
|
|
48,220
|
|
|
|
(5,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations
|
|
|
(171
|
)
|
|
|
—
|
|
|
|
(171
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
9,774
|
|
|
|
—
|
|
|
|
6,476
|
|
|
|
3,298
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
13,769
|
|
|
|
—
|
|
|
|
12,114
|
|
|
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
23,543
|
|
|
$
|
—
|
|
|
$
|
18,590
|
|
|
$
|
4,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Automotive
|
|
|
Guarantor
|
|
|
Non-Guarantor
|
|
|
|
|
Company
|
|
|
Group, Inc.
|
|
|
Subsidiaries
|
|
|
Subsidiaries
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities
|
|
$
|
176,057
|
|
|
$
|
(20,194
|
)
|
|
$
|
28,884
|
|
|
$
|
167,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(27,555
|
)
|
|
|
134
|
|
|
|
(19,102
|
)
|
|
|
(8,587
|
)
|
|
Dealership acquisitions, net
|
|
|
(11,476
|
)
|
|
|
—
|
|
|
|
(3,556
|
)
|
|
|
(7,920
|
)
|
|
Other
|
|
|
12,679
|
|
|
|
11,485
|
|
|
|
—
|
|
|
|
1,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities
|
|
|
(26,352
|
)
|
|
|
11,619
|
|
|
|
(22,658
|
)
|
|
|
(15,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings under U.S. credit agreement
revolving credit line
|
|
|
147,000
|
|
|
|
147,000
|
|
|
|
—
|
|
|
|
—
|
|
|
Repayments under U.S. credit agreement revolving credit line
|
|
|
(77,000
|
)
|
|
|
(77,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repayments under U.S. credit agreement term loan
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Repurchase 3.5% senior subordinated convertible notes
|
|
|
(51,425
|
)
|
|
|
(51,425
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Net (repayments) borrowings of other long-term debt
|
|
|
(43,333
|
)
|
|
|
—
|
|
|
|
28,751
|
|
|
|
(72,084
|
)
|
|
Net repayments of floor plan notes payable — non-trade
|
|
|
(117,201
|
)
|
|
|
—
|
|
|
|
(43,612
|
)
|
|
|
(73,589
|
)
|
|
Distributions from (to) parent
|
|
|
—
|
|
|
|
—
|
|
|
|
146
|
|
|
|
(146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities
|
|
|
(151,959
|
)
|
|
|
8,575
|
|
|
|
(14,715
|
)
|
|
|
(145,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations
|
|
|
(4,793
|
)
|
|
|
—
|
|
|
|
385
|
|
|
|
(5,178
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
(7,047
|
)
|
|
|
—
|
|
|
|
(8,104
|
)
|
|
|
1,057
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
17,108
|
|
|
|
—
|
|
|
|
14,126
|
|
|
|
2,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
10,061
|
|
|
$
|
—
|
|
|
$
|
6,022
|
|
|
$
|
4,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
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 “Forward Looking
Statements.” We have acquired and initiated a number of businesses since inception. Our
financial statements include the results of operations of those businesses from the date
acquired or when they commenced operations. This Management’s Discussion and Analysis of
Financial Condition and Results of Operations has been updated to reflect the revision of
our financial statements for entities which have been treated as discontinued operations
through March 31, 2010.
Overview
We are the second largest automotive retailer headquartered in the U.S. as measured
by total revenues. As of March 31, 2010, we owned and operated 168 franchises in the U.S.
and 152 franchises outside of the U.S., primarily in the U.K. We offer a full range of
vehicle brands with 95% of our total retail revenue in 2010 generated from brands of
non-U.S. based manufacturers, and 65% generated from premium brands, such as Audi, BMW,
Cadillac, Mercedes-Benz and Porsche. Each of our dealerships offers a wide selection of
new and used vehicles for sale. In addition to selling new and used vehicles, we generate
higher-margin revenue at each of our dealerships through maintenance and repair services
and the sale and placement of higher-margin products, such as third party finance and
insurance products, third-party extended service contracts and replacement and
aftermarket automotive products. We are also diversified geographically, with 61% of our
total revenues in 2010 generated by operations in the U.S. and Puerto Rico and 39%
generated from our operations outside the U.S. (predominately in the U.K.).
We are also, through smart USA Distributor, LLC (“smart USA”), a wholly-owned
subsidiary, the exclusive distributor of the smart fortwo vehicle in the U.S. and Puerto
Rico. The smart fortwo is manufactured by Mercedes-Benz Cars and is a Daimler brand. This
technologically advanced vehicle achieves 40 miles per gallon on the highway and is an
ultra-low emissions vehicle as certified by the State of California Air Resources Board.
As of March 31, 2010, smart USA has certified a network of more than 75 smart
dealerships, ten of which are owned and operated by us. The smart fortwo offers five
different versions, the
pure, passion coupe, passion cabriolet, BRABUS coupe
and
BRABUS
cabriolet,
with base prices currently ranging from $11,990 to $20,990. smart USA
wholesaled 956 and 5,714 smart fortwo vehicles during the three months ended March 31,
2010 and 2009, respectively.
We also hold a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P.
(“PTL”), a leading global transportation services provider. PTL operates and maintains
more than 200,000 vehicles and serves customers in North America, South America, Europe
and Asia. Product lines include full-service leasing, contract maintenance, commercial
and consumer truck rental and logistics services, including, transportation and
distribution center management and supply chain management. The general partner of PTL is
Penske Truck Leasing Corporation, a wholly-owned subsidiary of Penske Corporation, which,
together with other wholly-owned subsidiaries of Penske Corporation, owns 41.1% of PTL.
The remaining 49.9% of PTL is owned by GE Capital.
Outlook
Since September 2008, general economic conditions have impacted consumer traffic,
vehicle sales and vehicle service work at our dealerships. While we have experienced
increased traffic and sales in the first quarter of 2010 compared with the prior year,
volumes are still below historical levels. We believe general economic conditions will
continue to impact traffic and sales in the markets in which we operate throughout 2010.
Operating Overview
New and used vehicle revenues include sales to retail customers and to leasing
companies providing consumer automobile leasing. We generate finance and insurance
revenues from sales of third-party extended service contracts, sales of third-party
insurance policies, fees for facilitating the sale of third-party finance and lease
contracts and the sale of certain other products. Service and parts revenues include fees
paid for repair, maintenance and collision services, and the sale of replacement parts
and the sale of aftermarket accessories. During the three months ended March 31, 2010,
we experienced year over year increases in same store new and used retail unit sales,
resulting in retail revenue growth, including finance and insurance revenues. Our same
store service and parts business also experienced an increase during this period, due in
large part to Toyota recall activity.
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, service and parts
transactions, and the distribution of the smart fortwo. 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 may impact the mix of our revenues, and
therefore influence our gross profit margin. Aggregate gross profit increased $42.6
million, or 11.6%, in the first quarter of 2010 compared to the first quarter of 2009.
The increase in gross profit is largely attributable to
increases in sales levels, coupled with modest increases in margins in certain lines
of business. Our gross margin percentage declined from 17.1% in 2009 to 16.5%, due
primarily to an increase in the percentage of our revenues generated by lower margin
vehicle sales.
21
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 outside services. A significant portion of our selling
expenses are variable, and we believe a significant portion of our general and
administrative expenses are subject to our control, allowing us to adjust them over time
to reflect economic trends. Our selling, general, and administrative expenses increased
on a same-store basis during the three months ended March 31, 2010, due in large part to
higher variable compensation expense resulting from the increase in our gross profit
compared to the same period last year. Our rent expense also increased on a same store
basis, due in large part to cost of living increases outlined in our lease agreements.
However, selling, general and administrative expenses as a percentage of gross profit
decreased by 182 basis points to 83.1% in the first quarter of 2010 as compared to the
prior year.
Floor plan interest expense relates to financing incurred in connection with the
acquisition of new and used vehicle inventories that is secured by those vehicles. Other
interest expense consists of interest charges on all of our interest-bearing debt, other
than interest relating to floor plan financing. The cost of our variable rate
indebtedness is based on the prime rate, defined London Interbank Offered Rate (“LIBOR”),
the Bank of England Base Rate, the Finance House Base Rate, or the Euro Interbank Offered
Rate. During the latter part of 2008 and in early 2009, such benchmark rates were reduced
due to government actions designed to spur liquidity and bank lending activities. As a
result, our cost of capital on variable rate indebtedness declined during the first
quarter of 2010 compared to the first quarter of 2009. Our floor plan and other interest
expenses have decreased during the three months ended March 31, 2010 as a result of
decreases in average floor plan balances outstanding, term loan repayments and
repurchases of our 3.5% senior subordinated convertible notes, as well as the reduction
in interest rates.
Equity in earnings of affiliates represents our share of the earnings relating to
investments in joint ventures and other non-consolidated investments, including PTL. It
is our expectation that operating conditions as outlined above in the Outlook section
will similarly impact these businesses throughout 2010.
The future success of our business will likely be dependent on, among other things,
general economic and industry conditions, our ability to consummate and integrate
acquisitions, our ability to increase sales of higher margin products, especially service
and parts services, our ability to realize returns on our significant capital investment
in new and upgraded dealerships, the success of our distribution of the smart fortwo, and
the return realized from our investments in various joint ventures and other
non-consolidated investments. See “Forward-Looking Statements.”
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the 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
Vehicle, Parts and Service Sales
We record revenue when vehicles are delivered and title has passed to the customer,
when vehicle service or repair 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. During the
three months ended March 31, 2010 and 2009, we earned $82.6 million and $69.3 million,
respectively, of rebates, incentives and reimbursements from manufacturers, of which
$80.7 million and $67.5 million was recorded as a reduction of cost of sales.
Finance and Insurance Sales
Subsequent to the sale of a vehicle to a customer, we sell our 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 third-party
insurance products to customers, including credit and life insurance policies and
extended service contracts. These commissions are recorded as revenue at the time the
customer enters into the contract.
22
Impairment Testing
Franchise value impairment is assessed as of October 1 every year and upon the
occurrence of an indicator of impairment through a comparison of its carrying amount and
estimated fair value. An indicator of impairment exists if the carrying value of a
franchise exceeds its estimated fair value and an impairment loss may be recognized up to
that excess. The fair value of franchise value is determined using a discounted cash flow
approach, which includes assumptions that include revenue and profitability growth,
franchise profit margins, and our cost of capital. We also evaluate our franchise
agreements in connection with the annual impairment testing to determine whether events
and circumstances continue to support our assessment that the franchise agreements have
an indefinite life.
Goodwill impairment is assessed at the reporting unit level as of October 1 every
year and upon the occurrence of an indicator of impairment. We have determined that the
dealerships in each of our operating segments within the Retail reportable segment,
which are organized by geography, are components that are aggregated into five reporting
units as they (A) have similar economic characteristics (all are automotive dealerships
having similar margins), (B) offer similar products and services (all sell new and 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). Accordingly, our
operating segments are also considered our reporting units for the purpose of goodwill
impairment testing relating to our Retail reportable segment. There is no goodwill
recorded in our Distribution or PAG Investments reportable segments. An indicator of
goodwill impairment exists if the carrying amount of the reporting unit, including
goodwill, is determined to exceed the estimated fair value. The fair value of goodwill
is determined using a discounted cash flow approach, which includes assumptions that
include revenue and profitability growth, franchise profit margins, residual values and
our cost of capital. If an indication of goodwill impairment exists, an analysis
reflecting the allocation of the fair value of the reporting unit to all assets and
liabilities, including previously unrecognized intangible assets, is performed. The
impairment is measured by comparing the implied fair value of the reporting unit
goodwill with its carrying amount and an impairment loss may be recognized up to that
excess.
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 $276.1 million and $295.5 million as of March 31, 2010 and
December 31, 2009, respectively. 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 were to be 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, auto physical damage insurance, property insurance, employment
practices liability insurance, directors and officers insurance and employee medical
benefits in the U.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. 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
$22.2 million and $21.5 million as of March 31, 2010 and December 31, 2009, respectively.
Changes in the reserve estimate during 2010 relate primarily to current year activity in
our general liability and workers compensation programs.
Income Taxes
Tax regulations may require items to be included in our tax return 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 return in future years which we
have already recorded in our financial statements. Deferred tax liabilities generally
represent deductions taken on our tax return 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. A valuation allowance of $7.0 million has been recorded
relating to net operating losses and credit carryforwards in the U.S. based on our
determination that it is more likely than not that they will not be utilized.
23
Classification of Franchises in Continuing and Discontinued Operations
We classify the results of our operations in our consolidated financial statements
based on general accounting principles for discontinued operations, which requires
judgment in determining whether a franchise will be reported within continuing or
discontinued operations. Such judgments include whether a franchise will be divested, the
period required to complete the divestiture, and the likelihood of changes to the
divestiture plans. If we determine that a franchise should be either reclassified from
continuing operations to discontinued operations or from discontinued operations to
continuing operations, our consolidated financial statements for prior periods are
revised to reflect such reclassification.
New Accounting Pronouncement
We adopted a new accounting pronouncement amending the consolidation guidance
relating to variable interest entities (“VIE”) on January 1, 2010. The new guidance
replaced the quantitative model for determining the primary beneficiary of a variable
interest entity with a qualitative approach that considers which entity has the power to
direct activities that most significantly impact the variable interest entity’s
performance and whether the entity has an obligation to absorb losses or the right to
receive benefits that could potentially be significant to the variable interest entity.
The new guidance also requires: an additional reconsideration event for determining
whether an entity is a VIE when holders of an at risk equity investment lose voting or
similar rights to direct the activities that most significantly impact the entities
economic performance; ongoing assessments of whether an enterprise is the primary
beneficiary of a VIE; separate presentation of the assets and liabilities of the VIE on
the balance sheet; and additional disclosures about an entity’s involvement with a VIE.
The adoption of the new accounting pronouncement did not have an effect on our operating
results, financial position or cash flows during the period.
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 only
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 was acquired
on January 15, 2008, the results of the acquired entity would be included in annual same
store comparisons beginning with the year ended December 31, 2010 and in quarterly same
store comparisons beginning with the quarter ended June 30, 2009.
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
(dollars in millions, except per unit amounts)
Our results for the three months ended March 31, 2010 include a gain of $0.6 million
($0.4 million after-tax) relating to the repurchase of $71.1 million aggregate principal
amount of our 3.5% senior subordinated convertible notes. Our results for the three
months ended March 31, 2009 include a gain of $10.4 million ($6.5 million after-tax), or
$0.07 per share, relating to the repurchase of $68.7 million aggregate principal amount
of our 3.5% senior subordinated convertible notes.
New Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
New retail unit sales
|
|
|
36,212
|
|
|
|
30,756
|
|
|
|
5,456
|
|
|
|
17.7
|
%
|
|
Same store new retail unit sales
|
|
|
35,485
|
|
|
|
30,681
|
|
|
|
4,804
|
|
|
|
15.7
|
%
|
|
New retail sales revenue
|
|
$
|
1,234.7
|
|
|
$
|
971.8
|
|
|
$
|
262.9
|
|
|
|
27.1
|
%
|
|
Same store new retail sales revenue
|
|
$
|
1,206.1
|
|
|
$
|
967.5
|
|
|
$
|
238.6
|
|
|
|
24.7
|
%
|
|
New retail sales revenue per unit
|
|
$
|
34,097
|
|
|
$
|
31,598
|
|
|
$
|
2,499
|
|
|
|
7.9
|
%
|
|
Same store new retail sales revenue per unit
|
|
$
|
33,988
|
|
|
$
|
31,533
|
|
|
$
|
2,455
|
|
|
|
7.8
|
%
|
|
Gross profit — new
|
|
$
|
101.7
|
|
|
$
|
71.4
|
|
|
$
|
30.3
|
|
|
|
42.4
|
%
|
|
Same store gross profit — new
|
|
$
|
99.0
|
|
|
$
|
70.9
|
|
|
$
|
28.1
|
|
|
|
39.6
|
%
|
|
Average gross profit per new vehicle retailed
|
|
$
|
2,809
|
|
|
$
|
2,322
|
|
|
$
|
487
|
|
|
|
21.0
|
%
|
|
Same store average gross profit per new
vehicle retailed
|
|
$
|
2,790
|
|
|
$
|
2,311
|
|
|
$
|
479
|
|
|
|
20.7
|
%
|
|
Gross margin % — new
|
|
|
8.2
|
%
|
|
|
7.3
|
%
|
|
|
0.9
|
%
|
|
|
12.3
|
%
|
|
Same store gross margin % — new
|
|
|
8.2
|
%
|
|
|
7.3
|
%
|
|
|
0.9
|
%
|
|
|
12.3
|
%
|
Units
Retail unit sales of new vehicles increased 5,456 units, or 17.7%, from 2009 to
2010. The increase is due to a 4,804 unit, or 15.7%, increase in same store retail unit
sales during the period, coupled with a 652 unit increase from net dealership
acquisitions. The same store increase was due primarily to unit sales increases in our
premium brand stores in the U.S. and U.K. and volume foreign brand stores in the U.S.
24
Revenues
New vehicle retail sales revenue increased $262.9 million, or 27.1%, from 2009 to
2010. The increase is due to a $238.6 million, or 24.7%, increase in same store revenues,
coupled with a $24.3 million increase from net dealership acquisitions. The same store
revenue increase is due primarily to the 15.7% increase in retail unit sales, which
increased revenue by $163.3 million, coupled with the $2,455, or 7.8%, increase in
average selling prices per unit, which increased revenue by $75.3 million.
Gross Profit
Retail gross profit from new vehicle sales increased $30.3 million, or 42.4%, from
2009 to 2010. The increase is due to a $28.1 million, or 39.6%, increase in same store
gross profit, coupled with a $2.2 million increase from net dealership acquisitions. The
same store increase is due primarily to the $479, or 20.7%, increase in the average gross
profit per new vehicle retailed, which increased gross profit by $14.7 million, coupled
with the 15.7% increase in retail unit sales, which increased gross profit by
$13.4 million.
Used Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
Used retail unit sales
|
|
|
26,887
|
|
|
|
27,007
|
|
|
|
(120
|
)
|
|
|
(0.4
|
%)
|
|
Same store used retail unit sales
|
|
|
26,436
|
|
|
|
26,918
|
|
|
|
(482
|
)
|
|
|
(1.8
|
%)
|
|
Used retail sales revenue
|
|
$
|
698.8
|
|
|
$
|
616.7
|
|
|
$
|
82.1
|
|
|
|
13.3
|
%
|
|
Same store used retail sales revenue
|
|
$
|
681.1
|
|
|
$
|
613.2
|
|
|
$
|
67.9
|
|
|
|
11.1
|
%
|
|
Used retail sales revenue per unit
|
|
$
|
25,989
|
|
|
$
|
22,836
|
|
|
$
|
3,153
|
|
|
|
13.8
|
%
|
|
Same store used retail sales revenue per unit
|
|
$
|
25,763
|
|
|
$
|
22,778
|
|
|
$
|
2,985
|
|
|
|
13.1
|
%
|
|
Gross profit — used
|
|
$
|
56.9
|
|
|
$
|
56.1
|
|
|
$
|
0.8
|
|
|
|
1.4
|
%
|
|
Same store gross profit — used
|
|
$
|
55.7
|
|
|
$
|
55.8
|
|
|
$
|
(0.1
|
)
|
|
|
(0.2
|
%)
|
|
Average gross profit per used vehicle retailed
|
|
$
|
2,116
|
|
|
$
|
2,077
|
|
|
$
|
39
|
|
|
|
1.9
|
%
|
|
Same store average gross profit per used
vehicle retailed
|
|
$
|
2,109
|
|
|
$
|
2,071
|
|
|
$
|
38
|
|
|
|
1.8
|
%
|
|
Gross margin % — used
|
|
|
8.1
|
%
|
|
|
9.1
|
%
|
|
|
(1.0
|
%)
|
|
|
(11.0
|
%)
|
|
Same store gross margin % — used
|
|
|
8.2
|
%
|
|
|
9.1
|
%
|
|
|
(0.9
|
%)
|
|
|
(9.9
|
%)
|
Units
Retail unit sales of used vehicles decreased 120 units, or 0.4%, from 2009 to 2010.
The decrease is due to a 482 unit, or 1.8%, decrease in same store retail unit sales,
offset by a 362 unit increase from net dealership acquisitions. The same store decrease
was due primarily to a shift to more normal sales levels in premium and volume foreign
brand stores in the U.K., offset by increases in unit sales at our premium and volume
foreign brand stores in the U.S.
Revenues
Used vehicle retail sales revenue increased $82.1 million, or 13.3%, from 2009 to
2010. The increase is due to a $67.9 million, or 11.1%, increase in same store revenues,
coupled with a $14.2 million increase from net dealership acquisitions. The same store
revenue increase is due to the $2,985, or 13.1% increase in comparative average selling
prices per vehicle, which increased revenue by $78.9 million, offset by the 1.8% decrease
in same store retail unit sales which decreased revenue by $11.0 million.
Gross Profit
Retail gross profit from used vehicle sales increased $0.8 million, or 1.4%, from
2009 to 2010. The increase is primarily due to a $0.9 million increase from net
dealership acquisitions, offset by a $0.1 decrease in same store gross profit. The
decrease in same store gross profit resulted from the 1.8% decrease in used retail unit
sales, offset by the $38, or 1.8%, increase in average gross profit per used vehicle
retailed.
25
Finance and Insurance Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
Finance and insurance revenue
|
|
$
|
59.6
|
|
|
$
|
48.5
|
|
|
$
|
11.1
|
|
|
|
22.9
|
%
|
|
Same store finance and insurance revenue
|
|
$
|
58.4
|
|
|
$
|
48.4
|
|
|
$
|
10.0
|
|
|
|
20.7
|
%
|
|
Finance and insurance revenue per unit
|
|
$
|
944
|
|
|
$
|
840
|
|
|
$
|
104
|
|
|
|
12.4
|
%
|
|
Same store finance and insurance revenue per unit
|
|
$
|
942
|
|
|
$
|
840
|
|
|
$
|
102
|
|
|
|
12.1
|
%
|
Finance and insurance revenue increased $11.1 million, or 22.9%, from 2009 to 2010.
The increase is due to a $10.0 million, or 20.7%, increase in same store revenues during
the period, coupled with a $1.1 million increase from net dealership acquisitions. The
same store revenue increase is due to the $102, or 12.1%, increase in comparative average
finance and insurance revenue per unit which increased revenue by $5.9 million, coupled
with the 7.5% increase in retail unit sales which increased revenue by $4.1 million.
Service and Parts Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 vs. 2009
|
|
|
|
|
2010
|
|
|
2009
|
|
|
Change
|
|
|
% Change
|
|
|
Service and parts revenue
|
|
$
|
335.2
|
|
|
$
|
327.5
|
|
|
$
|
7.7
|
|
|
|
2.4
|
%
|
|
Same store service and parts revenue
|
|
$
|
329.3
|
|
|
$
|
324.8
|
|
|
$
|
4.5
|
|
|
|
1.4
|
%
|
|
Gross profit
|
|
$
|
189.0
|
|
|
$
|
177.1
|
|
|
$
|
11.9
|
|
|
|
6.7
|
%
|
|
Same store gross profit
|
|
$
|
185.8
|
|
|
$
|
175.6
|
|
|
$
|
10.2
|
|
|
|
5.8
|
%
|
|
Gross margin
|
|
|
56.4
|
%
|
|
|
54.1
|
%
|
|
|
2.3
|
%
|
|
|
4.3
|
%
|
|
Same store gross margin
|
|
|
56.4
|
%
|
|
|
54.1
|
%
|
|
|
2.3
|
%
|
|
|
4.3
|
%
|
Revenues
Service and parts revenue increased $7.7 million, or 2.4%, from 2009 to 2010. The
increase is due to a $4.5 million, or 1.4%, increase in same store revenues during the
period, coupled with a $3.2 million increase from net dealership acquisitions. The same
store revenue increase is due in large part to Toyota recall activity.
Gross Profit
Service and parts gross profit increased $11.9 million, or 6.7%, from 2009 to 2010.
The increase is due to a $10.2 million, or 5.8%, increase in same store gross profit
during the period, coupled with a $1.7 million increase from net dealership acquisitions.
The same store gross profit increase is due to the 2.3% increase in gross margin, which
increased gross profit by $7.7 million, coupled with the $4.5 million, or 1.4%, increase
in same store revenues, which increased gross profit by $2.5 million.
Distribution
Distribution units wholesaled during the quarter decreased 4,758 units, or 83.3%,
from 5,714 during the three months ended March 31, 2009 to 956 during the three months
ended March 31, 2010. During the three months ended March 31, 2010, smart USA recorded
$1.1 million of incentives relating to 2009 model year inventory which decreased gross profit. Due largely to the reduction in units
wholesaled and the incentives on 2009 model year inventory distribution segment revenue
decreased $73.5 million, or 83.0%, from $88.6 million during the three months ended 2009
to $15.1 million during the three months ended 2010, and segment gross profit decreased
$11.7 million, or 97.5%, from $12.0 million during the three months ended March 31, 2009
to $0.3 million during the three months ended March 31, 2010. In total, the distribution
segment generated a loss of $5.6 million in the first quarter of 2010 compared with
income of $6.3 million in the first quarter of 2009. In response to the reduced sales
activity, smart USA has effected several changes in management, and instituted a number
of initiatives designed to enhance sales and reduce expenses.
Selling, General and Administrative
Selling, general and administrative expenses (“SG&A”) increased $28.7 million, or
9.2%, from $312.9 million to $341.6 million. The aggregate increase is due primarily to a
$22.9 million, or 7.4%, increase in same store SG&A, coupled with a $5.8 million increase
from net dealership acquisitions. The increase in same store SG&A is due to (1) a net
increase in variable selling expenses, including increases in variable compensation, as a
result of the 13.7% increase in same store retail gross profit versus the prior year and
(2) increased rent and other costs relating to our ongoing facility improvement and
expansion programs,
offset by other cost savings initiatives which took place in 2008 and 2009, such as
headcount reductions, the amendment of pay plans, and a reduction in advertising
activities. SG&A expenses decreased as a percentage of gross profit from 84.9% to 83.1%.
26
Depreciation and Amortization
Depreciation and amortization decreased $0.5 million, or 3.9%, from $12.9 million to
$12.4 million. The decrease is due to a $0.6 million, or 4.9%, decrease in same store
depreciation and amortization, offset by a $0.1 million increase from net dealership
acquisitions. The same store decrease was due to a $1.4 million decrease due to a change
in the estimated useful lives of certain fixed assets effective January 1, 2010, offset
by a $0.8 million increase resulting from assets placed in service.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, decreased
$0.9 million, or 9.5%, from $9.5 million to $8.6 million. The decrease is due to a
$1.0 million, or 10.7%, decrease in same store floor plan interest expense, offset by a
$0.1 million increase from net dealership acquisitions. The same store decrease is due to
decreases in average outstanding floor plan balances, as well as a reduction in interest
rates.
Other Interest Expense
Other interest expense decreased $1.8 million, or 12.3%, from $14.5 million to
$12.7 million. The decrease is due primarily to $50.0 million of our U.S. credit
agreement term loan repayments since the first quarter of 2009, the repurchases of $71.1
million and $68.7 million aggregate principal amount of our 3.5% senior subordinated
convertible notes during the three months ended March 31, 2010 and 2009, respectively,
and a reduction in interest rates.
Debt Discount Amortization
Debt discount amortization decreased $0.7 million, from $3.6 million to $2.9
million, as a result of the write off of a portion of our aggregate debt discount in
connection with the repurchase of a portion of our outstanding 3.5% senior subordinated
convertible notes.
Equity in Earnings of Affiliates
Equity in earnings of affiliates decreased $1.1 million, from income of $0.7 million
to a loss of $0.4 million. The decrease from 2009 to 2010 is due primarily to a $0.6
million other than temporary impairment charge recorded relating to an equity method
investment.
Gain on Debt Repurchase
During the three months ended March 31, 2010, we repurchased $71.1 million principal
amount of our outstanding 3.5% senior subordinated convertible notes, which had a book
value, net of debt discount, of $67.5 million for $71.7 million. We allocated $5.2
million of the total consideration to the reacquisition of the equity component of the
Convertible Notes. In connection with the transactions, we wrote off $0.4 million of
unamortized deferred financing costs. As a result, we recorded a $0.6 pre-tax gain in
connection with the repurchases.
During the three months ended March 31, 2009, we repurchased $68.7 million principal
amount of our outstanding 3.5% senior subordinated convertible notes, which had a book
value, net of debt discount, of $62.8 million for $51.4 million. In connection with the
transaction, we wrote-off $0.7 million of unamortized deferred financing costs and
incurred $0.3 million of transaction costs. No element of the consideration was allocated
to the reacquisition of the equity component because the consideration paid was less than
the fair value of the liability component prior to extinguishment. As a result, we
recorded a $10.4 million pre-tax gain in connection with the repurchase.
Income Taxes
Income taxes increased $2.5 million, or 26.2%, from $9.9 million to $12.4 million.
The increase from 2009 to 2010 is due to the increase in our pre-tax income versus the
prior year. Our effective tax rate was 37.5% for the quarters ended March 31, 2010 and
2009.
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
construction of new facilities, debt service and repayments, and potentially for
dividends and 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, or the issuance of equity securities.
27
As discussed in more detail below, we had $235.2 million of 3.5% senior subordinated
convertible notes outstanding as of March 31, 2010. Because we currently expect to be
required to redeem these notes in April 2011, we are reviewing alternatives to refinance
these notes, which may include the issuance of additional securities. In the absence of a
refinancing of these notes, we expect to utilize cash flow from operations, working
capital and available capacity under the U.S. credit agreement to repay the 3.5% senior
subordinated convertible notes. See “Forward Looking Statements.” As of March 31, 2010,
we had working capital of $69.8 million, including $23.5 million of cash, available to
fund our operations and capital commitments. In addition, we had $250.0 million and
£74.8 million ($113.5 million) available for borrowing under our U.S. credit agreement
and our U.K. credit agreement, respectively, each of which is discussed below.
We have historically expanded our retail automotive operations through organic
growth and the acquisition of retail automotive dealerships. In addition, one of our
subsidiaries is the exclusive distributor of smart fortwo vehicles in the U.S. and Puerto
Rico. We believe that cash flow from operations and our existing capital resources,
including the liquidity provided by our credit agreements and floor plan financing
arrangements, will be sufficient to fund our operations and commitments for at least the
next twelve months. In the event we pursue additional significant acquisitions, other
expansion opportunities, significant repurchases of our outstanding securities; reinstate
our quarterly cash dividends; or refinance or repay existing debt (including our 3.5%
senior subordinated convertible notes), 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. For a discussion of these possible
events, see the discussion below with respect to our financing agreements.
Securities Repurchases
From time to time, the Company’s Board of Directors has authorized securities
repurchase programs pursuant to which we may, from time to time and as market conditions
warrant, purchase our outstanding common stock, debt or convertible debt on the open
market and in privately negotiated transactions and, potentially, via a tender offer or a
pre-arranged trading plan. We have historically funded repurchases through cash flow from
operations and borrowings under our U.S. credit facility. 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 alternative uses of capital, such as for strategic investments in
our current businesses, as well as any then-existing limits imposed by our finance
agreements and securities trading policy. In addition, we are currently reviewing
alternatives to refinance our existing $235.2 million of 3.5% senior subordinated
convertible notes, which may include the issuance of additional securities. During the
three months ended March 31, 2010, we repurchased a total of $71.1 aggregate principal
amount of 3.5% senior subordinated convertible notes for $71.7 million. As of March 31,
2010, we have $123.0 million in remaining authorization under the existing securities
repurchase program.
Dividends
In February 2009, we announced the suspension of our quarterly cash dividend.
Future quarterly or other cash dividends will depend upon a variety of factors
considered relevant by our Board of Directors which may include our earnings, capital
requirements, restrictions on any then existing indebtedness, financial condition, our
ability to fund or earlier refinance the expected April 2011 redemption of our $235.2
million of outstanding 3.5% convertible senior subordinated notes and other factors.
Inventory Financing
We finance substantially all of our new and a portion of our used vehicle
inventories under revolving floor plan arrangements with various lenders, primarily
through captive finance companies associated with automotive manufacturers. In the U.S.,
the floor plan arrangements are due on demand; however, we have not historically been
required to repay floor plan advances prior to the sale of the vehicles that have been
financed. We typically make monthly interest payments on the amount financed. Outside of
the U.S., substantially all of our floor plan arrangements are payable on demand or have
an original maturity of 90 days or less, and we are generally required to repay floor
plan advances at the earlier of the sale of the vehicles that have been financed or the
stated maturity. All of the floor plan agreements grant a security interest in
substantially all of the assets of our dealership subsidiaries, and in the U.S. are
guaranteed by us. Interest rates under the floor plan arrangements are variable and
increase or decrease based on changes in the prime rate, defined LIBOR, the Finance House
Base Rate, or the Euro Interbank Offered Rate. We receive non-refundable credits from
certain of our vehicle manufacturers, which are treated as a reduction of cost of sales
as vehicles are sold. 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.
U.S. Credit Agreement
We are party to a $409.0 million credit agreement with DCFS USA LLC and Toyota Motor
Credit Corporation, as amended (the “U.S. credit agreement”), which provides for up to
$250.0 million in revolving loans for working capital, acquisitions, capital
expenditures, investments and other general corporate purposes, a non-amortizing term
loan with a remaining balance of $149.0 million, and for an additional $10.0 million of
availability for letters of credit, through September 30, 2012. The revolving loans bear
interest at a defined LIBOR plus 2.50%, subject to an incremental 0.50% for
uncollateralized borrowings in excess of a defined borrowing base. The term loan, which
bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not
be re-borrowed.
28
The U.S. credit agreement is fully and unconditionally guaranteed on a joint and
several basis by our domestic subsidiaries and contains a number of significant covenants
that, among other things, restrict our ability to dispose of assets, incur additional
indebtedness, repay other indebtedness, pay dividends, create liens on assets, make
investments or acquisitions and engage in mergers or consolidations. We are also required
to comply with specified financial and other tests and ratios, each as defined in the
U.S. credit agreement, including: a ratio of current assets to current liabilities, a
fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt
to EBITDA. A breach of these requirements would give rise to certain remedies under the
agreement, the most severe of which is the termination of the agreement and acceleration
of the amounts owed. As of March 31, 2010, we were in compliance with all covenants under
the U.S. credit agreement, and we believe we will remain in compliance with such
covenants for the next twelve months. In making such determination, we have considered
the current margin of compliance with the covenants and our expected future results of
operations, working capital requirements, acquisitions, capital expenditures and
investments. However, in the event of continued weakness in the economy and the
automotive sector in particular, we may need to seek covenant relief. See “Forward
Looking Statements”.
The U.S. credit agreement also contains typical events of default, including change
of control, non-payment of obligations and cross-defaults to our other material
indebtedness. Substantially all of our domestic assets are subject to security interests
granted to lenders under the U.S. credit agreement. As of March 31, 2010, $149.0 million
of term loans, $1.3 million of letters of credit, and no revolving borrowings were
outstanding under the U.S. credit agreement.
U.K. Credit Agreement
Our subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to an agreement, as
amended, with the Royal Bank of Scotland plc, as agent for National Westminster Bank plc,
which provides for a funded term loan, a revolving credit agreement and a seasonally
adjusted overdraft line of credit (collectively, the “U.K. credit agreement”) to be used
for working capital, acquisitions, capital expenditures, investments and other general
corporate purposes. The U.K. credit agreement provides for (1) up to £100.0 million in
revolving loans through August 31, 2013, which bears interest between a defined LIBOR
plus 1.1% and defined LIBOR plus 3.0%, (2) a term loan which bears interest between 6.39%
and 8.29% and is payable ratably in quarterly intervals until fully repaid on June 30,
2011, and (3) a demand seasonally adjusted overdraft line of credit for up to £20.0
million that bears interest at the Bank of England Base Rate plus 1.75%.
The U.K. credit agreement is fully and unconditionally guaranteed on a joint and
several basis by our U.K. subsidiaries, and contains a number of significant covenants
that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends,
dispose of assets, incur additional indebtedness, repay other indebtedness, create liens
on assets, make investments or acquisitions and engage in mergers or consolidations. In
addition, our U.K. subsidiaries are required to comply with specified ratios and tests,
each as defined in the U.K. credit agreement, including: a ratio of EBITDAR to interest
plus rental payments (as defined), a measurement of maximum capital expenditures, and a
debt to EBITDA ratio (as defined). A breach of these requirements would give rise to
certain remedies under the agreement, the most severe of which is the termination of the
agreement and acceleration of the amounts owed. As of March 31, 2010, our U.K.
subsidiaries were in compliance with all covenants under the U.K. credit agreement and we
believe they will remain in compliance with such covenants for the next twelve months. In
making such determination, we have considered the current margin of compliance with the
covenants and our expected future results of operations, working capital requirements,
acquisitions, capital expenditures and investments in the U.K. However, in the event of
continued weakness in the U.K. economy and its automotive sector in particular, we may
need to seek covenant relief. See “Forward Looking Statements”.
The U.K. credit agreement also contains typical events of default, including change
of control and non-payment of obligations and cross-defaults to other material
indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries’ assets
are subject to security interests granted to lenders under the U.K. credit agreement. As
of March 31, 2010, outstanding loans under the U.K. credit agreement amounted to £54.0
million ($82.0 million), including £8.8 million ($13.4 million) under the term loan.
7.75% Senior Subordinated Notes
On December 7, 2006 we issued $375.0 million aggregate principal amount of 7.75%
senior subordinated notes due 2016 (the “7.75% Notes”). The 7.75% Notes are unsecured
senior subordinated notes and are subordinate to all existing and future senior debt,
including debt under our credit agreements, mortgages and floor plan indebtedness. The
7.75% Notes are guaranteed by substantially all of our wholly-owned domestic subsidiaries
on an unsecured senior subordinated basis. Those guarantees are full and unconditional
and joint and several. We can redeem all or some of the 7.75% Notes at our option
beginning in
December 2011 at specified redemption prices, or prior to December 2011 at 100% of
the principal amount of the notes plus an applicable “make-whole” premium, as defined.
Upon certain sales of assets or specific kinds of changes of control, we are required to
make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary
negative covenants and events of default. As of March 31, 2010, we were in compliance
with all negative covenants and there were no events of default.
29
Senior Subordinated Convertible Notes
In January 2006, we issued $375.0 million aggregate principal amount of 3.50% senior
subordinated convertible notes due 2026 (the “Convertible Notes”), of which $235.2
million were outstanding at March 31, 2010. The Convertible Notes mature on April 1,
2026, unless earlier converted, redeemed or purchased by us, as discussed below. The
Convertible Notes are unsecured senior subordinated obligations and are subordinate to
all future and existing debt under our credit agreements, mortgages and floor plan
indebtedness. The Convertible Notes are guaranteed on an unsecured senior subordinated
basis by substantially all of our wholly-owned domestic subsidiaries. The guarantees are
full and unconditional and joint and several. The Convertible Notes also contain
customary negative covenants and events of default. As of March 31, 2010, we were in
compliance with all negative covenants and there were no events of default.
Holders of the Convertible Notes may convert them based on a conversion rate of
42.7796 shares of our common stock per $1,000 principal amount of the Convertible Notes
(which is equal to a conversion price of approximately $23.38 per share), subject to
adjustment, only under the following circumstances: (1) in any quarterly period, if the
closing price of our common stock for twenty of the last thirty trading days in the prior
quarter exceeds $28.05 (subject to adjustment), (2) for specified periods, if the trading
price of the Convertible Notes falls below specific thresholds, (3) if the Convertible
Notes are called for redemption, (4) if specified distributions to holders of our common
stock are made or specified corporate transactions occur, (5) if a fundamental change (as
defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity
date.
Upon conversion of the Convertible Notes, for each $1,000 principal amount of the
Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i)
$1,000 or (ii) the conversion value, determined in the manner set forth in the indenture
covering the Convertible Notes, of the number of shares of common stock equal to the
conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our
election, cash, common stock or a combination of cash and common stock with respect to
the remaining value deliverable upon conversion.
In the event of a conversion due to a change of control on or before April 6, 2011,
we will, in certain circumstances, pay a make-whole premium by increasing the conversion
rate used in that conversion. In addition, we will pay additional cash interest
commencing with six-month periods beginning on April 1, 2011, if the average trading
price of a Convertible Note for certain periods in the prior six-month period equals 120%
or more of the principal amount of the Convertible Notes. On or after April 6, 2011, we
may redeem the Convertible Notes, in whole at any time or in part from time to time, for
cash at a redemption price of 100% of the principal amount of the Convertible Notes to be
redeemed, plus any accrued and unpaid interest to the applicable redemption date.
Holders of the Convertible Notes may require us to purchase all or a portion of
their Convertible Notes for cash on April 1, 2011, April 1, 2016 or April 1, 2021 at a
purchase price equal to 100% of the principal amount of the Convertible Notes to be
purchased, plus accrued and unpaid interest, if any, to the applicable purchase date.
Because we expect to be required to redeem the Convertible Notes in April 2011, we are
reviewing alternatives to refinance these notes, which may include the issuance of
additional securities. In the absence of a refinancing of the Convertible Notes, we
expect to utilize cash flow from operations, working capital and availability under the
U.S. credit agreement to repay the Convertible Notes. See “Forward Looking Statements”.
During the first quarter of 2010, we repurchased $71.1 million principal amount of
our outstanding Convertible Notes, which had a book value, net of debt discount, of $67.5
million for $71.7 million and recorded a $0.6 million pre-tax gain. In the first quarter
of 2009, we repurchased $68.7 million principal amount of our outstanding Convertible
Notes, which had a book value, net of debt discount, of $62.8 million for $51.4 million
and recorded a $10.4 million pre-tax gain.
Mortgage Facilities
We are party to a $42.4 million mortgage facility with respect to certain of our
dealership properties that matures on October 1, 2015. The facility bears interest at a
defined rate, requires monthly principal and interest payments, and includes the option
to extend the term for successive periods of five years up to a maximum term of
twenty-five years. In the event we exercise our options to extend the term, the interest
rate will be renegotiated at each renewal period. The mortgage facility also contains
typical events of default, including non-payment of obligations, cross-defaults to our
other material indebtedness, certain change of control events, and loss or sale of
certain franchises operated at the property. Substantially all of the buildings,
improvements, fixtures and personal property of the properties under the mortgage
facility are subject to security interests granted to the lender. As of March 31, 2010,
$41.1 million was outstanding under this facility.
Interest Rate Swaps
We use interest rate swaps to manage interest rate risk associated with our variable
rate floor plan debt. We are party to interest rate swap agreements through January 7,
2011 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor
plan debt was fixed at 3.67%. We may terminate these arrangements at any time, subject to
the settlement of the then current fair value of the swap arrangements. During the three
months ended March 31, 2010 and 2009, the swaps increased the weighted average interest
rate on our floor plan borrowings by approximately 0.2%.
30
PTL Dividends
We own a 9.0% limited partnership interest in Penske Truck Leasing. During the
three months ended March 31, 2010 and 2009, respectively, we received $8.8 million and
$20.0 million of pro rata cash dividends from this investment. We currently expect to
continue to receive future dividends from PTL subject in amount and timing on their
operating performance.
Operating Leases
We have historically structured our operations so as to minimize our ownership of
real property. As a result, we lease or sublease substantially all of our facilities.
These leases are generally for a period between five and 20 years, and are typically
structured to include renewal options at our election. Pursuant to the leases for some of
our larger facilities, we are required to comply with specified financial ratios,
including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these
leases, non-compliance with the ratios may require us to post collateral in the form of a
letter of credit. A breach of our other lease covenants give rise to certain remedies by
the landlord, the most severe of which include the termination of the applicable lease
and acceleration of the total rent payments due under the lease.
Sale/Leaseback Arrangements
We have in the past and expect in the future to 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 which
vary from period to period. In light of current market conditions, this financing option
has become more expensive and thus we may utilize these arrangements less in the near
term.
Off-Balance Sheet Arrangements
We have sold a number of dealerships to third parties and, as a condition to certain
of those sales, remain liable for the lease payments relating to the properties on which
those businesses operate in the event of non-payment by the buyer. We are also party to
lease agreements on properties that we no longer use in our retail operations that we
have sublet to third parties. We rely on subtenants to pay the rent and maintain the
property at these locations. In the event the subtenant does not perform as expected, we
may not be able to recover amounts owed to us and we could be required to fulfill these
obligations.
smart USA
We are subject to purchase commitments pursuant to the smart distribution agreement,
which requires us to purchase a number of vehicles to be negotiated on an ongoing basis.
In addition, we are potentially subject to a purchase commitment with respect to unsold
inventories and other items pursuant to the smart franchise agreement and state franchise
laws in the event of franchise terminations.
Cash Flows
Cash and cash equivalents increased by $9.8 million and decreased by $7.0 million
during the three months ended March 31, 2010 and 2009, respectively. The major components
of these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by operating activities was $49.8 million and $176.1 million during
the three months ended March 31, 2010 and 2009, respectively. Cash flows from continuing
operating activities include net income, as adjusted for non-cash items and the effects
of changes in working capital.
We finance substantially all of our new and a portion of our used vehicle
inventories under revolving floor plan notes payable with various lenders. 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 dealers
utilize this financing. Historically, our floor plan finance source has been based on
aggregate pricing considerations.
In accordance with general accounting principles relating to the statement of cash
flows, we report all cash flows arising in connection with floor plan notes payable with
the manufacturer of a particular new vehicle as an operating activity in our statement of
cash flows, and all cash flows arising in connection with floor plan notes payable to a
party other than the
manufacturer of a particular new vehicle and all floor plan notes payable relating
to pre-owned vehicles 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.
31
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 have presented
the following reconciliation of cash flow from operating activities as reported in our
condensed consolidated statement of cash flows as if all changes in vehicle floor plan
were classified as an operating activity for informational purposes:
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Three Months Ended March 31,
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|
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2010
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|
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2009
|
|
|
Net cash from continuing operating activities as reported
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$
|
49,822
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|
|
$
|
176,057
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|
|
Floor plan notes payable — non-trade as reported
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|
65,046
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|
|
|
(117,201
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)
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|
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|
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|
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|
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Net cash from continuing operating activities, including all floor plan notes payable
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$
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114,868
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|
$
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58,856
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|
|
|
|
|
|
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Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $31.6 million and $26.4 million
during the three months ended March 31, 2010 and 2009, respectively. Cash flows from
continuing investing activities consist primarily of cash used for capital expenditures,
proceeds from sale-leaseback transactions and net expenditures for acquisitions and other
investments. Capital expenditures were $19.3 million and $27.6 million during the three
months ended March 31, 2010 and 2009, respectively. Capital expenditures relate primarily
to improvements to our existing dealership facilities and the construction of new
facilities. As of March 31, 2010, we do not have material commitments related to our
planned or ongoing capital projects. We currently expect to finance our capital
expenditures with operating cash flows or borrowings under our U.S. or U.K. credit
facilities. Cash used in acquisitions and other investments, net of cash acquired, was
$12.3 million and $11.5 million during the three months ended March 31, 2010 and 2009,
respectively, and included cash used to repay sellers floor plan liabilities in such
business acquisitions of $7.2 million and $5.8 million, respectively. The three months
ended March 31, 2009 include $12.7 million of proceeds from other investing activities.
Cash Flows from Continuing Financing Activities
Cash used in continuing financing activities was $8.3 million and $152.0 million
during the three months ended March 31, 2010 and 2009, respectively. Cash flows from
continuing financing activities include net borrowings or repayments of long-term debt,
repurchases of securities, net borrowings or repayments of floor plan notes payable
non-trade, payments of deferred financing costs, proceeds from the issuance of common
stock and the exercise of stock options, and dividends. We had net borrowings under our
U.S. credit agreement revolving credit line of $70.0 million during the three months ended
March 31, 2009. During the three months ended March 31, 2009, we repaid $10.0 million of
our U.S. credit agreement term loan. We had net repayments of other long-term debt of
$1.8 million and $43.3 million during the three months ended March 31, 2010 and 2009,
respectively. We used $71.7 million to repurchase $71.1 million aggregate principal
amount of our 3.5% senior subordinated convertible notes during the three months ended
March 31, 2010. We used $51.4 million to repurchase $68.7 million aggregate principal
amount of our 3.5% senior subordinated convertible notes during the three months ended
March 31, 2009. We had net borrowings of floor plan notes payable non-trade of $65.0
million during the three months ended March 31, 2010 and net repayments of floor plan
notes payable non-trade of $117.2 million during the three months ended March 31, 2009.
During the three months ended March 31, 2010, we received proceeds of $0.2 million from
the exercise of stock options.
Cash Flows from Discontinued Operations
Cash flows relating to discontinued operations are not currently considered, nor are
they expected to be, material to our liquidity or our capital resources. Management does
not believe that there are any material past, present or upcoming cash transactions
relating to discontinued operations.
Related Party Transactions
Stockholders Agreement
Several of our directors and officers are affiliated with Penske Corporation or
related entities. Roger S. Penske, our Chairman of the Board and Chief Executive Officer,
is also Chairman of the Board and Chief Executive Officer of Penske Corporation, and
through entities affiliated with Penske Corporation, our largest stockholder owning
approximately 35% 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 of Penske Corporation are parties to a stockholders agreement pursuant to
which the Penske affiliated companies agreed to vote their shares for one director who is
a representative 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 in March 2014, upon the mutual consent of the parties, or when either party no
longer owns any of our common stock.
32
Other Related Party Interests and Transactions
Roger S. Penske is also a managing member of Transportation Resource Partners, an
organization that invests in transportation-related industries. Richard J. Peters, one of
our directors, is a managing director of Transportation Resource Partners and is a
director of Penske Corporation. Lucio A. Noto (one of our directors) is an investor in
Transportation Resource Partners. One of our directors, Hiroshi Ishikawa, serves as our
Executive Vice President — International Business Development and serves in a similar
capacity for Penske Corporation. Robert H. Kurnick, Jr., our President and a director, is
also the President and a director of Penske Corporation.
We sometimes pay to and/or receive fees from Penske Corporation, its subsidiaries,
and its affiliates for services rendered in the normal course of business, or to
reimburse payments made to third parties on each others’ 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 are a 9.0% limited partner of PTL, a leading global transportation services
provider. PTL operates and maintains more than 200,000 vehicles and serves customers in
North America, South America, Europe and Asia. Product lines include full-service
leasing, contract maintenance, commercial and consumer truck rental and logistics
services, including, transportation and distribution center management and supply chain
management. The general partner of PTL is Penske Truck Leasing Corporation, a
wholly-owned subsidiary of Penske Corporation, which together with other wholly-owned
subsidiaries of Penske Corporation, owns 41.1% of PTL. The remaining 49.9% of PTL is
owned by GE Capital. Among other things, the partnership agreement provides us with
specified partner distribution and governance rights and restricts our ability to
transfer our interests.
We have also entered into other joint ventures with certain related parties as more
fully discussed below.
Joint Venture Relationships
We are party to a number of joint ventures pursuant to which we own and operate
automotive dealerships together with other investors. We may provide these dealerships
with working capital and other debt financing at costs that are based on our incremental
borrowing rate. As of March 31, 2010, our automotive retail joint venture relationships
were as follows:
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Ownership
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Location
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Dealerships
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Interest
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Fairfield, Connecticut
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Audi, Mercedes-Benz, Porsche, smart
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87.95
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%(A)(B)
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Edison, New Jersey
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Ferrari, Maserati
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70.00
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%(B)
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Las Vegas, Nevada
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Ferrari, Maserati
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50.00
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%(C)
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Frankfurt, Germany
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Lexus, Toyota
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50.00
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%(C)
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Aachen, Germany
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Audi, Lexus, Skoda, Toyota, Volkswagen
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50.00
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%(C)
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(A)
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An entity controlled by one of our directors, Lucio A. Noto (the “Investor”), owns an 12.05%
interest in this joint venture, which entitles the Investor to 20% of the joint venture’s
operating profits. In addition, the Investor has an option to purchase up to a 20% interest in the
joint venture for specified amounts.
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(B)
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Entity is consolidated in our financial statements.
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(C)
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Entity is accounted for using the equity method of accounting.
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In the first quarter of 2010, the Company exited one of its German joint ventures by
exchanging its 50% interest in the joint venture for 100% ownership in three BMW
franchises previously held by the joint venture.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns, the
automotive retailing industry tends to experience periods of decline and recession
similar to those experienced by the general economy. We believe that the industry is
influenced by general economic conditions and particularly by consumer confidence, the
level of personal discretionary spending, fuel prices, interest rates and credit
availability.
Seasonality
Our business is modestly seasonal overall. Our U.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 the U.S. where
dealerships may be subject to severe winters. Our U.K. operations generally experience
higher volumes of vehicle sales in the first and third quarters of each year, due
primarily to vehicle registration practices in the U.K.
33
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
This quarterly report on Form 10-Q contains “forward-looking statements” which
generally can be identified by the use of terms such as “may,” “will,” “should,”
“expect,” “anticipate,” “believe,” “intend,” “plan,” “estimate,” “predict,” “potential,”
“forecast,” “continue” or variations of such terms, or the use of these terms in the
negative. Forward-looking statements include statements regarding our current plans,
forecasts, estimates, beliefs or expectations, including, without limitation, statements
with respect to:
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•
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our future financial and operating performance, including sales of the smart fortwo;
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•
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future acquisitions;
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•
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future potential capital expenditures and share repurchases;
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•
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our ability to realize cost savings and synergies;
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•
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our ability to respond to economic cycles;
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•
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trends in the automotive retail industry and in the general economy in the various countries in which we operate;
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our ability to access the remaining availability under our credit agreements;
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our liquidity, including our ability to refinance our outstanding senior subordinated convertible notes;
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future foreign exchange rates;
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future interest rate levels;
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•
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trends affecting our future financial condition or results of operations; and
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•
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our business strategy.
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Forward-looking statements involve known and unknown risks and uncertainties and are
not assurances of future performance. Actual results may differ materially from
anticipated results due to a variety of factors, including the factors identified in our
2009 annual report on Form 10-K filed February 24, 2010. Important factors that could
cause actual results to differ materially from our expectations include the following:
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•
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our business and the automotive retail industry in general are susceptible to adverse economic
conditions, including changes in interest rates, foreign exchange rates, consumer demand, consumer
confidence, fuel prices, unemployment rates and credit availability;
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•
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the number of new and used vehicles sold in our markets;
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•
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automobile manufacturers exercise significant control over our operations, and we depend on them in
order to operate our business;
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•
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we depend on the success and popularity of the brands we sell, and adverse conditions affecting one or
more automobile manufacturers, such as the current Toyota recalls, may negatively impact our revenues
and profitability;
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•
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a restructuring of any significant automotive manufacturers, as well as the automotive sector as a whole;
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•
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we may not be able to satisfy our capital requirements for acquisitions, dealership renovation projects,
refinancing of our debt when it becomes due (including our outstanding senior subordinated convertible
notes), or financing the purchase of our inventory;
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34
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•
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our failure to meet a manufacturer’s consumer satisfaction requirements may adversely affect our ability
to acquire new dealerships and our ability to obtain incentive payments from manufacturers;
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•
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although we typically purchase vehicles and parts in the local functional currency, changes in foreign
exchange rates may impact manufacturers, as many of the component parts of vehicles are manufactured in
foreign markets, which could lead to an increase in our costs which we may not be able to pass on to the
consumer;
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•
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changes in tax, financial or regulatory rules or requirements;
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•
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with respect to PTL, changes in the financial health of its customers, labor strikes or work stoppages
by its employees, a reduction in PTL’s asset utilization rates and industry competition;
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substantial competition in automotive sales and services;
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if we lose key personnel, especially our Chief Executive Officer, or
are unable to attract additional qualified personnel;
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import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;
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automobile dealerships are subject to substantial regulation;
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if state dealer laws in the U.S. are repealed or weakened our automotive dealerships may be subject to increased
competition and may be more susceptible to termination, non-renewal or renegotiation of their franchise agreements;
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•
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non-compliance with the financial ratios and other covenants under our credit agreements and operating leases;
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•
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our distribution of the smart fortwo vehicle is dependent upon continued availability of and customer demand for
the smart fortwo;
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our dealership operations may be affected by severe weather or other periodic business interruptions;
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some of our directors and officers may have conflicts of interest with respect to certain related party
transactions and other business interests;
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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;
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we may be involved in legal proceedings that could have a material adverse effect on our business;
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our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign
currency valuations; and
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•
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we are a holding company and, as a result, must rely on the receipt of payments from our subsidiaries, which are
subject to limitations, in order to meet our cash needs and service our indebtedness.
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In addition:
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•
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the price of our common stock is subject to substantial fluctuation,
which may be unrelated to our performance; and
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•
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shares eligible for future sale, or issuable under the terms of our
convertible notes, may cause the market price of our common stock to
drop significantly, even if our business is doing well.
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We urge you to carefully consider these 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
Securities and Exchange Commission rules and regulations, we have no intention or
obligation to update publicly any forward-looking statements whether as a result of new
information, future events or otherwise.
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rates.
We are exposed to market risk from changes in the interest rates on
a significant portion of our outstanding debt. Outstanding revolving balances under our
credit agreements bear interest at variable rates based on a margin over defined LIBOR or
the Bank of England Base Rate. Based on the amount outstanding under these facilities as
of March 31, 2010, a 100 basis point change in interest rates would result in an
approximate $2.2 million change to our annual other interest expense. Similarly, amounts
outstanding under floor plan financing arrangements bear interest at a variable rate
based on a margin over the prime rate, defined LIBOR, the Finance House Base Rate, or the
Euro Interbank Offered Rate. We are currently party to swap agreements pursuant to which
a notional $300.0 million of our floating rate floor plan debt was exchanged for fixed
rate debt through January 2011. Based on an average of the aggregate amounts outstanding
under our floor plan financing arrangements subject to variable interest payments during
the trailing twelve months ended March 31, 2010, adjusted to exclude the notional value
of the hedged swap agreements, a 100 basis point change in interest rates would result in
an approximate $8.9 million change to our annual floor plan interest expense.
We evaluate our exposure to interest rate fluctuations and follow established
policies and procedures to implement strategies designed to manage the amount of variable
rate indebtedness outstanding at any point in time in an effort to mitigate the effect of
interest rate fluctuations on our earnings and cash flows. These policies include:
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•
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the maintenance of our overall debt portfolio with targeted fixed and
variable rate components;
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•
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the use of authorized derivative instruments;
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•
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the prohibition of using derivatives for trading or other speculative
purposes; and
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•
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the prohibition of highly leveraged derivatives or derivatives which we
are unable to reliably value, or for which we are unable to obtain a market
quotation.
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Interest rate fluctuations affect the fair market value of our fixed rate debt,
including our swaps, mortgages, the 7.75% Notes, the Convertible Notes and certain seller
financed promissory notes, but, with respect to such fixed rate debt instruments, do not
impact our earnings or cash flows.
Foreign Currency Exchange Rates.
As of March 31, 2010, we had dealership operations
in the U.K. and Germany. In each of these markets, the local currency is the functional
currency. Due to our intent to remain permanently invested in these foreign markets, we
do not hedge against foreign currency fluctuations. In the event we change our intent
with respect to the investment in any of our international operations, we would expect to
implement strategies designed to manage those risks in an effort to mitigate the effect
of foreign currency fluctuations on our earnings and cash flows. A ten percent change in
average exchange rates versus the U.S. Dollar would have resulted in an approximate $97.0
million change to our revenues for the three months ended March 31, 2010.
In common with other automotive retailers, we purchase certain of our new vehicle
and parts inventories from foreign manufacturers. Although we purchase the majority of
our inventories in the local functional currency, our business is subject to certain
risks, including, but not limited to, differing economic conditions, changes in political
climate, differing tax structures, other regulations and restrictions and foreign
exchange rate volatility which may influence such manufacturers’ ability to provide their
products at competitive prices in the local jurisdictions. Our future results could be
materially and adversely impacted by changes in these or other factors.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including the
principal executive and financial officers, we conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)), as of the end of the period covered by this report. Our disclosure
controls and procedures are designed to ensure that information required to be disclosed
by us in the reports we file under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, and that
such information is accumulated and communicated to management, including our principal
executive and financial officers, to allow timely discussions regarding required
disclosure.
Based upon this evaluation, the Company’s principal executive and financial officers
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this report. In addition, we maintain internal controls designed to
provide us with the information required for accounting and financial reporting purposes.
There were no changes in our internal control over financial reporting that occurred
during the most recent quarter that materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
36
PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
We are involved in litigation which may relate to claims brought by governmental
authorities, issues with customers and employment related matters, including class action
claims and purported class action claims. As of March 31, 2010, we are not party to any
legal proceedings, including class action lawsuits, that, individually or in the
aggregate, are reasonably expected to have a material adverse effect on our results of
operations, financial condition or cash flows. However, the results of these matters
cannot be predicted with certainty, and an unfavorable resolution of one or more of these
matters could have a material adverse effect on our results of operations, financial
condition or cash flows.
Item 6.
Exhibits
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12
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Computation of Ratio of Earnings to Fixed Charges
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31.1
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Rule 13(a)-14(a)/15(d)-14(a) Certification.
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31.2
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Rule 13(a)-14(a)/15(d)-14(a) Certification.
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32
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Section 1350 Certification.
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37
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
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PENSKE AUTOMOTIVE GROUP, INC.
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By:
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/s/ Roger S. Penske
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Roger
S. Penske
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Date: May 3, 2010
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Chief Executive Officer
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By:
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/s/ Robert T. O’Shaughnessy
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Robert
T. O’Shaughnessy
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Date: May 3, 2010
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Chief Financial Officer
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38
EXHIBIT INDEX
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Exhibit
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No.
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Description
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12
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Computation of Ratio of Earnings to Fixed Charges
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|
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31.1
|
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Rule 13(a)-14(a)/15(d)-14(a) Certification.
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|
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31.2
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Rule 13(a)-14(a)/15(d)-14(a) Certification.
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|
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32
|
|
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Section 1350 Certification.
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