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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 March 31, 2020

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 May 4, 2020, there were 80,461,102 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 March 31, 2020 and December 31, 2019

3

Consolidated Condensed Statements of Income for the three months ended March 31, 2020 and 2019

4

Consolidated Condensed Statements of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019

5

Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2020 and 2019

6

Consolidated Condensed Statements of Equity for the three months ended March 31, 2020 and 2019

7

Notes to Consolidated Condensed Financial Statements

8

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

27

Item 3. Quantitative & Qualitative Disclosures About Market Risk

50

Item 4. Controls and Procedures

50

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

51

Item 1A. Risk Factors

51

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

52

Item 6. Exhibits

53

2

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

    

March 31,

    

December 31,

2020

2019

(Unaudited)

(In millions, except share

and per share amounts)

ASSETS

 

Cash and cash equivalents

$

431.9

$

28.1

Accounts receivable, net of allowance for doubtful accounts of $6.4 and $5.7

 

616.3

 

960.3

Inventories

 

4,262.7

 

4,260.7

Other current assets

 

85.2

 

85.0

Total current assets

 

5,396.1

 

5,334.1

Property and equipment, net

 

2,297.9

 

2,366.4

Operating lease right-of-use assets

 

2,292.1

 

2,360.5

Goodwill

 

1,868.8

 

1,911.0

Other indefinite-lived intangible assets

 

541.0

 

552.2

Equity method investments

 

1,400.7

 

1,399.0

Other long-term assets

 

20.2

 

19.5

Total assets

$

13,816.8

$

13,942.7

LIABILITIES AND EQUITY

Floor plan notes payable

$

2,283.4

$

2,412.5

Floor plan notes payable — non-trade

 

1,605.7

 

1,594.0

Accounts payable

 

589.8

 

638.8

Accrued expenses and other current liabilities

 

645.3

 

701.9

Current portion of long-term debt

 

104.6

 

103.3

Liabilities held for sale

 

0.5

 

0.5

Total current liabilities

 

5,229.3

 

5,451.0

Long-term debt

 

2,516.1

 

2,257.0

Long-term operating lease liabilities

 

2,234.1

 

2,301.2

Deferred tax liabilities

 

702.2

 

677.9

Other long-term liabilities

 

427.6

 

444.0

Total liabilities

 

11,109.3

 

11,131.1

Commitments and contingent liabilities (Note 12)

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; 80,463,278 shares issued and outstanding at March 31, 2020; 81,084,751 shares issued and outstanding at December 31, 2019

 

 

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

 

295.9

 

320.4

Retained earnings

 

2,693.3

 

2,675.8

Accumulated other comprehensive income (loss)

 

(299.5)

 

(202.8)

Total Penske Automotive Group stockholders’ equity

 

2,689.7

 

2,793.4

Non-controlling interest

 

17.8

 

18.2

Total equity

 

2,707.5

 

2,811.6

Total liabilities and equity

$

13,816.8

$

13,942.7

See Notes to Consolidated Condensed Financial Statements

3

Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

Three Months Ended

March 31,

 

2020

    

2019

(Unaudited)

(In millions, except per share amounts)

Revenue:

Retail automotive dealership

$

4,416.6

$

5,091.2

Retail commercial truck dealership

 

491.4

 

332.3

Commercial vehicle distribution and other

 

101.1

 

140.9

Total revenues

5,009.1

5,564.4

Cost of sales:

Retail automotive dealership

 

3,738.5

 

4,329.7

Retail commercial truck dealership

 

422.6

 

277.9

Commercial vehicle distribution and other

 

71.3

 

105.3

Total cost of sales

 

4,232.4

 

4,712.9

Gross profit

 

776.7

 

851.5

Selling, general and administrative expenses

 

641.8

 

666.4

Depreciation

 

28.5

 

26.4

Operating income

 

106.4

 

158.7

Floor plan interest expense

 

(17.7)

 

(21.8)

Other interest expense

 

(31.7)

 

(29.9)

Equity in earnings of affiliates

 

14.5

 

26.8

Income from continuing operations before income taxes

 

71.5

 

133.8

Income taxes

 

(20.1)

 

(34.7)

Income from continuing operations

 

51.4

 

99.1

Income (loss) from discontinued operations, net of tax

 

0.1

 

0.1

Net income

 

51.5

 

99.2

Less: Loss attributable to non-controlling interests

 

(0.2)

 

(1.0)

Net income attributable to Penske Automotive Group common stockholders

$

51.7

$

100.2

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

Continuing operations

$

0.64

$

1.19

Discontinued operations

0.00

0.00

Net income attributable to Penske Automotive Group common stockholders

$

0.64

$

1.19

Shares used in determining basic earnings per share

 

81.1

 

84.4

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

Continuing operations

$

0.64

$

1.19

Discontinued operations

0.00

0.00

Net income attributable to Penske Automotive Group common stockholders

$

0.64

$

1.19

Shares used in determining diluted earnings per share

 

81.1

 

84.4

Amounts attributable to Penske Automotive Group common stockholders:

Income from continuing operations

$

51.4

$

99.1

Less: Loss attributable to non-controlling interests

 

(0.2)

 

(1.0)

Income from continuing operations, net of tax

 

51.6

 

100.1

Income (loss) from discontinued operations, net of tax

 

0.1

 

0.1

Net income attributable to Penske Automotive Group common stockholders

$

51.7

$

100.2

Cash dividends per share

$

0.42

$

0.38

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

Three Months Ended

March 31,

2020

    

2019

(Unaudited)

(In millions)

Net income

$

51.5

$

99.2

 

Other comprehensive income:

Foreign currency translation adjustment

 

(92.9)

 

6.7

Other adjustments to comprehensive income, net

 

(4.0)

 

1.8

Other comprehensive (loss) income, net of tax

 

(96.9)

 

8.5

Comprehensive income

 

(45.4)

 

107.7

Less: Comprehensive (loss) income attributable to non-controlling interests

 

(0.4)

 

(1.3)

Comprehensive (loss) income attributable to Penske Automotive Group common stockholders

$

(45.0)

$

109.0

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

Three Months Ended

March 31,

    

2020

    

2019

(Unaudited)

(In millions)

Operating Activities:

 

Net income

$

51.5

$

99.2

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

Depreciation

 

28.5

 

26.4

Earnings of equity method investments

 

(14.5)

 

(26.8)

(Income) loss from discontinued operations, net of tax

 

(0.1)

 

(0.1)

Deferred income taxes

 

28.4

 

11.8

Changes in operating assets and liabilities:

Accounts receivable

 

343.9

 

(104.9)

Inventories

 

(9.3)

 

(90.5)

Floor plan notes payable

 

(126.8)

 

83.9

Accounts payable and accrued expenses

 

(84.9)

 

134.5

Other

 

(4.8)

 

(42.1)

Net cash provided by continuing operating activities

 

211.9

 

91.4

Investing Activities:

Purchase of equipment and improvements

 

(25.7)

 

(63.1)

Proceeds from sale of dealerships

10.3

7.2

Proceeds from sale-leaseback transactions

7.3

Acquisitions net, including repayment of sellers’ floor plan notes payable of $0 and $0, respectively

 

 

(1.1)

Other

(0.7)

(0.2)

Net cash used in continuing investing activities

 

(16.1)

 

(49.9)

Financing Activities:

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

 

515.0

 

406.0

Repayments under U.S. credit agreement revolving credit line

 

(210.0)

 

(381.0)

Net repayments of other long-term debt

 

(22.1)

 

(35.6)

Net borrowings of floor plan notes payable — non-trade

 

11.7

 

60.1

Payments for contingent consideration

(21.1)

Repurchases of common stock

 

(29.4)

 

(54.3)

Dividends

 

(34.2)

 

(32.2)

Other

(0.1)

Net cash provided by (used in) continuing financing activities

 

209.9

 

(37.1)

Discontinued operations:

Net cash provided by (used in) discontinued operating activities

 

0.1

 

(0.1)

Net cash provided by discontinued investing activities

 

 

Net cash provided by discontinued financing activities

 

 

Net cash provided by (used in) discontinued operations

 

0.1

 

(0.1)

Effect of exchange rate changes on cash and cash equivalents

(2.0)

(0.2)

Net change in cash and cash equivalents

 

403.8

 

4.1

Cash and cash equivalents, beginning of period

 

28.1

 

39.4

Cash and cash equivalents, end of period

$

431.9

$

43.5

Supplemental disclosures of cash flow information:

Cash paid (received) for:

Interest

$

36.3

$

35.8

Income taxes

 

(3.3)

 

8.8

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY

Three Months Ended March 31, 2020

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, 2019

    

81,084,751

$

$

320.4

$

2,675.8

$

(202.8)

    

$

2,793.4

    

$

18.2

    

$

2,811.6

Equity compensation

 

268,722

 

 

4.9

 

 

 

4.9

 

 

4.9

Repurchases of common stock

(890,195)

 

 

(29.4)

 

 

 

(29.4)

 

 

(29.4)

Dividends

 

 

 

 

(34.2)

 

 

(34.2)

 

 

(34.2)

Purchase of subsidiary shares from non-controlling interest

Distributions to non-controlling interest

 

 

 

 

 

 

 

 

Foreign currency translation

 

 

 

 

 

(92.7)

 

(92.7)

 

(0.2)

 

(92.9)

Other

 

 

 

 

 

(4.0)

 

(4.0)

 

 

(4.0)

Net income

 

 

 

 

51.7

 

 

51.7

 

(0.2)

 

51.5

Balance, March 31, 2020

 

80,463,278

$

$

295.9

$

2,693.3

$

(299.5)

$

2,689.7

$

17.8

$

2,707.5

Three Months Ended March 31, 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

 

 

 

5.0

 

 

5.0

 

 

5.0

Equity compensation

 

362,887

 

 

4.6

 

 

 

4.6

 

 

4.6

Repurchases of common stock

(1,258,348)

 

 

(54.3)

 

 

 

(54.3)

 

 

(54.3)

Dividends

 

 

 

 

(32.2)

 

 

(32.2)

 

 

(32.2)

Purchase of subsidiary shares from non-controlling interest

(4.8)

(4.8)

Distributions to non-controlling interest

 

 

 

 

 

 

 

(0.1)

 

(0.1)

Foreign currency translation

 

 

 

 

 

7.0

 

7.0

 

(0.3)

 

6.7

Other

 

 

 

 

 

1.8

 

1.8

 

0.3

 

2.1

Net income

 

 

 

 

100.2

 

 

100.2

 

(1.0)

 

99.2

Balance, March 31, 2019

 

83,651,509

$

$

428.1

$

2,438.8

$

(225.7)

$

2,641.2

$

19.7

$

2,660.9

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)
(In millions, except share and per share amounts)

1. Interim Financial Statements

Business Overview

Unless the context otherwise requires, the use of the terms “PAG,” “we,” “us,” and “our” in these Notes to the Consolidated Condensed Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries.

We are a diversified international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.

COVID-19 Disclosure

Overview - The outbreak of COVID-19 across the globe has adversely impacted each of our markets and the global economy, leading to disruptions to our business. The pandemic continues in all of our markets. Governmental authorities are taking countermeasures to slow the outbreak, including shelter-in-place orders, stay at home orders, large-scale restrictions on travel and government-funded assistance programs to individuals and businesses. For the first two months of 2020 prior to the COVID-19 pandemic, our retail automotive business same-store new vehicle revenue increased 5.3%, used vehicle revenues increased 7.3%, F&I increased 10.7%, and service and parts increased 3.0%, similar to performance we experienced in 2019. These results continued into early March, then progressively declined as shelter-in-place policies were established impacting many of our locations. In March 2020, same-store new and used automotive retail sales declined 40.2%. While most of our repair services have been deemed essential under such restrictions, in March 2020, we experienced a 24.5% decline in our automotive service and parts business and a 6.6% same-store decline in our commercial vehicle service and parts operations. The pandemic is a highly fluid and rapidly evolving situation, and we cannot anticipate with any certainty the length, scope, or severity of such restrictions in each of the jurisdictions that we operate. See “Item 1A. Risk Factors.”

In response to shelter-in-place orders resulting from the COVID-19 pandemic, most of our automotive, and many of our commercial vehicle, showrooms were closed (though some have reopened). In permissible jurisdictions, however, we continued limited sales activity by appointment or through our e-commerce channels. Virtually all of our service, parts and collision center departments have remained open during the crisis and curb-side or home delivery offerings have supplemented our traditional service offerings. We have modified certain business practices to conform to government restrictions and best practices encouraged by government and regulatory authorities. In all of our locations, we have implemented enhanced cleaning procedures, enforced social distancing guidelines and taken other precautions to protect our employees and customers. We will continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment.

Across the company, we implemented a hiring freeze, expense reductions including in advertising, and postponed an estimated $150 million in capital expenditures. We also furloughed over 15,000 employees in February and March in various countries. Our remaining employees are working reduced hours or have taken pay cuts, including a temporary 100% reduction in salary for the CEO and President, a 25% reduction in salary for our other executive officers, and the Board of Directors has waived cash compensation through September 30, 2020.

Most of our manufacturer partners began periodic suspension of production beginning in late March with some announcing extensions into May. We believe our current inventory levels will allow us to continue to do business with the slowdown in sales driven by the pandemic. We are strategically managing inventory levels by monitoring incoming units and deferring or canceling purchases. Our manufacturer partners began providing us with additional incentive

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support in March. In addition, our manufacturer and lending partners are providing support to retail customers such as increased incentives, payment deferrals, as well as 0% financing on certain vehicles and term lengths.

United States – Beginning in March 2020, shelter-in-place rules in many states either required we close dealerships or limit our automotive dealership operations to essential services. Virtual/online sales of new and used vehicles remained available in most locations, while the service departments remained open to support critical transportation needs. Commercial truck dealership sales and service operations remained open in most locations around the U.S. and Canada providing essential services to our customers. In March 2020, our automotive dealership operations across the U.S. experienced a 40.1% decline in unit volume and a 21.2% decline in service and parts revenues compared to the prior year. Additionally beginning in the middle of March, all sixteen of our used vehicle supercenters were closed (though some have reopened). As a result, in March the used supercenters experienced a same-store used unit sales decline of 49%.

Commercial truck dealership sales and service operations remained open in most locations around the U.S. and Canada providing essential services to our customers. We continued to experience steady demand for new and used truck sales and service and parts during March and April. For the three months ended March 31, 2020, the North American Class 8 retail sales market declined 26% while our new same-store unit sales declined 2.2% during the same period while same-store revenue declined 1.7%. However, in total, which includes the acquisition of Warner Trucks we completed in the third quarter of 2019, total units retailed increased 52.4%, and revenue increased 47.9% to $491.4 million.

Penske Transportation Solutions – We have a 28.9% ownership interest in Penske Transportation Solutions ("PTS"). As an integral part of the North American supply chain, PTS has been generally classified as essential by governmental authorities. This has allowed PTS to remain operating in much of its business, providing crucial supply chain and transportation services to its customers. While its full-service leasing and contract maintenance businesses remained consistent, commercial rental utilization has slowed. PTS experienced mixed results in the logistics services business as increased volume in the grocery sector was offset by plant closings in automotive and manufacturing. In response, PTS implemented, among other items, approximately 7,000 layoffs, a 30% reduction in executive salaries, and reduced associate work schedules.

United Kingdom – All dealerships closed on March 24, 2020 in accordance with government orders; though we provided service and parts operations on an emergency basis. As a result, we were unable to deliver a significant number of sold vehicles. In March 2020, our automotive dealership operations across the U.K. experienced a 38.0% decline in unit volume and a 29.5% decline in service and parts revenues on a same store basis compared to the prior year. Over 90% of the employees in the U.K. were placed on furlough beginning March 24, 2020. We expect to open substantially all service and parts operations on May 11, 2020, but we are unable to predict when governmental guidance will allow sales showrooms to re-open.

Australia – In most jurisdictions, non-essential business operations were closed by government order in March 2020; however, Penske Australia was deemed essential, and therefore, sales, parts, service, and defense functions remained operational.

Liquidity – As of March 31, 2020, we had $430 million of cash, access to an additional $450 million of availability through our revolving credit facilities, and access to $450 million in potentially financeable real estate. As of April 30, 2020, we had $221 million of cash and access to an additional $700 million of availability through our revolving credit facilities. On August 15, 2020, our $300 million of 3.75% senior subordinated notes are due. We currently expect to pay those notes with the availability from our U.S. Credit Agreement.

Risks and Uncertainties – The full impact that COVID-19 will have on our business cannot be predicted at this time due to numerous uncertainties, including the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions and business closures, the effectiveness of actions taken to contain the disease, the effect of government assistance programs, and other unintended consequences. This impact could include changes in customer demand; our relationship with, and the financial and operational capacities of, vehicle manufacturers, captive finance companies and other suppliers; workforce availability; risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms); the adequacy of our cash flow and earnings and other conditions which may affect our liquidity; our ability to

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pay our quarterly dividend at prior levels; and disruptions to our technology network and other critical systems, including our dealer management systems and software or other facilities or equipment.

We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the global economy and may materially affect our businesses as outlined above, or in other manners, all of which would adversely impact our business and results of operations.

Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $20.6 billion in total retail automotive dealership revenue we generated in 2019. As of March 31, 2020, we operated 317 retail automotive franchises, of which 145 franchises are located in the U.S. and 172 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the three months ended March 31, 2020, we retailed and wholesaled more than 133,000 vehicles. We are diversified geographically, with 56% of our total retail automotive dealership revenues in the three months ended March 31, 2020 generated in the U.S. and Puerto Rico and 44% generated outside the U.S. We offer over 35 vehicle brands, with 70% of our retail automotive dealership revenue in the three months ended March 31, 2020 generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz and Porsche. Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry.

We also operate sixteen used vehicle supercenters in the U.S. and the U.K. which retail and wholesale used vehicles under a one price, “no-haggle” methodology. Our CarSense operations in the U.S. consist of six retail locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas. Our CarShop operations in the U.K. consist of ten retail locations and a vehicle preparation center.

During the three months ended March 31, 2020, we disposed of four retail automotive franchises in the U.K. and made no acquisitions.

Retail Commercial Truck Dealership. We operate a heavy and medium-duty truck dealership group known as Premier Truck Group (“PTG”) offering primarily Freightliner and Western Star branded trucks, with locations in Texas, Oklahoma, Tennessee, Georgia, Utah, Idaho, and Canada. As of March 31, 2020, PTG operated twenty-five locations. PTG also offers a full range of used trucks available for sale as well as service and parts departments, providing a full range of maintenance and repair services.

Penske Australia. We are the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand and portions of the Pacific. In most of these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing MTU, Detroit Diesel, Allison Transmission, MTU Onsite Energy, and Rolls Royce Power Systems. This business, known as Penske Australia offers products across the on- and off-highway markets, including in the construction, mining, marine, and defense sectors, and supports full parts and aftersales service through a network of branches, field locations and dealers across the region.

Penske Transportation Solutions. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments. Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental and contract maintenance, along with logistic services such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services and dry van truckload carrier services.

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Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of March 31, 2020 and December 31, 2019 and for the three month periods ended March 31, 2020 and 2019 is unaudited, but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. 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 our audited financial statements for the year ended December 31, 2019, which are included as part of our Annual Report on Form 10-K.

Estimates

The preparation of financial statements in conformity with U.S. GAAP 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.

Fair Value of Financial Instruments

Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Our financial instruments consist of cash and cash equivalents, debt, floor plan notes payable, and forward exchange contracts used to hedge future cash flows. Other than our fixed rate debt, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting.

Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on current market interest rates

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for similar types of financial instruments (Level 2). A summary of the carrying values and fair values of our senior subordinated notes and our fixed rate mortgage facilities are as follows:

March 31, 2020

December 31, 2019

 

  

Carrying Value

  

Fair Value

  

Carrying Value

  

Fair Value

 

3.75% senior subordinated notes due 2020

$

299.5

$

291.3

$

299.2

$

302.6

5.75% senior subordinated notes due 2022

547.9

514.4

547.6

556.7

5.375% senior subordinated notes due 2024

298.2

249.9

298.0

306.7

5.50% senior subordinated notes due 2026

495.9

437.1

495.7

521.7

Mortgage facilities

 

416.7

 

446.1

 

423.2

 

430.9

Assets Held for Sale and Discontinued Operations

We had no entities newly classified as held for sale during the three months ended March 31, 2020 or 2019 that met the criteria to be classified as discontinued operations. The financial information for entities that were classified as discontinued operations prior to adoption of Accounting Standards Update No. 2014-08 are included in “Income from discontinued operations” in the accompanying consolidated condensed statements of income and “Liabilities held for sale” in the accompanying consolidated condensed balance sheets for all periods presented.

Disposals

During the three months ended March 31, 2020, we disposed of four retail automotive franchises. The results of operations for these businesses are included within continuing operations for the three months ended March 31, 2020 and 2019, as these franchises did not meet the criteria to be classified as held for sale and treated as discontinued operations.

Income Taxes

Tax regulations may require items to be included in our tax returns at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax returns in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax returns that have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes various income and payroll tax provisions, modifications to federal net operating loss rules, business interest deduction limitations, and bonus depreciation eligibility for qualified improvement property. The Company is currently evaluating the impact of these provisions.

Recent Accounting Pronouncements

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” This ASU replaces the current incurred loss impairment methodology of recognizing credit losses when a loss is probable, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to assess credit loss estimates. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, with early adoption

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permitted. We adopted this ASU on the effective date of January 1, 2020. The adoption of this accounting standard update has not had a material impact on our consolidated financial position, results of operations, and cash flows.

Fair Value Measurement Disclosure

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, modifies, and adds certain disclosure requirements on fair value measurements. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. Entities were permitted to early adopt any eliminated or amended disclosures and delay adoption of the additional disclosure requirements until the effective date. We adopted this ASU on the effective date of January 1, 2020. The adoption of this accounting standard update has not had a material impact on our on our consolidated financial statements and disclosures.

Accounting for Cloud Computing Arrangements

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under this new guidance, certain implementation costs incurred in a hosted cloud computing service arrangement will be capitalized in accordance with ASC 350-40. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied retrospectively or prospectively to all implementation costs incurred after adoption. We adopted this ASU on the effective date of January 1, 2020. The adoption of this accounting standard update has not had a material impact on our consolidated financial position, results of operations, and cash flows.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. The new standard was effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. We are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates, but do not expect a significant impact on our consolidated financial position, results of operations, and cash flows.

Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities

In March 2020, the Securities and Exchange Commission (“SEC”) adopted final rules that amend the financial disclosure requirements for subsidiary issuers and guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The amended rules narrow the circumstances that require separate financial statements of subsidiary issuers and guarantors and streamline the alternative disclosures required in lieu of those statements. The amended rules allow the registrants, among other things, to disclose summarized financial information of the issuer and guarantors on a combined basis and to present only the most recently completed fiscal year and subsequent year-to-date interim period. The rule is effective January 4, 2021, but earlier compliance is permitted. The Company early adopted the rule in the first quarter of 2020.

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2. Revenues

Automotive and commercial truck dealerships represent the majority of our revenues. New and used vehicle revenues typically include sales to retail customers, to fleet customers, and to leasing companies providing consumer leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties, and the sales of certain other products. Service and parts revenues include fees paid by customers for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories, as well as warranty repairs that are reimbursed directly by various OEMs. Revenues are recognized upon satisfaction of our performance obligations under contracts with our customers and are measured at the amount of consideration we expect to be entitled to in exchange for transferring goods or providing services. A discussion of revenue recognition by reportable segment is included below.

Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition

Dealership Vehicle Sales. We record revenue for vehicle sales at a point in time when vehicles are delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. The amount of consideration we receive for vehicle sales is stated within the executed contract with our customer and is reduced by any noncash consideration representing the fair value of trade-in vehicles, if applicable. Payment is typically due and collected within 30 days subsequent to transfer of control of the vehicle.

Dealership Parts and Service Sales. We record revenue for vehicle service and collision work over time as work is completed, and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment. The amount of consideration we receive for parts and service sales, including collision repair work, is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to the completion of services for the customer. We allow for customer returns of parts sales up to 30 days after the sale; however, parts returns are not material.

Dealership Finance and Insurance Sales. Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including guaranteed vehicle protection insurance, vehicle theft protection and extended service contracts. These commissions are recorded as revenue at a point in time when the customer enters into the contract. Payment is typically due and collected within 30 days subsequent to the execution of the contract with the customer. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts and other insurance products, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we received may be charged back based on the terms of the contracts. The revenue we record relating to these transactions is net of an estimate of the amount of chargebacks we will be required to pay. Our estimate is based upon our historical experience with similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products. Aggregate reserves relating to chargeback activity were $26.6 million as of March 31, 2020 and December 31, 2019.

Commercial Vehicle Distribution and Other Revenue Recognition

Penske Australia. We record revenue from the distribution of vehicles and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed, and when parts are delivered to

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our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.

The amount of consideration we receive for vehicle and product sales is stated within the executed contract with our customer. The amount of consideration we receive for parts and service sales is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.

We record revenue from the distribution of engines and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed, and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.

For our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones, which is considered an output method that requires judgment to determine our progress towards contract completion and the corresponding amount of revenue to recognize. Any revisions to estimates related to revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

The amount of consideration we receive for engine, product, and power generation sales is stated within the executed contract with our customer. The amount of consideration we receive for service sales is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.

Service and parts revenue represented $58.4 million and $61.5 million for the three months ended March 31, 2020 and March 31, 2019, respectively, for Penske Australia.

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Retail Automotive Dealership

The following tables disaggregate our retail automotive reportable segment revenue by product type and geographic location for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

Retail Automotive Dealership Revenue

    

2020

    

2019

  

New vehicle

$

1,864.5

$

2,231.2

Used vehicle

1,619.6

1,852.0

Finance and insurance, net

144.4

160.0

Service and parts

513.3

559.8

Fleet and wholesale

274.8

288.2

Total retail automotive dealership revenue

$

4,416.6

$

5,091.2

Three Months Ended March 31,

Retail Automotive Dealership Revenue

    

2020

    

2019

U.S.

$

2,453.9

$

2,722.8

U.K.

1,665.4

2,039.9

Germany and Italy

297.3

328.5

Total retail automotive dealership revenue

$

4,416.6

$

5,091.2

Retail Commercial Truck Dealership

The following table disaggregates our retail commercial truck reportable segment revenue by product type for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

Retail Commercial Truck Dealership Revenue

    

2020

    

2019

  

New truck

$

318.2

$

207.4

Used truck

34.6

24.1

Finance and insurance, net

3.2

3.0

Service and parts

124.3

91.5

Other

11.1

6.3

Total retail commercial truck dealership revenue

$

491.4

$

332.3

Commercial Vehicle Distribution and Other

The following table disaggregates our other reportable segment revenue by business for the three months ended March 31, 2020 and 2019:

Three Months Ended March 31,

Commercial Vehicle Distribution and Other

    

2020

    

2019

Commercial Vehicle Distribution

$

101.1

$

140.9

Other

Total commercial vehicle distribution and other revenue

$

101.1

$

140.9

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Contract Balances

The following table summarizes our accounts receivable and unearned revenues as of March 31, 2020 and December 31, 2019:

March 31,

    

December 31,

  

2020

    

2019

  

Accounts receivable

Contracts in transit

$

95.0

$

291.1

Vehicle receivables

 

191.8

 

249.8

Manufacturer receivables

161.2

244.6

Trade receivables