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Section 1: 10-Q (10-Q)

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-12297

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

22-3086739

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

2555 Telegraph Road

Bloomfield Hills, Michigan

48302-0954

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code:

(248648-2500

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Voting Common Stock, par value $0.0001 per share

PAG

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of October 28, 2019, there were 81,066,017 shares of voting common stock outstanding.

Table of Contents

TABLE OF CONTENTS

Page

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Balance Sheets as of September 30, 2019 and December 31, 2018

3

Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2019 and 2018

4

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018

5

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2019 and 2018

6

Consolidated Condensed Statement of Equity for the three and nine months ended September 30, 2019 and 2018

7

Notes to Consolidated Condensed Financial Statements

9

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

35

Item 3. Quantitative & Qualitative Disclosures About Market Risk

62

Item 4. Controls and Procedures

63

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

63

Item 1A. Risk Factors

63

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

65

Item 6. Exhibits

66

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

    

September 30,

    

December 31,

2019

2018

(Unaudited)

(In millions, except share

and per share amounts)

ASSETS

 

Cash and cash equivalents

$

77.5

$

39.4

Accounts receivable, net of allowance for doubtful accounts of $5.6 and $5.4

 

967.3

 

929.1

Inventories

 

4,043.9

 

4,040.1

Other current assets

 

98.8

 

86.6

Total current assets

 

5,187.5

 

5,095.2

Property and equipment, net

 

2,309.3

 

2,250.0

Operating lease right-of-use assets

 

2,384.4

 

Goodwill

 

1,876.5

 

1,752.0

Other indefinite-lived intangible assets

 

547.4

 

486.2

Equity method investments

 

1,362.8

 

1,305.2

Other long-term assets

 

21.6

 

15.9

Total assets

$

13,689.5

$

10,904.5

LIABILITIES AND EQUITY

Floor plan notes payable

$

2,444.1

$

2,362.2

Floor plan notes payable — non-trade

 

1,410.6

 

1,428.6

Accounts payable

 

672.3

 

598.2

Accrued expenses and other current liabilities

 

722.2

 

566.6

Current portion of long-term debt

 

96.8

 

92.0

Liabilities held for sale

 

0.5

 

0.7

Total current liabilities

 

5,346.5

 

5,048.3

Long-term debt

 

2,282.5

 

2,124.7

Long-term operating lease liabilities

 

2,334.7

 

Deferred tax liabilities

 

620.7

 

577.8

Other long-term liabilities

 

446.0

 

519.0

Total liabilities

 

11,030.4

 

8,269.8

Commitments and contingent liabilities (Note 11)

Equity

Penske Automotive Group stockholders’ equity:

Preferred Stock, $0.0001 par value; 100,000 shares authorized; none issued and outstanding

 

 

Common Stock, $0.0001 par value, 240,000,000 shares authorized; 81,066,927 shares issued and outstanding at September 30, 2019; 84,546,970 shares issued and outstanding at December 31, 2018

 

 

Non-voting Common Stock, $0.0001 par value; 7,125,000 shares authorized; none issued and outstanding

 

 

Class C Common Stock, $0.0001 par value; 20,000,000 shares authorized; none issued and outstanding

 

 

Additional paid-in capital

 

317.2

 

477.8

Retained earnings

 

2,607.7

 

2,365.8

Accumulated other comprehensive income (loss)

 

(286.0)

 

(234.5)

Total Penske Automotive Group stockholders’ equity

 

2,638.9

 

2,609.1

Non-controlling interest

 

20.2

 

25.6

Total equity

 

2,659.1

 

2,634.7

Total liabilities and equity

$

13,689.5

$

10,904.5

See Notes to Consolidated Condensed Financial Statements

3

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Three Months Ended

Nine Months Ended

September 30,

September 30,

 

    

2019

    

2018

2019

    

2018

(Unaudited)

(In millions, except per share amounts)

Revenue:

Retail automotive dealership

$

5,155.4

$

5,148.5

$

15,442.9

$

15,900.0

Retail commercial truck dealership

 

692.3

 

385.3

 

1,451.4

 

1,016.5

Commercial vehicle distribution and other

 

119.9

 

124.8

 

393.5

 

429.3

Total revenues

5,967.6

5,658.6

17,287.8

17,345.8

Cost of sales:

Retail automotive dealership

 

4,407.9

 

4,386.3

 

13,159.0

 

13,561.5

Retail commercial truck dealership

 

605.7

 

327.5

 

1,251.9

 

859.7

Commercial vehicle distribution and other

 

84.3

 

92.2

 

287.9

 

317.8

Total cost of sales

 

5,097.9

 

4,806.0

 

14,698.8

 

14,739.0

Gross profit

 

869.7

 

852.6

 

2,589.0

 

2,606.8

Selling, general and administrative expenses

 

672.8

 

662.8

 

2,008.1

 

2,001.3

Depreciation

 

27.5

 

25.9

 

81.0

 

77.2

Operating income

 

169.4

 

163.9

 

499.9

 

528.3

Floor plan interest expense

 

(21.4)

 

(20.2)

 

(64.2)

 

(59.0)

Other interest expense

 

(32.9)

 

(28.3)

 

(93.2)

 

(86.7)

Equity in earnings of affiliates

 

43.3

 

41.7

 

109.6

 

95.0

Income from continuing operations before income taxes

 

158.4

 

157.1

 

452.1

 

477.6

Income taxes

 

(42.4)

 

(27.1)

 

(118.6)

 

(104.7)

Income from continuing operations

 

116.0

 

130.0

 

333.5

 

372.9

Income from discontinued operations, net of tax

 

0.1

 

0.1

 

0.3

 

0.2

Net income

 

116.1

 

130.1

 

333.8

 

373.1

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

 

(0.1)

 

(0.1)

 

(0.4)

 

0.2

Net income attributable to Penske Automotive Group common stockholders

$

116.2

$

130.2

$

334.2

$

372.9

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

Continuing operations

$

1.42

$

1.53

$

4.02

$

4.37

Discontinued operations

0.00

0.00

0.00

0.00

Net income attributable to Penske Automotive Group common stockholders

$

1.42

$

1.53

$

4.03

$

4.37

Shares used in determining basic earnings per share

 

81.6

 

84.9

 

83.0

 

85.2

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

Continuing operations

$

1.42

$

1.53

$

4.02

$

4.37

Discontinued operations

0.00

0.00

0.00

0.00

Net income attributable to Penske Automotive Group common stockholders

$

1.42

$

1.53

$

4.03

$

4.37

Shares used in determining diluted earnings per share

 

81.7

 

84.9

 

83.0

 

85.3

Amounts attributable to Penske Automotive Group common stockholders:

Income from continuing operations

$

116.0

$

130.0

$

333.5

$

372.9

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

 

(0.1)

 

(0.1)

 

(0.4)

 

0.2

Income from continuing operations, net of tax

 

116.1

 

130.1

 

333.9

 

372.7

Income from discontinued operations, net of tax

 

0.1

 

0.1

 

0.3

 

0.2

Net income attributable to Penske Automotive Group common stockholders

$

116.2

$

130.2

$

334.2

$

372.9

Cash dividends per share

$

0.40

$

0.36

$

1.17

$

1.05

See Notes to Consolidated Condensed Financial Statements

4

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended

Nine Months Ended

September 30,

September 30,

    

2019

    

2018

2019

    

2018

(Unaudited)

(In millions)

Net income

$

116.1

$

130.1

$

333.8

$

373.1

 

Other comprehensive income:

Foreign currency translation adjustment

 

(44.3)

 

(19.6)

 

(54.1)

 

(57.2)

Other adjustments to comprehensive income, net

 

(1.9)

 

2.1

 

1.9

 

(1.3)

Other comprehensive loss, net of tax

 

(46.2)

 

(17.5)

 

(52.2)

 

(58.5)

Comprehensive income

 

69.9

 

112.6

 

281.6

 

314.6

Less: Comprehensive loss attributable to non-controlling interests

 

(0.6)

 

(0.2)

 

(1.1)

 

(1.0)

Comprehensive income attributable to Penske Automotive Group common stockholders

$

70.5

$

112.8

$

282.7

$

315.6

See Notes to Consolidated Condensed Financial Statements

5

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Nine Months Ended

September 30,

    

2019

    

2018

(Unaudited)

(In millions)

Operating Activities:

 

Net income

$

333.8

$

373.1

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

Depreciation

 

81.0

 

77.2

Earnings of equity method investments

 

(77.8)

 

(69.5)

Income from discontinued operations, net of tax

 

(0.3)

 

(0.2)

Deferred income taxes

 

48.2

 

64.3

Changes in operating assets and liabilities:

Accounts receivable

 

(38.0)

 

6.1

Inventories

 

119.9

 

205.2

Floor plan notes payable

 

108.7

 

(165.2)

Accounts payable and accrued expenses

 

128.6

 

26.2

Other

 

(43.3)

 

18.7

Net cash provided by continuing operating activities

 

660.8

 

535.9

Investing Activities:

Purchase of equipment and improvements

 

(188.8)

 

(188.5)

Proceeds from sale of dealerships

7.3

58.4

Proceeds from sale-leaseback transactions

7.3

10.7

Acquisitions net, including repayment of sellers’ floor plan notes payable of $138.5 and $25.8, respectively

 

(326.9)

 

(168.6)

Other

(2.3)

(3.5)

Net cash used in continuing investing activities

 

(503.4)

 

(291.5)

Financing Activities:

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

 

1,458.0

 

1,163.0

Repayments under U.S. credit agreement revolving credit line

 

(1,383.0)

 

(1,335.0)

Net borrowings of other long-term debt

 

95.3

 

131.0

Net repayments of floor plan notes payable — non-trade

 

(18.0)

 

(59.6)

Repurchases of common stock

 

(174.1)

 

(55.8)

Dividends

 

(97.3)

 

(89.7)

Other

0.1

(6.2)

Net cash used in continuing financing activities

 

(119.0)

 

(252.3)

Discontinued operations:

Net cash provided by discontinued operating activities

 

0.2

 

0.3

Net cash provided by discontinued investing activities

 

 

Net cash provided by discontinued financing activities

 

 

Net cash provided by discontinued operations

 

0.2

 

0.3

Effect of exchange rate changes on cash and cash equivalents

(0.5)

(0.5)

Net change in cash and cash equivalents

 

38.1

 

(8.1)

Cash and cash equivalents, beginning of period

 

39.4

 

45.7

Cash and cash equivalents, end of period

$

77.5

$

37.6

Supplemental disclosures of cash flow information:

Cash paid for:

Interest

$

139.6

$

127.4

Income taxes

 

69.8

 

36.5

Non cash activities:

Deferred consideration

$

6.8

Contingent consideration

$

10.6

See Notes to Consolidated Condensed Financial Statements

6

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

Three Months Ended September 30, 2019

Accumulated

Total

 

Common Stock

Additional

Other

Penske

 

Issued

Paid-in

Retained

Comprehensive

Automotive Group

Non-controlling

Total

Shares

Amount

Capital

Earnings

Income (Loss)

Stockholders’ Equity

Interest

Equity

(Unaudited)

(Dollars in millions)

Balance, June 30, 2019

    

81,956,305

$

$

356.5

$

2,524.3

$

(240.3)

    

$

2,640.5

    

$

20.5

    

$

2,661.0

Adoption of ASC 842 (Note 1)

 

 

 

 

 

 

 

Equity compensation

 

132,244

 

 

4.3

 

 

 

4.3

 

 

4.3

Repurchases of common stock

(1,021,622)

 

 

(43.6)

 

 

 

(43.6)

 

 

(43.6)

Dividends

 

 

 

 

(32.8)

 

 

(32.8)

 

 

(32.8)

Purchase of subsidiary shares from non-controlling interest

Distributions to non-controlling interest

 

 

 

 

 

 

 

(0.1)

 

(0.1)

Foreign currency translation

 

 

 

 

 

(43.8)

 

(43.8)

 

(0.5)

 

(44.3)

Other

 

 

 

 

 

(1.9)

 

(1.9)

 

0.4

 

(1.5)

Net income

 

 

 

 

116.2

 

 

116.2

 

(0.1)

 

116.1

Balance, September 30, 2019

 

81,066,927

$

$

317.2

$

2,607.7

$

(286.0)

$

2,638.9

$

20.2

$

2,659.1

Three Months Ended September 30, 2018

Accumulated

Total

 

Common Stock

Additional

Other

Penske

 

Issued

Paid-in

Retained

Comprehensive

Automotive Group

Non-controlling

Total

Shares

Amount

Capital

Earnings

Income (Loss)

Stockholders’ Equity

Interest

Equity

(Unaudited)

(Dollars in millions)

Balance, June 30, 2018

    

84,865,069

$

$

483.9

$

2,199.7

    

$

(186.4)

    

$

2,497.2

    

$

28.6

    

$

2,525.8

Adoption of ASC 606

 

 

 

 

 

 

 

Equity compensation

 

(1,900)

 

 

4.0

 

 

 

4.0

 

 

4.0

Repurchases of common stock

 

 

 

 

 

 

 

Dividends

 

 

 

 

(30.7)

 

 

(30.7)

 

 

(30.7)

Purchase of subsidiary shares from non-controlling interest

Distributions to non-controlling interest

 

 

 

 

 

 

 

(0.1)

 

(0.1)

Foreign currency translation

 

 

 

 

 

(19.5)

 

(19.5)

 

(0.1)

 

(19.6)

Other

 

 

 

 

 

2.1

 

2.1

 

0.4

 

2.5

Net income

 

 

 

 

130.2

 

 

130.2

 

(0.1)

 

130.1

Balance, September 30, 2018

 

84,863,169

$

$

487.9

$

2,299.2

$

(203.8)

$

2,583.3

$

28.7

$

2,612.0

See Notes to Consolidated Condensed Financial Statements

7

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

Nine Months Ended September 30, 2019

Accumulated

Total

 

Common Stock

Additional

Other

Penske

 

Issued

Paid-in

Retained

Comprehensive

Automotive Group

Non-controlling

Total

Shares

Amount

Capital

Earnings

Income (Loss)

Stockholders’ Equity

Interest

Equity

(Unaudited)

(Dollars in millions)

Balance, December 31, 2018

    

84,546,970

    

$

    

$

477.8

    

$

2,365.8

    

$

(234.5)

    

$

2,609.1

    

$

25.6

    

$

2,634.7

Adoption of ASC 842 (Note 1)

 

 

 

5.0