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 |
For the quarterly period ended March 31, 2009
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 |
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 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2555 Telegraph Road,
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48302-0954 |
Bloomfield Hills, Michigan
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(Zip Code) |
(Address of principal executive offices) |
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Registrants 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 o |
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Accelerated filer þ |
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Non-accelerated filer o
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Smaller reporting company o |
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, 2009, there were 91,530,960 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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2009 |
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2008 |
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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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$ |
11,458 |
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$ |
20,109 |
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Accounts receivable, net of allowance for doubtful accounts of $1,925 and $2,075 |
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312,039 |
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294,567 |
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Inventories |
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1,360,239 |
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1,593,267 |
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Other current assets |
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91,193 |
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88,378 |
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Assets held for sale |
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8,411 |
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9,739 |
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Total current assets |
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1,783,340 |
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2,006,060 |
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Property and equipment, net |
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666,602 |
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662,493 |
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Goodwill |
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774,349 |
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777,811 |
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Franchise value |
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196,332 |
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196,838 |
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Equity method investments |
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285,338 |
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296,487 |
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Other long-term assets |
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19,154 |
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22,460 |
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Total assets |
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$ |
3,725,115 |
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$ |
3,962,149 |
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LIABILITIES AND EQUITY |
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Floor plan notes payable |
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$ |
847,711 |
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$ |
968,873 |
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Floor plan notes payable non-trade |
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389,491 |
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511,357 |
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Accounts payable |
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201,798 |
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178,811 |
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Accrued expenses |
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199,085 |
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196,274 |
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Current portion of long-term debt |
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11,132 |
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11,305 |
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Liabilities held for sale |
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10,592 |
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13,492 |
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Total current liabilities |
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1,659,809 |
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1,880,112 |
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Long-term debt |
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1,008,093 |
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1,052,060 |
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Other long-term liabilities |
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228,743 |
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221,556 |
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Total liabilities |
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2,896,645 |
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3,153,728 |
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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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Common Stock, $0.0001 par value, 240,000 shares authorized; 91,531 shares
issued and outstanding at March 31, 2009; 91,431 shares issued and
outstanding at December 31, 2008 |
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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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Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none
issued and outstanding |
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Additional paid-in-capital |
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732,577 |
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731,037 |
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Retained earnings |
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136,027 |
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119,745 |
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Accumulated other comprehensive loss |
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(43,619 |
) |
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(45,990 |
) |
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Total Penske Automotive Group stockholders equity |
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824,994 |
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804,801 |
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Non-controlling interest |
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3,476 |
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3,620 |
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Total equity |
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828,470 |
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808,421 |
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Total liabilities and equity |
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$ |
3,725,115 |
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$ |
3,962,149 |
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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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2009 |
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2008 |
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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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$ |
972,127 |
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$ |
1,625,950 |
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Used vehicle |
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614,630 |
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794,063 |
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Finance and insurance, net |
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48,409 |
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73,877 |
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Service and parts |
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327,554 |
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359,142 |
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Distribution |
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80,113 |
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63,770 |
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Fleet and wholesale |
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115,043 |
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258,535 |
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Total revenues |
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2,157,876 |
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3,175,337 |
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Cost of sales: |
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New vehicle |
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900,750 |
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1,489,357 |
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Used vehicle |
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558,650 |
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728,295 |
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Service and parts |
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150,453 |
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157,885 |
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Distribution |
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68,314 |
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53,617 |
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Fleet and wholesale |
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111,418 |
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257,696 |
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Total cost of sales |
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1,789,585 |
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2,686,850 |
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Gross profit |
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368,291 |
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488,487 |
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Selling, general and administrative expenses |
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313,002 |
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394,072 |
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Depreciation and amortization |
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12,872 |
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13,291 |
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Operating income |
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42,417 |
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81,124 |
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Floor plan interest expense |
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(9,515 |
) |
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(17,026 |
) |
Other interest expense |
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(14,494 |
) |
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(11,911 |
) |
Debt discount amortization |
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(3,638 |
) |
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(3,496 |
) |
Equity in earnings of affiliates |
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714 |
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1,392 |
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Gain on debt repurchase |
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10,429 |
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Income from continuing operations before income taxes |
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25,913 |
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50,083 |
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Income taxes |
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(9,717 |
) |
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(17,809 |
) |
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Income from continuing operations |
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16,196 |
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32,274 |
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Income from discontinued operations, net of tax |
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6 |
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57 |
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Net income |
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16,202 |
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32,331 |
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Less: (Loss) income attributable to non-controlling interests |
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(80 |
) |
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435 |
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Net income attributable to Penske Automotive Group common stockholders |
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$ |
16,282 |
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$ |
31,896 |
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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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$ |
0.18 |
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$ |
0.33 |
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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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$ |
0.18 |
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$ |
0.34 |
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Shares used in determining basic earnings per share |
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91,481 |
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|
95,137 |
|
Diluted earnings per share attributable to Penske Automotive Group common
stockholders: |
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|
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Continuing operations |
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$ |
0.18 |
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|
$ |
0.33 |
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Discontinued operations |
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|
0.00 |
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|
0.00 |
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|
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|
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Net income |
|
$ |
0.18 |
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|
$ |
0.33 |
|
Shares used in determining diluted earnings per share |
|
|
91,501 |
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|
95,252 |
|
Amounts attributable to Penske Automotive Group common stockholders: |
|
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Income from continuing operations |
|
$ |
16,196 |
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$ |
32,274 |
|
Less: (Loss) income attributable to non-controlling interests |
|
|
(80 |
) |
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|
435 |
|
|
|
|
|
|
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|
Income from continuing operations, net of tax |
|
|
16,276 |
|
|
|
31,839 |
|
Income from discontinued operations, net of tax |
|
|
6 |
|
|
|
57 |
|
|
|
|
|
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|
Net income |
|
$ |
16,282 |
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|
$ |
31,896 |
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|
|
|
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|
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Cash dividends per share |
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$ |
|
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|
$ |
0.09 |
|
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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2009 |
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2008 |
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|
(Unaudited) |
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|
|
(In thousands) |
|
Operating Activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,202 |
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|
$ |
32,331 |
|
Adjustments to reconcile net income to net cash from continuing operating activities: |
|
|
|
|
|
|
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|
Depreciation and amortization |
|
|
12,872 |
|
|
|
13,291 |
|
Debt discount amortization |
|
|
3,638 |
|
|
|
3,496 |
|
Undistributed earnings of equity method investments |
|
|
(714 |
) |
|
|
(1,392 |
) |
Income from discontinued operations, net of tax |
|
|
(6 |
) |
|
|
(57 |
) |
Deferred income taxes |
|
|
12,191 |
|
|
|
3,163 |
|
Gain on debt repurchase |
|
|
(10,733 |
) |
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(17,402 |
) |
|
|
(52,660 |
) |
Inventories |
|
|
250,341 |
|
|
|
(131,566 |
) |
Floor plan notes payable |
|
|
(121,202 |
) |
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|
123,767 |
|
Accounts payable and accrued expenses |
|
|
23,090 |
|
|
|
55,179 |
|
Other |
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|
7,588 |
|
|
|
(9,159 |
) |
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|
|
|
|
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|
Net cash from continuing operating activities |
|
|
175,865 |
|
|
|
36,393 |
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|
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Investing Activities: |
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|
Purchase of equipment and improvements |
|
|
(27,529 |
) |
|
|
(47,154 |
) |
Proceeds from sale-leaseback transactions |
|
|
|
|
|
|
3,676 |
|
Dealership acquisitions net, including repayment of sellers floor plan notes
payable of $5,784 and $0, respectively |
|
|
(11,476 |
) |
|
|
|
|
Other |
|
|
12,679 |
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
Net cash from continuing investing activities |
|
|
(26,326 |
) |
|
|
(44,978 |
) |
|
|
|
|
|
|
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Financing Activities: |
|
|
|
|
|
|
|
|
Proceeds from borrowings under U.S. credit agreement revolving credit line |
|
|
147,000 |
|
|
|
138,200 |
|
Repayments under U.S. credit agreement revolving credit line |
|
|
(77,000 |
) |
|
|
(138,200 |
) |
Repayments under U.S. credit agreement term loan |
|
|
(10,000 |
) |
|
|
|
|
Repurchase 3.5% senior subordinated convertible notes |
|
|
(51,425 |
) |
|
|
|
|
Net repayments of other long-term debt |
|
|
(43,333 |
) |
|
|
(226 |
) |
Net (repayments) borrowings of floor plan notes payable non-trade |
|
|
(121,866 |
) |
|
|
24,632 |
|
Dividends |
|
|
|
|
|
|
(8,550 |
) |
|
|
|
|
|
|
|
Net cash from continuing financing activities |
|
|
(156,624 |
) |
|
|
15,856 |
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Net cash from discontinued operating activities |
|
|
1,911 |
|
|
|
(9,380 |
) |
Net cash from discontinued investing activities |
|
|
(761 |
) |
|
|
(816 |
) |
Net cash from discontinued financing activities |
|
|
(2,716 |
) |
|
|
9,962 |
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
(1,566 |
) |
|
|
(234 |
) |
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(8,651 |
) |
|
|
7,037 |
|
Cash and cash equivalents, beginning of period |
|
|
20,109 |
|
|
|
14,798 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
11,458 |
|
|
$ |
21,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
16,416 |
|
|
$ |
20,060 |
|
Income taxes |
|
|
533 |
|
|
|
660 |
|
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 |
|
|
Loss |
|
|
Automotive Group |
|
|
Interest |
|
|
Equity |
|
|
|
(Unaudited) |
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2009 |
|
|
91,430,781 |
|
|
$ |
9 |
|
|
$ |
731,037 |
|
|
$ |
119,745 |
|
|
$ |
(45,990 |
) |
|
$ |
804,801 |
|
|
$ |
3,620 |
|
|
$ |
808,421 |
|
Equity compensation |
|
|
100,179 |
|
|
|
|
|
|
|
1,540 |
|
|
|
|
|
|
|
|
|
|
|
1,540 |
|
|
|
|
|
|
|
1,540 |
|
Distributions to
non-controlling
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64 |
) |
|
|
(64 |
) |
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,208 |
|
|
|
2,208 |
|
|
|
|
|
|
|
2,208 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163 |
|
|
|
163 |
|
|
|
|
|
|
|
163 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,282 |
|
|
|
|
|
|
|
16,282 |
|
|
|
(80 |
) |
|
|
16,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
|
91,530,960 |
|
|
$ |
9 |
|
|
$ |
732,577 |
|
|
$ |
136,027 |
|
|
$ |
(43,619 |
) |
|
$ |
824,994 |
|
|
$ |
3,476 |
|
|
$ |
828,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Companys 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, 2009 and December 31, 2008 and for the three month periods ended
March 31, 2009 and 2008 is unaudited, but includes all adjustments which the 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, 2009 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 Companys audited financial statements for the
year ended December 31, 2008, which are included as part of the Companys Annual Report
on Form 10-K.
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 3.5% senior subordinated
convertible notes.
In June 2008, the Company acquired a 9% limited partnership interest in Penske Truck
Leasing Co., L.P. (PTL), a leading global transportation services provider, from
subsidiaries of General Electric Capital Corporation (collectively, GE Capital) in
exchange for $219,000. 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.
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 will be eliminated from ongoing
operations in its retail segment, the Company considers whether it is likely that
customers will migrate to similar franchises that it owns in the same geographic market.
The Companys 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 the Company 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, 2009 and
2008 and the net assets as of March 31, 2009 and December 31, 2008 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.
Accounting Changes
The Company adopted FASB Staff Position (FSP) APB 14-1, Accounting for
Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including
Partial Cash Settlement) effective January 1, 2009. Pursuant to FSP APB 14-1, the
Company was required to account separately for the debt and equity components of its 3.5%
Senior Subordinated Convertible Notes. The value ascribed to the debt component was
determined using a fair value methodology, with the residual representing the equity
component. The equity component was recorded as an increase in equity, with
the debt discount being amortized as additional interest expense over the expected life
of the instrument. The Company has applied the provisions of this
standard retrospectively to all periods
presented herein in accordance with SFAS No. 154, Accounting Changes and Error
Corrections. As a result of this accounting change, the Companys retained earnings as
of January 1, 2008 decreased by $13,884 from $587,566 as originally reported to
$573,682.
7
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company adopted FSP EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities effective January 1, 2009,
which requires that unvested share-based payment awards with non-forfeitable rights to
dividends or dividend equivalents be considered participating securities that must be included in
the computation of EPS pursuant to the two-class method. The Company has applied the
provisions of this standard retrospectively to all periods presented herein in accordance with SFAS No.
154. As a result, basic weighted average shares outstanding increased by 666 shares and
802 shares for the three months ended March 31, 2009 and 2008, respectively. Diluted
shares outstanding increased by 587 and 595 shares for the three months ended March 31,
2009 and 2008, respectively.
The following tables summarize the effect of the accounting changes resulting from
the adoption of FSP APB 14-1 and FSP EITF 03-6-1, which required retrospective
application, on our consolidated condensed financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
previous |
|
|
Effect of |
|
|
|
|
|
|
previous |
|
|
Effect of |
|
|
|
|
|
|
accounting |
|
|
changes |
|
|
As reported |
|
|
accounting |
|
|
changes |
|
|
As reported |
|
Statement of Income for
the three months ended
March 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other interest expense |
|
|
14,606 |
|
|
|
(112 |
) |
|
|
14,494 |
|
|
|
12,023 |
|
|
|
(112 |
) |
|
|
11,911 |
|
Debt discount amortization |
|
|
|
|
|
|
3,638 |
|
|
|
3,638 |
|
|
|
|
|
|
|
3,496 |
|
|
|
3,496 |
|
Income tax expense |
|
|
11,123 |
|
|
|
(1,406 |
) |
|
|
9,717 |
|
|
|
19,159 |
|
|
|
(1,350 |
) |
|
|
17,809 |
|
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders |
|
|
18,396 |
|
|
|
(2,120 |
) |
|
|
16,276 |
|
|
|
33,873 |
|
|
|
(2,034 |
) |
|
|
31,839 |
|
Net income attributable
to Penske Automotive
Group common stockholders |
|
|
18,402 |
|
|
|
(2,120 |
) |
|
|
16,282 |
|
|
|
33,930 |
|
|
|
(2,034 |
) |
|
|
31,896 |
|
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per basic common share |
|
|
0.20 |
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
0.36 |
|
|
|
(0.03 |
) |
|
|
0.33 |
|
Net income attributable
to Penske Automotive
Group common stockholders
per basic common share |
|
|
0.20 |
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
0.36 |
|
|
|
(0.02 |
) |
|
|
0.34 |
|
Shares used in
determining basic
earnings per share |
|
|
90,815 |
|
|
|
666 |
|
|
|
91,481 |
|
|
|
94,335 |
|
|
|
802 |
|
|
|
95,137 |
|
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per diluted common share |
|
|
0.20 |
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
0.36 |
|
|
|
(0.03 |
) |
|
|
0.33 |
|
Net income attributable
to Penske Automotive
Group common stockholders
per diluted common share |
|
|
0.20 |
|
|
|
(0.02 |
) |
|
|
0.18 |
|
|
|
0.36 |
|
|
|
(0.02 |
) |
|
|
0.33 |
|
Shares used in
determining diluted
earnings per share |
|
|
90,914 |
|
|
|
587 |
|
|
|
91,501 |
|
|
|
94,657 |
|
|
|
595 |
|
|
|
95,252 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
previous |
|
|
Effect of |
|
|
As |
|
|
previous |
|
|
Effect of |
|
|
As |
|
|
|
accounting |
|
|
changes |
|
|
reported |
|
|
accounting |
|
|
changes |
|
|
reported |
|
Balance Sheet as of March
31, 2009 and December 31,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
|
91,560 |
|
|
|
(367 |
) |
|
|
91,193 |
|
|
|
88,828 |
|
|
|
(450 |
) |
|
|
88,378 |
|
Other
long-term assets |
|
|
19,521 |
|
|
|
(367 |
) |
|
|
19,154 |
|
|
|
23,022 |
|
|
|
(562 |
) |
|
|
22,460 |
|
Long-term debt |
|
|
1,034,418 |
|
|
|
(26,325 |
) |
|
|
1,008,093 |
|
|
|
1,087,932 |
|
|
|
(35,872 |
) |
|
|
1,052,060 |
|
Other long-term liabilities |
|
|
218,701 |
|
|
|
10,042 |
|
|
|
228,743 |
|
|
|
207,771 |
|
|
|
13,785 |
|
|
|
221,556 |
|
Additional paid-in-capital |
|
|
689,484 |
|
|
|
43,093 |
|
|
|
732,577 |
|
|
|
687,944 |
|
|
|
43,093 |
|
|
|
731,037 |
|
Retained earnings |
|
|
163,571 |
|
|
|
(27,544 |
) |
|
|
136,027 |
|
|
|
141,763 |
|
|
|
(22,018 |
) |
|
|
119,745 |
|
8
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
As |
|
|
|
|
|
|
|
|
|
|
As |
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
|
calculated |
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
|
under |
|
|
|
|
|
|
|
|
|
previous |
|
|
Effect of |
|
|
|
|
|
|
previous |
|
|
Effect of |
|
|
|
|
|
|
accounting |
|
|
changes |
|
|
As reported |
|
|
accounting |
|
|
changes |
|
|
As reported |
|
Statement of Cash Flows
for the three months
ended March 31: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
18,322 |
|
|
|
(2,120 |
) |
|
|
16,202 |
|
|
|
34,365 |
|
|
|
(2,034 |
) |
|
|
32,331 |
|
Debt discount amortization |
|
|
|
|
|
|
3,638 |
|
|
|
3,638 |
|
|
|
|
|
|
|
3,496 |
|
|
|
3,496 |
|
Deferred income taxes |
|
|
13,597 |
|
|
|
(1,406 |
) |
|
|
12,191 |
|
|
|
4,513 |
|
|
|
(1,350 |
) |
|
|
3,163 |
|
Other |
|
|
7,700 |
|
|
|
(112 |
) |
|
|
7,588 |
|
|
|
(9,047 |
) |
|
|
(112 |
) |
|
|
(9,159 |
) |
Net cash from continuing
operating activities |
|
|
175,865 |
|
|
|
|
|
|
|
175,865 |
|
|
|
36,393 |
|
|
|
|
|
|
|
36,393 |
|
The Company adopted SFAS No. 160, Non-controlling Interests in Consolidated
Financial Statements an Amendment of ARB No. 51, pursuant to which the Company
reclassified its minority interest liabilities to equity relating to the
Companys non-wholly owned consolidated subsidiaries and amended the presentation
of income attributable to non-controlling interests on the income
statement. Prior period statements have been reclassified to conform
to the current year presentation. There were no changes in the Companys ownership interest of
non-wholly owned consolidated subsidiaries during the period that would impact equity
attributable to Penske Automotive Group.
The Company adopted FSP FAS 157-2, which deferred the provisions of SFAS No. 157, Fair
Value Measurements, for non-financial assets and liabilities until January 1, 2009. The
adoption of FAS FAS 157-2 did not have a material effect on the Companys operating results,
financial position or cash flows during the period.
The Company adopted FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets, which amends the factors that should be considered in developing renewal or
extension assumptions used in connection with the determination of the useful life of a
recognized intangible asset under SFAS No. 142,Goodwill and Other Intangible Assets on
January 1, 2009. The guidance in FSP 142-3 for determining the useful life of a
recognized intangible asset is being applied to intangible assets acquired after
adoption, with related disclosure requirements being applied to all intangible assets
recognized as of, and subsequent to, adoption. The adoption of FSP FAS 142-3 did not
have a material effect on the Companys operating results, financial position or cash
flows during the period.
The Company adopted SFAS No. 141(R) Business Combinations, including FSP FAS
141(R)-1, an amendment to SFAS No. 141(R), effective January 1, 2009. SFAS No. 141(R)
requires almost all assets acquired and liabilities assumed in business combinations to
be recorded at fair value as of the acquisition date, liabilities related to contingent
consideration to be remeasured at fair value in each subsequent reporting period,
acquisition related costs to be expensed as incurred, and restructuring costs expected,
but not obligated to occur as a result of the business combination, to be expensed
subsequent to the acquisition. FSP FAS 141(R)-1 requires that pre-acquisition contingencies be
recognized at fair value if the acquisition-date fair value of that asset or liability
can be determined during the measurement period. The provisions of these pronouncements
are applicable on a prospective basis to all business combinations subsequent to the
effective date. The adoption of these pronouncements did not have a material impact to
the Companys operating results, financial position or cash flows during the period.
2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
New vehicles |
|
$ |
1,013,168 |
|
|
$ |
1,251,727 |
|
Used vehicles |
|
|
265,268 |
|
|
|
259,474 |
|
Parts, accessories and other |
|
|
81,803 |
|
|
|
82,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,360,239 |
|
|
$ |
1,593,267 |
|
|
|
|
|
|
|
|
9
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company receives non-refundable credits from certain vehicle manufacturers that
reduce cost of sales when the vehicles are sold. Such credits amounted to $4,215 and
$6,297 during the three months ended March 31, 2009 and 2008, respectively.
3. Business Combinations
The Companys acquired five retail automotive franchises during the three months
ended March 31, 2009. The Company made no acquisitions during the three months ended
March 31, 2008. The fair value of the assets acquired and liabilities assumed 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 during the three months ended March 31, 2009
follows:
|
|
|
|
|
|
|
March 31, |
|
|
|
2009 |
|
Inventory |
|
$ |
5,815 |
|
Other current assets |
|
|
129 |
|
Property and equipment |
|
|
4,367 |
|
Goodwill |
|
|
1,657 |
|
Franchise value |
|
|
749 |
|
Current liabilities |
|
|
(1,241 |
) |
|
|
|
|
|
|
|
|
|
Cash used in dealership acquisitions |
|
$ |
11,476 |
|
|
|
|
|
4. Intangible Assets
Following is a summary of the changes in the carrying amount of goodwill and
franchise value for the three months ended March 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
|
|
Goodwill |
|
|
Value |
|
Balances January 1, 2009 |
|
$ |
777,811 |
|
|
$ |
196,838 |
|
Additions |
|
|
1,657 |
|
|
|
749 |
|
Deletions |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(5,119 |
) |
|
|
(1,255 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance March 31, 2009 |
|
$ |
774,349 |
|
|
$ |
196,332 |
|
|
|
|
|
|
|
|
During the fourth quarter 2008, the Company determined that the carrying value of
the goodwill in four of its five reporting units exceeded fair value, and recorded an
estimated pre-tax non-cash impairment charge of $606,349. The Company finalized the
goodwill impairment assessment during the first quarter of 2009, and determined that no
adjustment to the estimate recorded in 2008 was required.
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. 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 Companys dealership
subsidiaries, and in the U.S. are guaranteed by the Companys parent. Interest rates
under the floor plan arrangements are variable and increase or decrease based on changes
in the prime rate, defined LIBOR or Euro Interbank Offer 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.
10
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6. Earnings Per Share
Basic earnings per share is computed using net income attributable to Penske
Automotive Group common stockholders and weighted average shares of voting common stock
outstanding. Diluted earnings per share is computed using net income attributable to
Penske Automotive Group common stockholders and the 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, 2009 and 2008 follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Weighted average number of common shares outstanding |
|
|
91,481 |
|
|
|
95,137 |
|
Effect of stock options |
|
|
20 |
|
|
|
115 |
|
|
|
|
|
|
|
|
Weighted average number of common shares
outstanding, including effect of dilutive
securities |
|
|
91,501 |
|
|
|
95,252 |
|
|
|
|
|
|
|
|
As of March 31, 2009, 227 stock options have been excluded from the calculation of
diluted earnings per share because the effect of such securities was anti-dilutive.
There were no anti-dilutive stock options as of March 31, 2008. 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, 2009 and
2008, 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 not
dilutive.
7. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
U.S. credit agreement revolving credit line |
|
$ |
70,000 |
|
|
$ |
|
|
U.S. credit agreement term loan |
|
|
199,000 |
|
|
|
209,000 |
|
U.K. credit agreement revolving credit line |
|
|
22,955 |
|
|
|
59,831 |
|
U.K. credit agreement term loan |
|
|
22,786 |
|
|
|
25,752 |
|
U.K. credit agreement seasonally adjusted overdraft line of credit |
|
|
4,651 |
|
|
|
9,502 |
|
7.75% senior subordinated notes due 2016 |
|
|
375,000 |
|
|
|
375,000 |
|
3.5% senior subordinated convertible notes due 2026, net of debt
discount |
|
|
279,935 |
|
|
|
339,128 |
|
Mortgage facilities |
|
|
42,022 |
|
|
|
42,243 |
|
Other |
|
|
2,876 |
|
|
|
2,909 |
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,019,225 |
|
|
|
1,063,365 |
|
Less: current portion |
|
|
(11,132 |
) |
|
|
(11,305 |
) |
|
|
|
|
|
|
|
Net long-term debt |
|
$ |
1,008,093 |
|
|
$ |
1,052,060 |
|
|
|
|
|
|
|
|
U.S. Credit Agreement
The Company is party to a $479,000 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 for other general corporate purposes, a non-amortizing term loan
originally funded for $219,000, and for an additional $10,000 of availability for letters
of credit, through September 30, 2011. The revolving loans bear interest at defined LIBOR
plus 1.75%, 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 Company repaid
$10,000 of this term loan in the first quarter of 2009.
The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the Companys domestic subsidiaries and contains a number of significant
covenants that, among other things, restrict the Companys 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, 2009, the Company was in
compliance with all covenants under the U.S. Credit Agreement.
11
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The U.S. Credit Agreement also contains typical events of default, including change
of control, non-payment of obligations and cross-defaults to the Companys other material
indebtedness. Substantially all of the Companys domestic assets are subject to security
interests granted to lenders under the U.S. Credit Agreement. As of March 31, 2009,
$70,000 of revolving loans, $199,000 of term loans and $500 of letters of credit were
outstanding under this facility.
U.K. Credit Agreement
The Companys subsidiaries in the U.K. (the U.K. Subsidiaries) are party to an
agreement with the Royal Bank of Scotland plc, as agent for National Westminster Bank
plc, as amended, 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 to finance acquisitions, working capital, and general corporate
purposes. The U.K. Credit Agreement provides for (1) up to £80,000 in revolving loans
through August 31, 2011, which bears interest between a defined LIBOR plus 1.0% and
defined LIBOR plus 1.6%, (2) a term loan originally funded for £30,000 which bears
interest between 6.29% and 6.89% and is payable ratably in quarterly intervals until
fully repaid on June 30, 2011, and (3) a seasonally adjusted overdraft line of credit for
up to £20,000 that bears interest at the Bank of England Base Rate plus 1.75%, and
matures on August 31, 2011.
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 earnings before
interest and taxes plus rental payments 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, 2009, the U.K. subsidiaries were in compliance with all covenants
under the U.K. Credit Agreement.
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, 2009, outstanding loans under the U.K. Credit Agreement amounted to £35,124
($50,392), including £15,882 ($22,786) 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 Companys credit agreements, mortgages and floor plan
indebtedness. The 7.75% Notes are guaranteed by substantially all of the Companys
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. In addition, the Company may redeem
up to 40% of the 7.75% Notes at specified redemption prices using the proceeds of certain
equity offerings before December 15, 2009. 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, 2009, 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). 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 Companys
credit agreements, mortgages and floor plan indebtedness. The Convertible Notes are
guaranteed on an unsecured senior subordinated basis by substantially all of the
Companys 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, 2009, 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 $28.43 (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.
12
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Upon conversion of the Convertible Notes, for each $1,000 principal amount of the
Convertible Notes, a holder will receive an amount in cash, in lieu of shares of the
Companys common stock, 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 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.
In March 2009, the Company repurchased $68,740 principal amount of its outstanding
Convertible Notes, which had a book value of $62,831 net of debt discount, for $51,425. The Company
recorded a $10,429 pre-tax gain in connection with the repurchase. In addition to the
write-off of $5,909 of unamortized debt discount, the Company also wrote off $672 of
unamortized deferred financing costs and incurred $305 of transaction costs. No cash was
allocated to the reacquisition of the equity component because the cash paid was less
than the fair value of the liability component prior to extinguishment.
The liability and equity components related to the Convertible Notes consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Carrying amount of the equity component |
|
$ |
43,093 |
|
|
$ |
43,093 |
|
|
|
|
|
|
|
|
|
|
Principal amount of the liability component |
|
$ |
306,260 |
|
|
$ |
375,000 |
|
Unamortized debt discount |
|
|
26,325 |
|
|
|
35,872 |
|
|
|
|
|
|
|
|
|
|
Net carrying amount of the liability component |
|
$ |
279,935 |
|
|
$ |
339,128 |
|
|
|
|
|
|
|
|
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. Approximately $12,765 of the unamortized debt discount will be
recognized as an increase of interest expense over the next twelve months. The effective
interest rate on the liability component is based on an annual rate of 8.25%.
Mortgage Facilities
The Company is party to a $42,400 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 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 Companys 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, 2009, $42,022 was outstanding under this facility.
8. Interest Rate Swaps
The Company uses interest rate swaps to manage interest rate risk associated with the
Companys 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 Companys
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. The
swaps are designated as cash flow hedges of future interest payments of LIBOR based U.S. floor
plan borrowings. The effective portion of the gain or loss on the derivative is reported as a
component of other
comprehensive income and reclassified into earnings when the hedged transaction affects
earnings. As of March 31, 2009, the Company used Level 2 inputs as described under SFAS No. 157
to estimate the fair value of these contracts to be a liability of $15,100, of which $9,026 and
$6,074 are recorded in accrued expenses and other long-term liabilities, respectively, in the
Condensed Consolidated Balance Sheet. During the three months ended March 31, 2009, the Company
recognized a net gain of $167 related to the interest rate swaps in accumulated other
comprehensive loss and reclassified $2,413 of existing derivative losses from accumulated other
comprehensive loss into floor plan interest expense in the Condensed Consolidated Statement of
Income. The Company expects approximately $9,026 associated with the swaps to be recognized as
an increase of interest expense over the next twelve months as the interest payments become due.
During the three months ended March 31, 2009, the swaps increased the weighted average interest
rate on the Companys floor plan borrowings by approximately 0.2%.
13
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company was party to an interest rate swap agreement which expired in January
2008, pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged
for fixed rate debt. The swap was designated as a cash flow hedge of future interest
payments of the LIBOR based U.S. floor plan borrowings.
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, 2009, 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
Companys 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 Companys results of
operations, financial condition or cash flows. See MD&A -Forward Looking Statements.
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
dealership properties and other facilities. These leases are generally for a period
between five and 20 years, and are typically structured to include renewal options at the
Companys election. Pursuant to the leases for some of the Companys 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, as defined.
Since 1999, the Company has sold a number of dealerships to third parties. The
Company has at times, as a condition to the sale, remained liable for the lease payments
relating to the properties on which those franchises operate, although the buyer of the
franchise is required to pay the rent and maintain the property. In the event the buyer
does not perform as expected (due to the buyers financial condition or other factors
such as the market performance of the underlying vehicle manufacturer), the Company may
not be able to recover amounts owed to it by the buyer. In this event, the Company could
be required to fulfill these obligations, which could materially adversely affect its
results of operations, financial condition or cash flows.
10. Equity
Comprehensive income
Other comprehensive income includes foreign currency translation gains and losses,
as well as changes relating to certain other immaterial items, including: certain defined
benefit plans in the U.K., changes in the fair value of interest rate swap agreements,
and valuation adjustments relating to certain available for sale securities, each of
which has been excluded from net income and reflected in equity. Total comprehensive
income is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Attributable to Penske Automotive Group: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
16,282 |
|
|
$ |
31,896 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
2,208 |
|
|
|
4,060 |
|
Other |
|
|
163 |
|
|
|
(5,272 |
) |
|
|
|
|
|
|
|
Total attributable to Penske Automotive Group |
|
|
18,653 |
|
|
|
30,684 |
|
|
|
|
|
|
|
|
|
|
Attributable to the non-controlling interest: |
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(80 |
) |
|
|
435 |
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
18,573 |
|
|
$ |
31,119 |
|
|
|
|
|
|
|
|
14
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
11. Segment Information
The Companys operations are organized by management into operating segments by line
of business and geography. The Company has determined it has three reportable operating
segments as defined in SFAS No. 131: (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 segment
have been grouped into five geographic operating segments which are 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). In
connection with the addition of PAG Investments, we have reclassified historical amounts
to conform to our current segment presentation.
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 item discussed
below in order to enhance the comparability of segment income from period to period.
Three Months Ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAG |
|
|
Intersegment |
|
|
|
|
|
|
Retail |
|
|
Distribution |
|
|
Investments |
|
|
Elimination |
|
|
Total |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
2,077,763 |
|
|
$ |
88,631 |
|
|
$ |
|
|
|
$ |
(8,518 |
) |
|
$ |
2,157,876 |
|
2008 |
|
|
3,111,567 |
|
|
|
75,480 |
|
|
|
|
|
|
|
(11,710 |
) |
|
|
3,175,337 |
|
Adjusted segment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
8,737 |
|
|
$ |
6,305 |
|
|
$ |
605 |
|
|
$ |
(163 |
) |
|
$ |
15,484 |
|
2008 |
|
|
46,478 |
|
|
|
3,947 |
|
|
|
245 |
|
|
|
(587 |
) |
|
|
50,083 |
|
The following table reconciles total adjusted segment income to consolidated income
from continuing operations before income taxes.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Adjusted segment income |
|
$ |
15,484 |
|
|
$ |
50,083 |
|
Gain on debt repurchase |
|
|
10,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
$ |
25,913 |
|
|
$ |
50,083 |
|
|
|
|
|
|
|
|
15
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, 2009 and December 31, 2008 and for the three month periods ended March 31, 2009
and 2008 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, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,458 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,946 |
|
|
$ |
5,512 |
|
Accounts receivable, net |
|
|
312,039 |
|
|
|
(203,729 |
) |
|
|
203,729 |
|
|
|
170,466 |
|
|
|
141,573 |
|
Inventories |
|
|
1,360,239 |
|
|
|
|
|
|
|
|
|
|
|
883,637 |
|
|
|
476,602 |
|
Other current assets |
|
|
91,193 |
|
|
|
|
|
|
|
722 |
|
|
|
56,097 |
|
|
|
34,374 |
|
Assets held for sale |
|
|
8,411 |
|
|
|
|
|
|
|
|
|
|
|
252 |
|
|
|
8,159 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
1,783,340 |
|
|
|
(203,729 |
) |
|
|
204,451 |
|
|
|
1,116,398 |
|
|
|
666,220 |
|
Property and equipment,
net |
|
|
666,602 |
|
|
|
|
|
|
|
6,503 |
|
|
|
416,407 |
|
|
|
243,692 |
|
Intangible assets |
|
|
970,681 |
|
|
|
|
|
|
|
|
|
|
|
571,194 |
|
|
|
399,487 |
|
Equity method investments |
|
|
285,338 |
|
|
|
|
|
|
|
219,307 |
|
|
|
|
|
|
|
66,031 |
|
Other long-term assets |
|
|
19,154 |
|
|
|
(1,316,962 |
) |
|
|
1,324,724 |
|
|
|
9,959 |
|
|
|
1,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,725,115 |
|
|
$ |
(1,520,691 |
) |
|
$ |
1,754,985 |
|
|
$ |
2,113,958 |
|
|
$ |
1,376,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable |
|
$ |
847,711 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
522,567 |
|
|
$ |
325,144 |
|
Floor plan notes payable
non-trade |
|
|
389,491 |
|
|
|
|
|
|
|
|
|
|
|
225,375 |
|
|
|
164,116 |
|
Accounts payable |
|
|
201,798 |
|
|
|
|
|
|
|
2,124 |
|
|
|
76,095 |
|
|
|
123,579 |
|
Accrued expenses |
|
|
199,085 |
|
|
|
(203,729 |
) |
|
|
456 |
|
|
|
106,139 |
|
|
|
296,219 |
|
Current portion of
long-term debt |
|
|
11,132 |
|
|
|
|
|
|
|
|
|
|
|
979 |
|
|
|
10,153 |
|
Liabilities held for sale |
|
|
10,592 |
|
|
|
|
|
|
|
|
|
|
|
188 |
|
|
|
10,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,659,809 |
|
|
|
(203,729 |
) |
|
|
2,580 |
|
|
|
931,343 |
|
|
|
929,615 |
|
Long-term debt |
|
|
1,008,093 |
|
|
|
(113,152 |
) |
|
|
923,935 |
|
|
|
43,871 |
|
|
|
153,439 |
|
Other long-term
liabilities |
|
|
228,743 |
|
|
|
|
|
|
|
|
|
|
|
209,418 |
|
|
|
19,325 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,896,645 |
|
|
|
(316,881 |
) |
|
|
926,515 |
|
|
|
1,184,632 |
|
|
|
1,102,379 |
|
Total equity |
|
|
828,470 |
|
|
|
(1,203,810 |
) |
|
|
828,470 |
|
|
|
929,326 |
|
|
|
274,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity |
|
$ |
3,725,115 |
|
|
$ |
(1,520,691 |
) |
|
$ |
1,754,985 |
|
|
$ |
2,113,958 |
|
|
$ |
1,376,863 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
20,109 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
14,060 |
|
|
$ |
6,049 |
|
Accounts receivable, net |
|
|
294,567 |
|
|
|
(196,465 |
) |
|
|
196,465 |
|
|
|
182,582 |
|
|
|
111,985 |
|
Inventories |
|
|
1,593,267 |
|
|
|
|
|
|
|
|
|
|
|
1,001,571 |
|
|
|
591,696 |
|
Other current assets |
|
|
88,378 |
|
|
|
|
|
|
|
2,711 |
|
|
|
59,931 |
|
|
|
25,736 |
|
Assets held for sale |
|
|
9,739 |
|
|
|
|
|
|
|
|
|
|
|
1,700 |
|
|
|
8,039 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,006,060 |
|
|
|
(196,465 |
) |
|
|
199,176 |
|
|
|
1,259,844 |
|
|
|
743,505 |
|
Property and equipment,
net |
|
|
662,493 |
|
|
|
|
|
|
|
6,927 |
|
|
|
416,277 |
|
|
|
239,289 |
|
Intangible assets |
|
|
974,649 |
|
|
|
|
|
|
|
|
|
|
|
542,128 |
|
|
|
432,521 |
|
Equity method investments |
|
|
296,487 |
|
|
|
|
|
|
|
227,451 |
|
|
|
|
|
|
|
69,036 |
|
Other long-term assets |
|
|
22,460 |
|
|
|
(1,293,431 |
) |
|
|
1,300,546 |
|
|
|
12,169 |
|
|
|
3,176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
3,962,149 |
|
|
$ |
(1,489,896 |
) |
|
$ |
1,734,100 |
|
|
$ |
2,230,418 |
|
|
$ |
1,487,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable |
|
$ |
968,873 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
659,532 |
|
|
$ |
309,341 |
|
Floor plan notes payable
non-trade |
|
|
511,357 |
|
|
|
|
|
|
|
|
|
|
|
268,987 |
|
|
|
242,370 |
|
Accounts payable |
|
|
178,811 |
|
|
|
|
|
|
|
2,183 |
|
|
|
80,000 |
|
|
|
96,628 |
|
Accrued expenses |
|
|
196,274 |
|
|
|
(196,465 |
) |
|
|
368 |
|
|
|
94,927 |
|
|
|
297,444 |
|
Current portion of
long-term debt |
|
|
11,305 |
|
|
|
|
|
|
|
|
|
|
|
978 |
|
|
|
10,327 |
|
Liabilities held for sale |
|
|
13,492 |
|
|
|
|
|
|
|
|
|
|
|
1,460 |
|
|
|
12,032 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,880,112 |
|
|
|
(196,465 |
) |
|
|
2,551 |
|
|
|
1,105,884 |
|
|
|
968,142 |
|
Long-term debt |
|
|
1,052,060 |
|
|
|
(138,341 |
) |
|
|
923,128 |
|
|
|
44,117 |
|
|
|
223,156 |
|
Other long-term
liabilities |
|
|
221,556 |
|
|
|
|
|
|
|
|
|
|
|
201,691 |
|
|
|
19,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,153,728 |
|
|
|
(334,806 |
) |
|
|
925,679 |
|
|
|
1,351,692 |
|
|
|
1,211,163 |
|
Total equity |
|
|
808,421 |
|
|
|
(1,155,090 |
) |
|
|
808,421 |
|
|
|
878,726 |
|
|
|
276,364 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
equity |
|
$ |
3,962,149 |
|
|
$ |
(1,489,896 |
) |
|
$ |
1,734,100 |
|
|
$ |
2,230,418 |
|
|
$ |
1,487,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
2,157,876 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,277,186 |
|
|
$ |
880,690 |
|
Cost of sales |
|
|
1,789,585 |
|
|
|
|
|
|
|
|
|
|
|
1,051,191 |
|
|
|
738,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
368,291 |
|
|
|
|
|
|
|
|
|
|
|
225,995 |
|
|
|
142,296 |
|
Selling, general, and
administrative
expenses |
|
|
313,002 |
|
|
|
|
|
|
|
3,318 |
|
|
|
198,147 |
|
|
|
111,537 |
|
Depreciation and
amortization |
|
|
12,872 |
|
|
|
|
|
|
|
290 |
|
|
|
8,303 |
|
|
|
4,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
42,417 |
|
|
|
|
|
|
|
(3,608 |
) |
|
|
19,545 |
|
|
|
26,480 |
|
Floor plan interest
expense |
|
|
(9,515 |
) |
|
|
|
|
|
|
|
|
|
|
(6,271 |
) |
|
|
(3,244 |
) |
Other interest expense |
|
|
(14,494 |
) |
|
|
|
|
|
|
(11,472 |
) |
|
|
(31 |
) |
|
|
(2,991 |
) |
Debt discount
amortization |
|
|
(3,638 |
) |
|
|
|
|
|
|
(3,638 |
) |
|
|
|
|
|
|
|
|
Equity in income of
affiliates |
|
|
714 |
|
|
|
|
|
|
|
583 |
|
|
|
|
|
|
|
131 |
|
Gain on debt repurchase |
|
|
10,429 |
|
|
|
|
|
|
|
10,429 |
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(33,699 |
) |
|
|
33,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations before
income taxes |
|
|
25,913 |
|
|
|
(33,699 |
) |
|
|
25,993 |
|
|
|
13,243 |
|
|
|
20,376 |
|
Income taxes |
|
|
(9,717 |
) |
|
|
12,598 |
|
|
|
(9,717 |
) |
|
|
(6,974 |
) |
|
|
(5,624 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing
operations |
|
|
16,196 |
|
|
|
(21,101 |
) |
|
|
16,276 |
|
|
|
6,269 |
|
|
|
14,752 |
|
Income (loss) from
discontinued
operations, net of tax |
|
|
6 |
|
|
|
(6 |
) |
|
|
6 |
|
|
|
(129 |
) |
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
16,202 |
|
|
|
(21,107 |
) |
|
|
16,282 |
|
|
|
6,140 |
|
|
|
14,887 |
|
Less: Loss
attributable to the
non-controlling
interest |
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to Penske
Automotive Group
common stockholders |
|
$ |
16,282 |
|
|
$ |
(21,107 |
) |
|
$ |
16,282 |
|
|
$ |
6,140 |
|
|
$ |
14,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,175,337 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,727,807 |
|
|
$ |
1,447,530 |
|
Cost of sales |
|
|
2,686,850 |
|
|
|
|
|
|
|
|
|
|
|
1,454,186 |
|
|
|
1,232,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
488,487 |
|
|
|
|
|
|
|
|
|
|
|
273,621 |
|
|
|
214,866 |
|
Selling, general, and
administrative
expenses |
|
|
394,072 |
|
|
|
|
|
|
|
3,851 |
|
|
|
230,466 |
|
|
|
159,755 |
|
Depreciation and
amortization |
|
|
13,291 |
|
|
|
|
|
|
|
363 |
|
|
|
7,187 |
|
|
|
5,741 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
81,124 |
|
|
|
|
|
|
|
(4,214 |
) |
|
|
35,968 |
|
|
|
49,370 |
|
Floor plan interest
expense |
|
|
(17,026 |
) |
|
|
|
|
|
|
|
|
|
|
(9,422 |
) |
|
|
(7,604 |
) |
Other interest expense |
|
|
(11,911 |
) |
|
|
|
|
|
|
(7,044 |
) |
|
|
(2 |
) |
|
|
(4,865 |
) |
Debt discount
amortization |
|
|
(3,496 |
) |
|
|
|
|
|
|
(3,496 |
) |
|
|
|
|
|
|
|
|
Equity in income of
affiliates |
|
|
1,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,392 |
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(64,402 |
) |
|
|
64,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations
before income taxes |
|
|
50,083 |
|
|
|
(64,402 |
) |
|
|
49,648 |
|
|
|
26,544 |
|
|
|
38,293 |
|
Income taxes |
|
|
(17,809 |
) |
|
|
23,101 |
|
|
|
(17,809 |
) |
|
|
(11,825 |
) |
|
|
(11,276 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from
continuing operations |
|
|
32,274 |
|
|
|
(41,301 |
) |
|
|
31,839 |
|
|
|
14,719 |
|
|
|
27,017 |
|
Income (loss) from
discontinued
operations, net of
tax |
|
|
57 |
|
|
|
(57 |
) |
|
|
57 |
|
|
|
(424 |
) |
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
32,331 |
|
|
|
(41,358 |
) |
|
|
31,896 |
|
|
|
14,295 |
|
|
|
27,498 |
|
Less: Income
attributable to the
non-controlling
interest |
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
attributable to
Penske Automotive
Group common
stockholders |
|
$ |
31,896 |
|
|
$ |
(41,358 |
) |
|
$ |
31,896 |
|
|
$ |
14,295 |
|
|
$ |
27,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
175,865 |
|
|
$ |
(20,195 |
) |
|
$ |
28,994 |
|
|
$ |
167,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(27,529 |
) |
|
|
134 |
|
|
|
(19,018 |
) |
|
|
(8,645 |
) |
Dealership acquisitions, net |
|
|
(11,476 |
) |
|
|
|
|
|
|
(3,556 |
) |
|
|
(7,920 |
) |
Other |
|
|
12,679 |
|
|
|
11,485 |
|
|
|
|
|
|
|
1,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing
activities |
|
|
(26,326 |
) |
|
|
11,619 |
|
|
|
(22,574 |
) |
|
|
(15,371 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
long-term debt |
|
|
(43,333 |
) |
|
|
|
|
|
|
28,750 |
|
|
|
(72,083 |
) |
Net repayments of floor plan notes
payable non-trade |
|
|
(121,866 |
) |
|
|
|
|
|
|
(43,612 |
) |
|
|
(78,254 |
) |
Distributions from (to) parent |
|
|
|
|
|
|
|
|
|
|
146 |
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing
activities |
|
|
(156,624 |
) |
|
|
8,575 |
|
|
|
(14,716 |
) |
|
|
(150,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
(1,566 |
) |
|
|
|
|
|
|
182 |
|
|
|
(1,748 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
(8,651 |
) |
|
|
|
|
|
|
(8,114 |
) |
|
|
(537 |
) |
Cash and cash equivalents, beginning of
period |
|
|
20,109 |
|
|
|
|
|
|
|
14,060 |
|
|
|
6,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
11,458 |
|
|
$ |
|
|
|
$ |
5,946 |
|
|
$ |
5,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Three Months Ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating
activities |
|
$ |
36,393 |
|
|
$ |
137 |
|
|
$ |
39,368 |
|
|
$ |
(3,112 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(47,154 |
) |
|
|
(137 |
) |
|
|
(28,688 |
) |
|
|
(18,329 |
) |
Proceeds from sale leaseback
transactions |
|
|
3,676 |
|
|
|
|
|
|
|
3,676 |
|
|
|
|
|
Other |
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing
activities |
|
|
(44,978 |
) |
|
|
(137 |
) |
|
|
(25,012 |
) |
|
|
(19,829 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (repayments) borrowings of
long-term debt |
|
|
(226 |
) |
|
|
8,550 |
|
|
|
(12,105 |
) |
|
|
3,329 |
|
Net borrowings (repayments) of floor
plan notes payable non-trade |
|
|
24,632 |
|
|
|
|
|
|
|
(1,217 |
) |
|
|
25,849 |
|
Distributions from (to) parent |
|
|
|
|
|
|
|
|
|
|
1,821 |
|
|
|
(1,821 |
) |
Dividends |
|
|
(8,550 |
) |
|
|
(8,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing
activities |
|
|
15,856 |
|
|
|
|
|
|
|
(11,501 |
) |
|
|
27,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
(234 |
) |
|
|
|
|
|
|
(4,522 |
) |
|
|
4,288 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
7,037 |
|
|
|
|
|
|
|
(1,667 |
) |
|
|
8,704 |
|
Cash and cash equivalents, beginning of
period |
|
|
14,798 |
|
|
|
|
|
|
|
3,108 |
|
|
|
11,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
21,835 |
|
|
$ |
|
|
|
$ |
1,441 |
|
|
$ |
20,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
This Managements 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 Managements 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, 2009 in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Overview
We are the second largest automotive retailer headquartered in the U.S. as measured
by total revenues. As of March 31, 2009, we owned and operated 157 franchises in the U.S.
and 152 franchises outside of the U.S., primarily in the United Kingdom. We offer a full
range of vehicle brands with 95% of our total retail vehicle revenue in 2009 generated
from brands of non-U.S. based manufacturers and sales relating to premium brands, such as
Audi, BMW, Cadillac and Porsche, representing 65% of our total retail vehicle revenue.
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 64% of our total revenues in 2009 generated from
operations in the U.S. and 36% 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-plus miles per gallon on the highway and is
an ultra-low emissions vehicle as certified by the State of California Air Resources
Board. smart USA has certified a network of 75 smart dealerships in 35 states, of which
eight 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 ranging from $11,990 to $20,990. We currently expect to distribute more than
20,000 smart fortwo vehicles in 2009.
In June 2008, we acquired a 9.0% limited partnership interest in Penske Truck
Leasing Co., L.P. (PTL), a leading global transportation services provider, from
subsidiaries of General Electric Capital Corporation (collectively, GE Capital) in
exchange for $219.0 million. 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 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. We expect to receive annual pro-rata cash distributions of
partnership profits and realize U.S. cash tax savings from this investment.
Outlook
We have experienced reduced consumer confidence and spending in the markets in
which we operate, which we believe reduced customer traffic in our dealerships,
particularly since September 2008. We expect our business to remain significantly
impacted by economic conditions in 2009. Market conditions have also negatively impacted
vehicle manufacturers. In particular, the U.S. based automotive manufacturers have
experienced critical operational and financial distress, due in part to shrinking market
share in the U.S. and the recent limitation in worldwide credit capacity. In 2008 and
early 2009, certain U.S. based manufacturers received support from the U.S. government
in the form of loans and one manufacturer filed for bankruptcy in April.
Currently, it remains in doubt whether continued support will be given to certain U.S.
based automotive brands. While we have limited exposure to these manufacturers as a
percentage of our overall revenue, a restructuring of any one of them may lead to
significant disruption to the automotive supply chain and to our dealerships that
represent those manufacturers, and could possibly also impact other automotive
manufacturers and suppliers. We cannot reasonably predict the impact to the automotive
retail environment of any such disruption.
In addition, turbulence in worldwide credit markets has resulted in an increase in
the cost of capital for the captive finance subsidiaries that provide us financing for
our inventory procurement. Interest rates under our inventory borrowing arrangements are
variable and based on changes in the prime rate, defined LIBOR or the Euro Interbank
Offer Rate (the base rate), plus a spread that varies by lender. While the base rate
under these arrangements are generally lower due to government actions designed to spur
liquidity and bank lending activities, certain of our lenders raised the spread charged
to us, or have established minimum lending rates. These increases became effective in
late 2008 and early 2009, and varied between 50 and 250 basis points. Due to these
relative increases, we do not expect to realize the full benefit of the lower base rates
expected in 2009
compared to 2008. The increases levied by lenders to date would result in $5.8
million of incremental floorplan interest expense based on average outstanding balances
during 2008.
22
In response to the challenging operating environment, we have undertaken
significant cost saving initiatives. In 2008, we eliminated approximately 1,400
positions, representing approximately 10.0% of our worldwide workforce, and amended pay
plans for certain other employees to better align our workforce for current business
levels and to reduce compensation expense generally. Other cost curtailment initiatives
include a reduction in advertising activities, a suspension of matching contributions to
our defined contribution plans, and the suspension of our quarterly cash dividends to
stockholders. We will continue to monitor the business climate, and take such further
actions as needed to respond to business conditions.
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, 2009,
we experienced a year over year decline on a same store basis of new and used vehicle
unit sales, coupled with a corresponding decrease in finance and insurance revenues. Our
same store service and parts business also experienced a decline during this period,
although less so than vehicle sales. We expect a continuation of this difficult
operating environment throughout 2009.
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 customer demand,
consumer sentiment, 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. During the three
months ended March 31, 2009, we experienced year over year margin declines relating to
our new vehicle sales and service and parts operations, and an increase in used vehicle
sales margins. We expect such margin pressure to continue throughout 2009.
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 for
compensation and advertising have decreased during the three months ended March 31, 2009,
due in part to lower vehicle sales volumes, coupled with the cost savings initiatives
outlined above. Our rent expense is expected to grow as a result of cost of living
indexes outlined in our lease agreements. As outlined in Outlook above, we will
continue to monitor the business climate, and take such further actions as needed to
respond to business conditions.
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 typically based on benchmark lending rates, which are based in large part
upon national inter-bank lending rates set by local governments. During the latter part
of 2008, such benchmark rates were significantly reduced as a result of government
actions designed to spur liquidity and bank lending activities. As a result, our cost of
capital on variable rate indebtedness has declined during the first quarter 2009;
however, the significance of this decrease is limited somewhat by the increases in rate
spreads being charged by our vehicle finance partners outlined in Outlook above.
Equity in earnings of affiliates represents our share of the earnings relating to
investments in various joint ventures and other non-consolidated investments, notably
PTL. It is our expectation that difficult operating conditions outlined above will similarly
impact these businesses throughout 2009.
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, notably PTL. See Forward-Looking Statements.
23
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 performed 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 various 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, 2009 and 2008, we earned $67.8 million and $85.3 million,
respectively, of rebates, incentives and reimbursements from manufacturers, of which
$66.3 million and $83.5 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.
Intangible Assets
Our principal intangible assets relate to our franchise agreements with vehicle
manufacturers, which represent the estimated value of franchises acquired in business
combinations, and goodwill, which represents the excess of cost over the fair value of
tangible and identified intangible assets acquired in business combinations. We believe
the franchise value of our dealerships have an indefinite useful life based on the
following facts:
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Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers; |
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|
There are no known changes or events that would alter the automotive retailing franchise environment; |
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|
Certain franchise agreement terms are indefinite; |
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|
Franchise agreements that have limited terms have historically been renewed by us without substantial cost; and |
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Our history shows that manufacturers have not terminated our franchise agreements. |
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 amounts and
estimated fair values. 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. We also evaluate our franchises in connection with the annual impairment
testing to determine whether events and circumstances continue to support its assessment
that the franchise has 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 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 its
estimated fair value. 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.
24
The fair values of franchise rights and goodwill are 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.
Investments
Investments include marketable securities and investments in businesses accounted
for under the equity method. A majority of our investments are in joint ventures that are
more fully described in Joint Venture Relationships below. Such joint venture
relationships are accounted for under the equity method, pursuant to which we record our
proportionate share of the joint ventures income each period.
Investments in marketable securities held by us are typically classified as
available for sale and are stated at fair value, determined by the use of Level 1 inputs
as described under SFAS No. 157, on our balance sheet with unrealized gains and losses
included in accumulated other comprehensive income, a separate component of stockholders
equity.
The net book value of our investments was $285.3 million and $297.8 million as of
March 31, 2009 and December 31, 2008, 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 would
estimate the fair value of the investment using a discounted cash flow approach, which
would include 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 majority 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 such
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
$22.3 million and $19.2 million as of March 31, 2009 and December 31, 2008, respectively.
Changes in the reserve estimate during 2009 relate primarily to the inclusion of
additional participants in our employee medical benefit plans and reserves for 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 $3.4 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.
Classification of Franchises in Continuing and Discontinued Operations
We classify the results of our operations in our consolidated financial statements
based on the provisions of Statement of Financial Accounting Standards (SFAS) No. 144,
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.
25
New Accounting Pronouncements
See Note 1 of the Notes to the
Consolidated Condensed Financial Statements for a summary of the
accounting changes impacting our operating results, financial
position and cash flows.
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, 2007, the results of the acquired entity would be included in annual same
store comparisons beginning with the year ended December 31, 2009 and in quarterly same
store comparisons beginning with the quarter ended June 30, 2008.
Three Months Ended March 31, 2009 Compared to Three Months Ended March 31, 2008
(dollars in millions, except per unit amounts)
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
|
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|
|
|
|
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|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
2009 vs. 2008 |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
% Change |
|
New retail unit sales |
|
|
30,668 |
|
|
|
45,188 |
|
|
|
(14,520 |
) |
|
|
(32.1 |
%) |
Same store new retail unit sales |
|
|
28,963 |
|
|
|
44,645 |
|
|
|
(15,682 |
) |
|
|
(35.1 |
%) |
New retail sales revenue |
|
$ |
972.1 |
|
|
$ |
1,626.0 |
|
|
$ |
(653.9 |
) |
|
|
(40.2 |
%) |
Same store new retail sales revenue |
|
$ |
918.2 |
|
|
$ |
1,607.0 |
|
|
$ |
(688.8 |
) |
|
|
(42.9 |
%) |
New retail sales revenue per unit |
|
$ |
31,698 |
|
|
$ |
35,982 |
|
|
$ |
(4,284 |
) |
|
|
(11.9 |
%) |
Same store new retail sales revenue per unit |
|
$ |
31,703 |
|
|
$ |
35,994 |
|
|
$ |
(4,291 |
) |
|
|
(11.9 |
%) |
Gross profit new |
|
$ |
71.4 |
|
|
$ |
136.6 |
|
|
$ |
(65.2 |
) |
|
|
(47.7 |
%) |
Same store gross profit new |
|
$ |
67.0 |
|
|
$ |
134.9 |
|
|
$ |
(67.9 |
) |
|
|
(50.3 |
%) |
Average gross profit per new vehicle retailed |
|
$ |
2,327 |
|
|
$ |
3,023 |
|
|
$ |
(696 |
) |
|
|
(23.0 |
%) |
Same store average gross profit per new
vehicle retailed |
|
$ |
2,315 |
|
|
$ |
3,021 |
|
|
$ |
(706 |
) |
|
|
(23.4 |
%) |
Gross margin % new |
|
|
7.3 |
% |
|
|
8.4 |
% |
|
|
(1.1 |
%) |
|
|
(13.1 |
%) |
Same store gross margin % new |
|
|
7.3 |
% |
|
|
8.4 |
% |
|
|
(1.1 |
%) |
|
|
(13.1 |
%) |
Units
Retail unit sales of new vehicles decreased 14,520 units, or 32.1%, from 2008 to
2009. The decrease is due a 15,682 unit, or 35.1%, decrease in same store retail unit
sales during the period, offset by a 1,162 unit increase from net dealership
acquisitions. The same store decrease was due primarily to unit sales decreases in our
volume foreign brand stores in the U.S. and premium and domestic brand stores in the U.S.
and U.K.
Revenues
New vehicle retail sales revenue decreased $653.9 million, or 40.2%, from 2008 to
2009. The decrease is due to a $688.8 million, or 42.9%, decrease in same store revenues,
offset by a $34.9 million increase from net dealership acquisitions. The same store
revenue decrease is due primarily to the 35.1% decrease in retail unit sales, which
reduced revenue by $564.5 million, coupled with the $4,291, or 11.9%, decrease in average
selling prices per unit, which decreased revenue by $124.3 million.
Gross Profit
Retail gross profit from new vehicle sales decreased $65.2 million, or 47.7%, from
2008 to 2009. The decrease is due to a $67.9 million, or 50.3%, decrease in same store
gross profit, offset by a $2.7 million increase from net dealership acquisitions. The
same store decrease is due primarily to the 35.1% decrease in retail unit sales, which
reduced gross profit by $47.4 million, coupled with the $706, or 23.4%, decrease in the
average gross profit per new vehicle retailed, which decreased gross profit by
$20.5 million.
26
Used Vehicle Data
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|
|
|
|
|
|
|
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|
2009 vs. 2008 |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
% Change |
|
Used retail unit sales |
|
|
26,811 |
|
|
|
26,402 |
|
|
|
409 |
|
|
|
1.5 |
% |
Same store used retail unit sales |
|
|
25,113 |
|
|
|
26,208 |
|
|
|
(1,095 |
) |
|
|
(4.2 |
%) |
Used retail sales revenue |
|
$ |
614.6 |
|
|
$ |
794.1 |
|
|
$ |
(179.5 |
) |
|
|
(22.6 |
%) |
Same store used retail sales revenue |
|
$ |
574.7 |
|
|
$ |
788.9 |
|
|
$ |
(214.2 |
) |
|
|
(27.2 |
%) |
Used retail sales revenue per unit |
|
$ |
22,925 |
|
|
$ |
30,076 |
|
|
$ |
(7,151 |
) |
|
|
(23.8 |
%) |
Same store used retail sales revenue per unit |
|
$ |
22,883 |
|
|
$ |
30,103 |
|
|
$ |
(7,220 |
) |
|
|
(24.0 |
%) |
Gross profit used |
|
$ |
56.0 |
|
|
$ |
65.8 |
|
|
$ |
(9.8 |
) |
|
|
(14.9 |
%) |
Same store gross profit used |
|
$ |
52.1 |
|
|
$ |
65.3 |
|
|
$ |
(13.2 |
) |
|
|
(20.2 |
%) |
Average gross profit per used vehicle retailed |
|
$ |
2,088 |
|
|
$ |
2,491 |
|
|
$ |
(403 |
) |
|
|
(16.2 |
%) |
Same store average gross profit per used
vehicle retailed |
|
$ |
2,074 |
|
|
$ |
2,491 |
|
|
$ |
(417 |
) |
|
|
(16.7 |
%) |
Gross margin % used |
|
|
9.1 |
% |
|
|
8.3 |
% |
|
|
0.8 |
% |
|
|
9.6 |
% |
Same store gross margin % used |
|
|
9.1 |
% |
|
|
8.3 |
% |
|
|
0.8 |
% |
|
|
9.6 |
% |
Units
Retail unit sales of used vehicles increased 409 units, or 1.5%, from 2008 to 2009.
The increase is due to a 1,504 unit increase from net dealership acquisitions, offset by
a 1,095 unit, or 4.2%, decrease in same store retail unit sales. The same store decrease
was due primarily to unit sales decreases in volume foreign and domestic brand stores in
the U.S., offset by increases in unit sales at our premium brand stores in the U.S. and
U.K. We believe our sales of used vehicle units were influenced by the reduction in
traffic into our stores resulting from the significant decline in consumer confidence
offset by customers choosing used vehicles as a less expensive alternative to new
vehicles due to the challenging economic climate.
Revenues
Used vehicle retail sales revenue decreased $179.5 million, or 22.6%, from 2008 to
2009. The decrease is due to a $214.2 million, or 27.2%, decrease in same store revenues,
offset by a $34.7 million increase from net dealership acquisitions. The same store
revenue decrease is due to the $7,220, or 24.0% decrease in comparative average selling
prices per vehicle, which decreased revenue by $181.3 million, coupled with the 4.2%
decrease in same store retail unit sales which decreased revenue by $32.9 million.
Gross Profit
Retail gross profit from used vehicle sales decreased $9.8 million, or 14.9%, from
2008 to 2009. The decrease is due to a $13.2 million, or 20.2%, decrease in same store
gross profit, offset by a $3.4 million increase from net dealership acquisitions. The
decrease in same store gross profit is due to the $417, or 16.7%, decrease in average
gross profit per used vehicle retailed, which decreased retail gross profit by
$10.5 million, coupled with the 4.2% decrease in used retail unit sales, which decreased
gross profit by $2.7 million.
Finance and Insurance Data
|
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|
|
|
|
|
|
|
|
|
|
2009 vs. 2008 |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
% Change |
|
Finance and insurance revenue |
|
$ |
48.4 |
|
|
$ |
73.9 |
|
|
$ |
(25.5 |
) |
|
|
(34.5 |
%) |
Same store finance and insurance revenue |
|
$ |
46.3 |
|
|
$ |
73.2 |
|
|
$ |
(26.9 |
) |
|
|
(36.7 |
%) |
Finance and insurance revenue per unit |
|
$ |
842 |
|
|
$ |
1,032 |
|
|
$ |
(190 |
) |
|
|
(18.4 |
%) |
Same store finance and insurance revenue per unit |
|
$ |
857 |
|
|
$ |
1,033 |
|
|
$ |
(176 |
) |
|
|
(17.0 |
%) |
Finance and insurance revenue decreased $25.5 million, or 34.5%, from 2008 to 2009.
The decrease is due to a $26.9 million, or 36.7%, decrease in same store revenues during
the period, offset by a $1.4 million increase from net dealership acquisitions. The same
store revenue decrease is due to the 23.7% decrease in retail unit sales which decreased
revenue by $17.4 million, coupled with the $176, or 17.0%, decrease in comparative
average finance and insurance revenue per unit which decreased revenue by $9.5 million.
The $176 decrease in comparative average finance and insurance revenue per unit retailed
is due primarily to decreased sales penetration of certain products which we believe was
brought about by the challenging economic conditions.
27
Service and Parts Data
|
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
2009 vs. 2008 |
|
|
|
2009 |
|
|
2008 |
|
|
Change |
|
|
% Change |
|
Service and parts revenue |
|
$ |
327.6 |
|
|
$ |
359.1 |
|
|
$ |
(31.5 |
) |
|
|
(8.8 |
%) |
Same store service and parts revenue |
|
$ |
310.4 |
|
|
$ |
353.4 |
|
|
$ |
(43.0 |
) |
|
|
(12.2 |
%) |
Gross profit |
|
$ |
177.1 |
|
|
$ |
201.3 |
|
|
$ |
(24.2 |
) |
|
|
(12.0 |
%) |
Same store gross profit |
|
$ |
168.2 |
|
|
$ |
198.0 |
|
|
$ |
(29.8 |
) |
|
|
(15.1 |
%) |
Gross margin |
|
|
54.1 |
% |
|
|
56.0 |
% |
|
|
(1.9 |
%) |
|
|
(3.4 |
%) |
Same store gross margin |
|
|
54.2 |
% |
|
|
56.0 |
% |
|
|
(1.8 |
%) |
|
|
(3.2 |
%) |
Revenues
Service and parts revenue decreased $31.5 million, or 8.8%, from 2008 to 2009. The
decrease is due to a $43.0 million, or 12.2%, decrease in same store revenues during the
period, offset by an $11.5 million increase from net dealership acquisitions. The same
store decrease largely resulted from a decline in pre-inspection and delivery work due to
the 35.1% decrease in same store new vehicle retail unit sales.
Gross Profit
Service and parts gross profit decreased $24.2 million, or 12.0%, from 2008 to 2009.
The decrease is due to a $29.8 million, or 15.1%, decrease in same store gross profit
during the period, offset by a $5.6 million increase from net dealership acquisitions.
The same store gross profit decrease is due to the $43.0 million, or 12.2%, decrease in
same store revenues, which decreased gross profit by $23.3 million, coupled with a 1.8%
decrease in gross margin, which decreased gross profit by $6.5 million. The decline in
gross margin on parts, service and collision repairs in 2009 compared to the prior year
was due in part to a higher proportion of lower margin sales such as standard oil changes
and tire sales.
Distribution
smart USA, a wholly-owned subsidiary, began distributing the smart fortwo vehicle
in the U.S. in 2008. Distribution units wholesaled during the quarter increased 801
units, or 16.3%, from 4,913 during the three months ended March 31, 2008 to 5,714 during
the three months ended March 31, 2009. Total distribution segment revenue increased
$13.1 million, or 17.4%, from $75.5 million during the three months ended 2008 to $88.6
million during the three months ended 2009. Segment gross profit, which includes gross
profit on vehicle and parts sales, totaled $12.0 million and $10.7 million during the
three months ended March 31, 2009 and 2008, respectively.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) decreased $81.1 million, or
20.6%, from $394.1 million to $313.0 million. The aggregate decrease is due primarily to
a $90.3 million, or 23.3%, decrease in same store SG&A, offset by a $9.2 million increase
from net dealership acquisitions. The decrease in same store SG&A is due to (1) a net
decrease in variable selling expenses, including decreases in variable compensation, as a
result of the 29.2% decrease in same store retail gross profit versus the prior year and
(2) other cost savings initiatives discussed above under Outlook, offset by (1)
increased rent and other costs relating to our ongoing facility improvement and expansion
programs. SG&A expenses increased as a percentage of gross profit from 80.7% to 85.0%.
Depreciation and Amortization
Depreciation and amortization decreased $0.4 million, or 3.2%, from $13.3 million to
$12.9 million. The decrease is due to a $0.6 million, or 4.4%, decrease in same store
depreciation and amortization, offset by a $0.2 million increase from net dealership
acquisitions.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, decreased
$7.5 million, or 44.1%, from $17.0 million to $9.5 million. The decrease is due to a
$7.6 million, or 45.5%, 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 in
large part to decreases in average outstanding floor plan balances, coupled with
decreases in interest rates charged to us. While the base rate under these arrangements
were generally lower in 2009 versus 2008 in part due to lower benchmark lending rates as
a result of government actions designed to spur liquidity and bank lending activities,
certain of our lenders reacted to increases in their cost of capital by raising the
spread charged to us or by establishing minimum lending rates. Due to these relative
increases, we do not expect to realize the full benefit of the lower base rates in 2009
compared to 2008.
28
Other Interest Expense
Other interest expense increased $2.6 million, or 21.7%, from $11.9 million to
$14.5 million. The increase is due primarily to an increase in average outstanding
indebtedness in 2009 relating from our investment in PTL, offset by decreases in
benchmark lending rates.
Debt Discount Amortization
We adopted FSP APB 14-1, Accounting for Convertible Debt Instruments That May Be
Settled in Cash Upon Conversion (Including Partial Cash Settlement) effective January 1,
2009. Pursuant to FSP APB 14-1, we were required to account separately for the debt and
equity components of our 3.5% Senior Subordinated Convertible Notes. The value ascribed
to the debt component was determined using a fair value methodology, with the residual
representing the equity component. The equity component was recorded as an increase in
equity, with the debt discount being amortized as additional interest
expense over the expected life of the instrument. We have applied the provisions
of this standard retrospectively to all periods presented herein. Debt discount amortization increased
$0.1 million, from $3.5 million to $3.6 million, as a result of the requirement to
amortize the debt discount over the expected life of the obligation so as to maintain a
consistent effective interest rate.
Equity in Earnings of Affiliates
Equity in earnings of affiliates decreased $0.7 million, from $1.4 million to $0.7
million. The decrease from 2008 to 2009 is due primarily to the
impact of the difficult operating conditions outlined above on these businesses.
Gain on Debt Repurchase
In March 2009, we repurchased $68.7 million principal amount of our outstanding
Convertible Notes, which had a book value of $62.8 million net of debt discount, for $51.4 million. We
recorded a $10.4 million pre-tax gain in connection with the repurchase. In addition to
the write-off of $5.9 million of unamortized debt discount we also wrote off
$0.7 million of unamortized deferred financing costs and incurred $0.3 million of
transaction costs. No cash was allocated to the reacquisition of the equity component
because the cash paid was less than the fair value of the liability component prior to
extinguishment.
Income Taxes
Income taxes decreased $8.1 million, or 45.4%, from $17.8 million to $9.7 million.
The decrease from 2008 to 2009 is due to the decrease in our pre-tax income versus the
prior year, offset by an increase in our overall effective income tax rate.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing, the
acquisition of new dealerships, the improvement and expansion of existing facilities, the
construction of new facilities and debt service, and potentially for dividends and
repurchases of 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. As of March
31, 2009, we had working capital of $123.5 million, including $11.5 million of cash,
available to fund our operations and capital commitments. In addition, we had
$180.0 million and £80.8 million ($115.9 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. To the extent we pursue additional significant acquisitions, other
expansion opportunities, significant repurchases of our outstanding securities, or
refinance or repay existing debt, we may need to raise additional capital either through
the public or private issuance of equity or debt securities or through additional
borrowings which sources of funds may not necessarily be available on terms acceptable to
us, if at all. In addition, our liquidity could be negatively impacted in the event we
fail to comply with the covenants under our various financing and operating agreements or
in the event our floor plan financing is withdrawn. For a discussion of these possible
events, see the discussion below with respect to our financing agreements.
Share Repurchases and Dividends
Our board of directors has approved a repurchase program for our outstanding
securities with a remaining authority of $44.9 million. During the first quarter of 2009,
we repurchased $68.7 million aggregate principal amount of 3.5% senior subordinated
convertible notes for $51.4 million under this program. We may, from time to time 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 any 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.
29
We paid dividends of nine cents per share on March 3, 2008, June 2, 2008, September
1, 2008 and December 1, 2008. In February 2009, we announced the suspension of our
quarterly cash dividend. Future quarterly or other cash dividends will depend upon our
earnings, capital requirements, financial condition, restrictions on any then existing
indebtedness and other factors considered relevant by our Board of Directors.
Inventory Financing
We finance substantially all of our new and a portion of our used vehicle
inventories under revolving floor plan notes payable with various lenders, including the
captive finance companies associated with the U.S. based automotive manufacturers. In the
U.S., the floor plan arrangements are due on demand; however, we have not historically
been required to make loan principal repayments prior to the sale of the vehicles
financed. We typically make monthly interest payments on the amount financed. In the
U.K., 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 financed or the stated maturity. 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 our parent company. Interest
rates under the floor plan arrangements are variable and increase or decrease based on
changes in the prime rate, defined LIBOR or the Euro Interbank offer 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. See Results of Operations Floor Plan
Interest Expense for a discussion of the impact of challenging credit conditions on the
rates charged to us under these agreements.
U.S. Credit Agreement
We are party to a $479.0 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 originally funded for $219.0 million, and for an additional $10.0 million of
availability for letters of credit, through September 30, 2011. The revolving loans bear
interest at a defined LIBOR plus 1.75%, 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. We repaid $10.0 million of this term loan in the first quarter of 2009.
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, 2009, 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, 2009, $70.0 million
of revolving loans, $199.0 million of term loans and $0.5 million of letters of credit
were outstanding under this agreement.
U.K. Credit Agreement
Our subsidiaries in the U.K. (the U.K. subsidiaries) are party to an agreement
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 to
finance acquisitions, working capital, and general corporate purposes. The U.K. credit
agreement provides for (1) up to £80.0 million in revolving loans through August 31,
2011, which bears interest between a defined LIBOR plus 1.0% and defined LIBOR plus 1.6%,
(2) a term loan originally funded for £30.0 million which bears interest between 6.29%
and 6.89% and is payable ratably in quarterly intervals until fully repaid on June 30,
2011, and (3) a 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%, and matures on August 31,
2011.
30
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 earnings before
interest and taxes plus rental payments 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, 2009, 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 economy and
the 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, 2009, outstanding loans under the U.K. credit agreement amounted to £35.1
million ($50.4 million), including £15.9 million ($22.8 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 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. In
addition, we may redeem up to 40% of the 7.75% Notes at specified redemption prices using
the proceeds of certain equity offerings before December 15, 2009. 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, 2009, we were in compliance with all negative
covenants and there were no events of default.
Senior Subordinated Convertible Notes
On January 31, 2006, we issued $375.0 million aggregate principal amount of 3.50%
senior subordinated convertible notes due 2026 (the Convertible Notes). 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, 2009, 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 $28.43 (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, in lieu of shares of our
common stock, 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.
31
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 of this feature, we currently expect to be required to redeem the Convertible
Notes in April 2011.
In March 2009, we repurchased $68.7 million principal amount of our outstanding
Convertible Notes, which had a book value of $62.8 million net of debt discount, for $51.4 million. We
recorded a $10.4 million pre-tax gain in connection with the repurchase. In addition to
the write-off of $5.9 million of unamortized debt discount we also wrote off
$0.7 million of unamortized deferred financing costs, and $0.3 million of transaction
costs. As of March 31, 2009, $306.3 million principal amount of the Convertible Notes
were outstanding.
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, 2009,
$42.0 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 this arrangement at any time subject to
the settlement of the then current fair value of the swap arrangements. The swaps are
designated as cash flow hedges of future interest payments of LIBOR based U.S. floor plan
borrowings. The effective portion of the gain or loss on the derivative is reported as a
component of other comprehensive income and reclassified into earnings when the hedged
transaction affects earnings. As of March 31, 2009, we used Level 2 inputs as described
under SFAS No. 157 to estimate the fair value of these contracts to be a liability of
$15.1 million, of which $9.0 million and $6.1 million are recorded in accrued expenses
and other long-term liabilities, respectively, in the Condensed Consolidated Balance
Sheet. During the three months ended March 31, 2009, we recognized a net gain of $0.2
million related to the interest rate swaps in accumulated other comprehensive loss and
reclassified $2.4 million of existing derivative losses from accumulated other
comprehensive loss into floor plan interest expense in the Condensed Consolidated
Statement of Income. We expect approximately $9.0 million associated with the swaps to
be recognized as an increase of interest expense over the next twelve months as the
interest payments become due. During the three months ended March 31, 2009, the swaps
increased the weighted average interest rate on floor plan borrowings by approximately
0.2%.
We were party to an interest rate swap agreement which expired in January 2008,
pursuant to which a notional $200.0 million of our U.S. floating rate debt was exchanged
for fixed rate debt. The swap was designated as a cash flow hedge of future interest
payments of the LIBOR based U.S. floor plan borrowings.
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 dealership
properties and other 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, as defined.
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.
32
Off-Balance Sheet Arrangements
Third Party Lease Obligations
Since 1999, we have sold a number of dealerships to third parties. We have at
times, as a condition to the sale, remained liable for the lease payments relating to
the properties on which those franchises operate. We rely on the buyer of the
franchise to pay the associated rent and maintain the property. In the event the
buyer does not perform as expected (due to the buyers financial condition or other
factors such as the market performance of the underlying vehicle manufacturer), we
may not be able to recover amounts owed to us by the buyer. In this event, we could
be required to fulfill these obligations, which could materially adversely affect our
results of operations, financial condition or cash flows.
Cash Flows
Cash and cash equivalents decreased by $8.7 million during the three months ended
March 31, 2009 and increased by $7.0 million during the three months ended March 31,
2008. The major components of these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by operating activities was $175.9 million and $36.4 million during
the three months ended March 31, 2009 and 2008, respectively. Cash flows from 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 the guidance under SFAS No. 95,
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.
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:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net cash from operating activities as reported |
|
$ |
175,865 |
|
|
$ |
36,393 |
|
Floor plan notes payable non-trade as reported |
|
|
(121,866 |
) |
|
|
24,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities, including all floor plan notes payable |
|
$ |
53,999 |
|
|
$ |
61,025 |
|
|
|
|
|
|
|
|
Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $26.3 million and $45.0 million
during the three months ended March 31, 2009 and 2008, respectively. Cash flows from
investing activities consist primarily of cash used for capital expenditures, proceeds
from sale-leaseback transactions and net expenditures for dealership acquisitions and
other investments. Capital expenditures were $27.5 million and $47.2 million during the
three months ended March 31, 2009 and 2008, respectively. Capital expenditures relate
primarily to improvements to our existing dealership facilities and the construction of
new facilities. As of March 31, 2009, 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. Proceeds from sale-leaseback transactions were $3.7 million during the three
months ended March 31, 2008. There were no sale-leaseback transactions during the three
months ended March 31, 2009. Cash used in acquisitions and other investments, net of
cash acquired, was $11.5 million during the three months ended March 31, 2009, which
includes cash used to repay sellers floor plan liabilities in such business acquisitions
of $5.8 million. We made no acquisitions during the three months ended March 31, 2008.
The three months ended March 31, 2009 and 2008 include $12.7 million of proceeds from
other investing activities and $1.5 million cash used in other investing activities,
respectively.
33
Cash Flows from Continuing Financing Activities
Cash used in continuing financing activities was $156.6 million during the three
months ended March 31, 2009, and cash provided by continuing financing activities was
$15.9 million during the three months ended March 31, 2008. Cash flows from 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, and proceeds from the issuance of common stock, including
proceeds from 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 of
our U.S. credit agreement term loan. We had net repayments of other long-term debt of
$43.3 million and $0.2 million during the three months ended March 31, 2009 and 2008,
respectively. We used $51.4 million to repurchase $68.7 million aggregate principal
amount of our 3.5% senior subordinated convertible notes. We had net repayments of floor
plan notes payable non-trade of $121.9 million during the three months ended March 31,
2009 and net borrowings of floor plan notes payable non-trade of $24.6 million during the
three months ended March 31, 2008. During the three months ended March 31, 2008 we paid
$8.6 million of cash dividends to our stockholders. No cash dividends were paid to our
stockholders during the three months ended March 31, 2009.
Cash Flows from Discontinued Operations
Cash flows relating to discontinued operations are not currently, nor are they
expected to be, material to our liquidity or our capital resources. Management does not
believe that there are any significant 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 41% 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.
Other Related Party Interests and Transactions
Roger S. Penske is also a managing member of Transportation Resource Partners, an
organization that undertakes investments 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 providers cost or an amount
mutually agreed upon by both parties. We, Penske Corporation and certain affiliates have
also entered into a joint insurance agreement which provides that, with respect to
certain joint insurance policies (which includes our property policy), available coverage
with respect to a loss shall be paid to each party as stipulated in the policies. In the
event of losses that exceed the limit of liability for any policy or policy period, the
total policy proceeds shall be allocated based on the ratio of premiums paid.
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.
34
We have also entered into other joint ventures with certain related parties as more
fully discussed below.
Joint Venture Relationships
From time to time, we enter into other joint venture relationships in the ordinary
course of business, through 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,
2009, our automotive joint venture relationships were as follows:
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Ownership |
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Location |
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Dealerships |
|
Interest |
|
Fairfield, Connecticut |
|
Audi, Mercedes-Benz, Porsche, smart |
|
|
88.53 |
%(A)(B) |
Edison, New Jersey |
|
Ferrari, Maserati |
|
|
70.00 |
%(B) |
Las Vegas, Nevada |
|
Ferrari, Maserati |
|
|
50.00 |
%(C) |
Munich, Germany |
|
BMW, MINI |
|
|
50.00 |
%(C) |
Frankfurt, Germany |
|
Lexus, Toyota |
|
|
50.00 |
%(C) |
Aachen, Germany |
|
Audi, Lexus, Toyota, Volkswagen |
|
|
50.00 |
%(C) |
Mexico |
|
Toyota |
|
|
48.70 |
%(C) |
Mexico |
|
Toyota |
|
|
45.00 |
%(C) |
|
|
|
(A) |
|
An entity controlled by one of our directors, Lucio A. Noto (the Investor), owns an 11.47% interest in this
joint venture, which entitles the Investor to 20% of the joint ventures operating profits. In addition, the
Investor has an option to purchase up to a 20% interest in the joint venture for specified amounts. |
|
(B) |
|
Entity is consolidated in our financial statements. |
|
(C) |
|
Entity is accounted for using the equity method of accounting. |
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.
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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our future financial performance; |
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future acquisitions; |
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future capital expenditures and share repurchases; |
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our ability to obtain cost savings and synergies; |
35
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our ability to respond to economic cycles; |
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|
trends in the automotive retail industry and in the general economy in the
various countries in which we operate dealerships; |
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our ability to access the remaining availability under our credit agreements; |
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our liquidity; |
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interest rates; |
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trends affecting our future financial condition or results of operations; and |
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our business strategy. |
Forward-looking statements involve known and unknown risks and uncertainties and are
not assurances of future performance. Actual results may differ materially from
anticipated results due to a variety of factors, including the factors identified in our
2008 annual report on Form 10-K filed March 11, 2009. Important factors that could cause
actual results to differ materially from our expectations include the following:
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our business and the automotive retail industry in general are susceptible to further or
continued adverse economic conditions, including changes in interest rates, consumer
confidence, fuel prices and credit availability; |
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the ability of automobile manufacturers to exercise significant control over our operations,
since we depend on them in order to operate our business; |
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|
because we depend on the success and popularity of the brands we sell, adverse conditions
affecting one or more automobile manufacturers may negatively impact our revenues and
profitability; |
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|
a restructuring of one of the U.S. automotive manufacturers may adversely affect our
operations, as well as the automotive sector as a whole; |
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we may not be able to satisfy our capital requirements for acquisitions, dealership renovation
projects or financing the purchase of our inventory; |
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|
our failure to meet a manufacturers consumer satisfaction requirements may adversely affect
our ability to acquire new dealerships, our ability to obtain incentive payments from
manufacturers and our profitability; |
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with respect to PTL, changes in tax, financial or regulatory rules or requirements, changes in
the financial health of PTLs customers, labor strikes or work stoppages, asset utilization
rates and industry competition; |
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substantial competition in automotive sales and services may adversely affect our profitability; |
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if we lose key personnel, especially our Chief Executive Officer, or
are unable to attract additional qualified personnel, our business
could be adversely affected; |
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because most customers finance the cost of purchasing a vehicle,
increased interest rates or a reduction in credit available to
consumers may adversely affect our vehicle sales; |
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our business may be adversely affected by import product restrictions and foreign trade risks that may impair
our ability to sell foreign vehicles profitably; |
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our automobile dealerships are subject to substantial regulation which may adversely affect our profitability; |
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if state dealer laws in the United States 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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non-compliance with the financial ratios and other covenants under our credit agreements and operating leases
may materially adversely affect us; |
36
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the success of our smart distribution depends upon continued availability of the vehicle and customer demand
for that vehicle; |
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our dealership operations may be affected by severe weather or other periodic business interruptions; |
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our principal stockholders have substantial influence over us and may make decisions with which other
stockholders may disagree; |
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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 for acquisitions 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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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. |
In addition:
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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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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. |
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.
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, 2009, a 100 basis point change in interest rates would result in an
approximate $3.0 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 or the Euro Interbank offer 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, 2009, adjusted to exclude the notional value of the swap agreements, a
100 basis point change in interest rates would result in an approximate $12.2 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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the maintenance of our overall debt portfolio with targeted fixed and
variable rate components; |
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the use of authorized derivative instruments; |
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the prohibition of using derivatives for trading or other speculative
purposes; and |
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the prohibition of highly leveraged derivatives or derivatives for which
we are unable to reliably estimate a fair value or obtain a market quotation. |
37
Interest rate fluctuations affect the fair market value of our fixed rate debt,
including our swaps, 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, 2009, 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
$78.0 million change to our revenues for the three months ended March 31, 2009.
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 SECs 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 Companys 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.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising in the
normal course of business. Such claims may relate to actions brought
by governmental authorities, litigation with customers and employment related lawsuits, including
class action claims and purported class action claims. As of March 31, 2009, we are not a
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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10.1
|
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Third Amended and Restated Limited Partnership Agreement of Penske
Truck Leasing Co., L.P. dated March 26, 2009. |
12
|
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Computation of Ratio of Earnings to Fixed Charges. |
31.1
|
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Rule 13(a)-14(a)/15(d)-14(a) Certification. |
31.2
|
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Rule 13(a)-14(a)/15(d)-14(a) Certification. |
32
|
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Section 1350 Certification. |
38
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: |
/s/ Roger S. Penske
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Roger S. Penske |
|
Date: May 8, 2009 |
|
Chief Executive Officer |
|
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By: |
/s/ Robert T. OShaughnessy
|
|
|
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Robert T. OShaughnessy |
|
Date: May 8, 2009 |
|
Chief Financial Officer |
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39
EXHIBIT INDEX
|
|
|
Exhibit |
|
|
No. |
|
Description |
|
|
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10.1
|
|
Third Amended and Restated Limited Partnership Agreement of
Penske Truck Leasing Co., L.P. dated March 26, 2009. |
12
|
|
Computation of Ratio of Earnings to Fixed Charges. |
31.1
|
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
31.2
|
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
32
|
|
Section 1350 Certification. |