PENSKE AUTOMOTIVE GROUP, INC. - Quarter Report: 2009 September (Form 10-Q)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | 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, | 48302-0954 | |
Bloomfield Hills, Michigan | (Zip Code) | |
(Address of principal executive offices) |
Registrants telephone number, including area code:
(248) 648-2500
(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):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | 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 October 22, 2009, there were 91,528,778 shares of voting common stock
outstanding.
TABLE OF CONTENTS
Page | ||||||||
PART I FINANCIAL INFORMATION |
||||||||
Item 1. Financial Statements |
||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
7 | ||||||||
26 | ||||||||
46 | ||||||||
46 | ||||||||
47 | ||||||||
47 | ||||||||
Exhibit 4.1 | ||||||||
Exhibit 12 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32 |
2
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In thousands, except | ||||||||
per share amounts) | ||||||||
ASSETS |
||||||||
Cash and cash equivalents |
$ | 29,540 | $ | 20,108 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,861 and $2,075 |
322,539 | 294,048 | ||||||
Inventories |
1,174,393 | 1,589,105 | ||||||
Other current assets |
102,805 | 88,251 | ||||||
Assets held for sale |
6,780 | 15,534 | ||||||
Total current assets |
1,636,057 | 2,007,046 | ||||||
Property and equipment, net |
711,766 | 662,121 | ||||||
Goodwill |
808,491 | 777,677 | ||||||
Franchise value |
201,411 | 196,358 | ||||||
Equity method investments |
297,249 | 296,487 | ||||||
Other long-term assets |
17,926 | 22,460 | ||||||
Total assets |
$ | 3,672,900 | $ | 3,962,149 | ||||
LIABILITIES AND EQUITY |
||||||||
Floor plan notes payable |
$ | 708,014 | $ | 964,783 | ||||
Floor plan notes payable non-trade |
380,453 | 506,688 | ||||||
Accounts payable |
183,143 | 178,282 | ||||||
Accrued expenses |
251,076 | 195,994 | ||||||
Current portion of long-term debt |
15,122 | 11,305 | ||||||
Liabilities held for sale |
7,718 | 23,060 | ||||||
Total current liabilities |
1,545,526 | 1,880,112 | ||||||
Long-term debt |
955,469 | 1,052,060 | ||||||
Other long-term liabilities |
252,936 | 221,556 | ||||||
Total liabilities |
2,753,931 | 3,153,728 | ||||||
Commitments and contingent liabilities |
||||||||
Equity |
||||||||
Penske Automotive Group stockholders equity: |
||||||||
Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding |
| | ||||||
Common Stock, $0.0001 par value, 240,000 shares authorized; 91,529 shares issued and
outstanding at September 30, 2009; 91,431 shares issued and outstanding at December 31, 2008 |
9 | 9 | ||||||
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding |
| | ||||||
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding |
| | ||||||
Additional paid-in-capital |
735,372 | 731,037 | ||||||
Retained earnings |
177,529 | 119,745 | ||||||
Accumulated other comprehensive income (loss) |
2,327 | (45,990 | ) | |||||
Total Penske Automotive Group stockholders equity |
915,237 | 804,801 | ||||||
Non-controlling interest |
3,732 | 3,620 | ||||||
Total equity |
918,969 | 808,421 | ||||||
Total liabilities and equity |
$ | 3,672,900 | $ | 3,962,149 | ||||
See Notes to Consolidated Condensed Financial Statements
3
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||
Revenue: |
||||||||||||||||
New vehicle |
$ | 1,339,016 | $ | 1,548,507 | $ | 3,401,478 | $ | 4,899,269 | ||||||||
Used vehicle |
672,764 | 711,750 | 1,944,098 | 2,309,456 | ||||||||||||
Finance and insurance, net |
60,761 | 67,594 | 163,664 | 216,573 | ||||||||||||
Service and parts |
336,313 | 359,186 | 995,456 | 1,076,901 | ||||||||||||
Distribution |
36,451 | 85,567 | 169,716 | 247,758 | ||||||||||||
Fleet and wholesale vehicle |
142,617 | 197,811 | 388,266 | 720,190 | ||||||||||||
Total revenues |
2,587,922 | 2,970,415 | 7,062,678 | 9,470,147 | ||||||||||||
Cost of sales: |
||||||||||||||||
New vehicle |
1,226,127 | 1,421,906 | 3,131,177 | 4,491,775 | ||||||||||||
Used vehicle |
613,384 | 659,814 | 1,769,500 | 2,131,717 | ||||||||||||
Service and parts |
150,511 | 159,526 | 449,903 | 474,857 | ||||||||||||
Distribution |
36,353 | 72,362 | 150,369 | 208,584 | ||||||||||||
Fleet and wholesale |
138,592 | 199,489 | 376,725 | 722,332 | ||||||||||||
Total cost of sales |
2,164,967 | 2,513,097 | 5,877,674 | 8,029,265 | ||||||||||||
Gross profit |
422,955 | 457,318 | 1,185,004 | 1,440,882 | ||||||||||||
Selling, general and administrative expenses |
347,968 | 380,176 | 988,522 | 1,166,368 | ||||||||||||
Depreciation and amortization |
14,011 | 13,966 | 40,654 | 40,623 | ||||||||||||
Operating income |
60,976 | 63,176 | 155,828 | 233,891 | ||||||||||||
Floor plan interest expense |
(9,080 | ) | (15,312 | ) | (27,571 | ) | (48,512 | ) | ||||||||
Other interest expense |
(13,468 | ) | (16,159 | ) | (41,610 | ) | (40,451 | ) | ||||||||
Debt discount amortization |
(3,135 | ) | (3,496 | ) | (9,908 | ) | (10,488 | ) | ||||||||
Equity in earnings of affiliates |
7,536 | 8,995 | 11,716 | 13,322 | ||||||||||||
Gain on debt repurchase |
| | 10,429 | | ||||||||||||
Income from continuing operations before income taxes |
42,829 | 37,204 | 98,884 | 147,762 | ||||||||||||
Income taxes |
(15,033 | ) | (13,150 | ) | (35,059 | ) | (52,055 | ) | ||||||||
Income from continuing operations |
27,796 | 24,054 | 63,825 | 95,707 | ||||||||||||
Loss from discontinued operations, net of tax |
(134 | ) | (1,682 | ) | (5,794 | ) | (2,747 | ) | ||||||||
Net income |
27,662 | 22,372 | 58,031 | 92,960 | ||||||||||||
Less: Income attributable to non-controlling interests |
239 | 189 | 247 | 1,052 | ||||||||||||
Net income attributable to Penske Automotive
Group common stockholders |
$ | 27,423 | $ | 22,183 | $ | 57,784 | $ | 91,908 | ||||||||
Basic earnings per share attributable to Penske Automotive Group
common stockholders: |
||||||||||||||||
Continuing operations |
$ | 0.30 | $ | 0.25 | $ | 0.69 | $ | 1.00 | ||||||||
Discontinued operations |
| (0.02 | ) | (0.06 | ) | (0.03 | ) | |||||||||
Net income |
$ | 0.30 | $ | 0.24 | $ | 0.63 | $ | 0.97 | ||||||||
Shares used in determining basic earnings per share |
91,528 | 93,737 | 91,504 | 94,743 | ||||||||||||
Diluted earnings per share attributable to Penske Automotive Group
common stockholders: |
||||||||||||||||
Continuing operations |
$ | 0.30 | $ | 0.25 | $ | 0.69 | $ | 1.00 | ||||||||
Discontinued operations |
| (0.02 | ) | (0.06 | ) | (0.03 | ) | |||||||||
Net income |
$ | 0.30 | $ | 0.24 | $ | 0.63 | $ | 0.97 | ||||||||
Shares used in determining diluted earnings per share |
91,625 | 93,801 | 91,563 | 94,841 | ||||||||||||
Amounts attributable to Penske Automotive Group common stockholders: |
||||||||||||||||
Income from continuing operations |
$ | 27,796 | $ | 24,054 | $ | 63,825 | $ | 95,707 | ||||||||
Less: Income attributable to non-controlling interests |
239 | 189 | 247 | 1,052 | ||||||||||||
Income from continuing operations, net of tax |
27,557 | 23,865 | 63,578 | 94,655 | ||||||||||||
Loss from discontinued operations, net of tax |
(134 | ) | (1,682 | ) | (5,794 | ) | (2,747 | ) | ||||||||
Net income |
$ | 27,423 | $ | 22,183 | $ | 57,784 | $ | 91,908 | ||||||||
Cash dividends per share |
$ | | $ | 0.09 | $ | | $ | 0.27 |
See Notes to Consolidated Condensed Financial Statements
4
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
(Unaudited) | ||||||||
(In thousands) | ||||||||
Operating Activities: |
||||||||
Net income |
$ | 58,031 | $ | 92,960 | ||||
Adjustments to reconcile net income to net cash from continuing operating activities: |
||||||||
Depreciation and amortization |
40,654 | 40,623 | ||||||
Debt discount amortization |
9,908 | 10,488 | ||||||
Undistributed earnings of equity method investments |
(11,716 | ) | (13,322 | ) | ||||
Loss from discontinued operations, net of tax |
5,794 | 2,747 | ||||||
Deferred income taxes |
33,920 | 10,415 | ||||||
Gain on debt repurchase |
(10,733 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(27,617 | ) | 71,207 | |||||
Inventories |
432,133 | 37,014 | ||||||
Floor plan notes payable |
(256,809 | ) | 100,171 | |||||
Accounts payable and accrued expenses |
56,266 | (26,707 | ) | |||||
Other |
(13,061 | ) | 40,119 | |||||
Net cash from continuing operating activities |
316,770 | 365,715 | ||||||
Investing Activities: |
||||||||
Purchase of equipment and improvements |
(71,077 | ) | (164,285 | ) | ||||
Proceeds from sale-leaseback transactions |
2,338 | 19,740 | ||||||
Dealership acquisitions net, including repayment of sellers floor plan notes payable of $5,784 and $30,711, respectively |
(11,476 | ) | (142,054 | ) | ||||
Purchase of Penske Truck Leasing Co., L.P. partnership interest |
| (219,000 | ) | |||||
Other |
11,729 | (1,500 | ) | |||||
Net cash from continuing investing activities |
(68,486 | ) | (507,099 | ) | ||||
Financing Activities: |
||||||||
Proceeds from borrowings under U.S. credit agreement revolving credit line |
391,300 | 493,400 | ||||||
Repayments under U.S. credit agreement revolving credit line |
(391,300 | ) | (493,400 | ) | ||||
Proceeds from U.S. credit agreement term loan |
| 219,000 | ||||||
Repayments under U.S. credit agreement term loan |
(50,000 | ) | | |||||
Repurchase 3.5% senior subordinated convertible notes |
(51,424 | ) | | |||||
Proceeds from mortgage facility |
| 32,875 | ||||||
Net borrowings (repayments) of other long-term debt |
1,113 | (13,909 | ) | |||||
Net repayments of floor plan notes payable non-trade |
(126,235 | ) | (35,671 | ) | ||||
Payment of deferred financing costs |
| (661 | ) | |||||
Proceeds from exercises of options, including excess tax benefit |
76 | 820 | ||||||
Repurchases of common stock |
| (50,061 | ) | |||||
Dividends |
| (25,633 | ) | |||||
Net cash from continuing financing activities |
(226,470 | ) | 126,760 | |||||
Discontinued operations: |
||||||||
Net cash from discontinued operating activities |
(7,588 | ) | (6,243 | ) | ||||
Net cash from discontinued investing activities |
2,389 | 63,709 | ||||||
Net cash from discontinued financing activities |
(7,183 | ) | (26,409 | ) | ||||
Net cash from discontinued operations |
(12,382 | ) | 31,057 | |||||
Net change in cash and cash equivalents |
9,432 | 16,433 | ||||||
Cash and cash equivalents, beginning of period |
20,108 | 14,797 | ||||||
Cash and cash equivalents, end of period |
$ | 29,540 | $ | 31,230 | ||||
Supplemental disclosures of cash flow information: |
||||||||
Cash paid for: |
||||||||
Interest |
$ | 62,017 | $ | 85,085 | ||||
Income taxes |
10,228 | 4,574 | ||||||
Seller financed debt |
| 4,728 |
See Notes to Consolidated Condensed Financial Statements
5
Table of Contents
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) Income | 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 |
93,457 | | 4,259 | | | 4,259 | | 4,259 | ||||||||||||||||||||||||
Exercise of stock options, including tax
benefit of $12 |
4,540 | | 76 | | | 76 | | 76 | ||||||||||||||||||||||||
Distributions to non-controlling interests |
| | | | | | (135 | ) | (135 | ) | ||||||||||||||||||||||
Foreign currency translation |
| | | | 45,398 | 45,398 | | 45,398 | ||||||||||||||||||||||||
Other |
| | | | 2,919 | 2,919 | | 2,919 | ||||||||||||||||||||||||
Net income |
| | | 57,784 | | 57,784 | 247 | 58,031 | ||||||||||||||||||||||||
Balance, September 30, 2009 |
91,528,778 | $ | 9 | $ | 735,372 | $ | 177,529 | $ | 2,327 | $ | 915,237 | $ | 3,732 | $ | 918,969 | |||||||||||||||||
See Notes to Consolidated Condensed Financial Statements
6
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
(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 SEC rules and regulations. The information presented as
of September 30, 2009 and December 31, 2008 and for the three and nine month periods
ended September 30, 2009 and 2008 is unaudited, but includes all adjustments which
management of the Company believes to be necessary for the fair presentation of results
for the periods presented. The Company evaluated subsequent events through November 3,
2009, the date the consolidated condensed financial statements were filed with the SEC.
The consolidated condensed financial statements for prior periods have been revised for
entities which have been treated as discontinued operations through September 30, 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 nine months ended September 30, 2009 include a $10,429 pre-tax gain
relating to the repurchase of $68,740 aggregate principal amount of the Companys 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 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.
On September 30, 2009, the Company announced that it terminated its discussions
with General Motors Company to acquire the Saturn brand.
Discontinued Operations
The Company accounts for dispositions as discontinued operations when it is evident
that the operations and cash flows of the business being disposed of will be eliminated
from on-going operations and that the Company will not have any significant continuing
involvement in its operations.
In evaluating whether the cash flows of a dealership in its retail segment will be
eliminated from ongoing operations, the Company considers whether it is likely that
customers will migrate to similar franchises that it owns in the same geographic market.
The 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 it believes that the cash flows previously generated by the
disposed franchise will be replaced by expanded operations of the remaining franchises.
The net assets of dealerships accounted for as discontinued operations as of September
30, 2009 were immaterial. Combined income statement information relating to dealerships
accounted for as discontinued operations follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
$ | 12,470 | $ | 44,141 | $ | 46,438 | $ | 266,827 | ||||||||
Pre-tax loss |
(412 | ) | (1,905 | ) | (5,958 | ) | (6,121 | ) | ||||||||
Gain (loss) on disposal |
17 | (560 | ) | (3,131 | ) | (794 | ) |
7
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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.
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable, debt, floor plan notes payable, and interest rate swaps used to hedge
future cash flows. Other than our subordinated notes, the carrying amount of all
significant financial instruments approximates fair value due either to length of
maturity, the existence of variable interest rates that approximate prevailing market
rates, or as a result of mark to market accounting. A summary of the fair value of the
subordinated notes as of September 30, 2009, based on quoted, level one market data,
follows:
Carrying Value | Fair Value | |||||||
7.75% senior subordinated notes due 2016 |
$ | 375,000 | $ | 339,375 | ||||
3.5% senior subordinated convertible notes due 2026 |
286,208 | 298,604 |
Accounting Changes
Effective January 1, 2009, the Company adopted a general accounting principle
relating to debt with cash conversion options which required the Company 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 accounting principle retrospectively to all periods
presented herein in accordance with general accounting principles governing accounting
changes. 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.
Effective January 1, 2009, the Company adopted a general accounting principle
relating to earnings per share which required 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 accounting principle
retrospectively to all periods presented herein in accordance with accounting principles
governing accounting changes.
The following tables summarize the effect of the accounting changes described above
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 | |||||||||||||||||||
Balance Sheet as of
September 30, 2009 and
December 31, 2008: |
||||||||||||||||||||||||
Other current assets |
$ | 103,172 | $ | (367 | ) | $ | 102,805 | $ | 88,701 | $ | (450 | ) | $ | 88,251 | ||||||||||
Other long-term assets |
18,110 | (184 | ) | 17,926 | 23,022 | (562 | ) | 22,460 | ||||||||||||||||
Long-term debt |
975,521 | (20,052 | ) | 955,469 | 1,087,932 | (35,872 | ) | 1,052,060 | ||||||||||||||||
Other long-term liabilities |
245,357 | 7,579 | 252,936 | 207,771 | 13,785 | 221,556 | ||||||||||||||||||
Additional paid-in-capital |
692,279 | 43,093 | 735,372 | 687,944 | 43,093 | 731,037 | ||||||||||||||||||
Retained earnings |
208,700 | (31,171 | ) | 177,529 | 141,763 | (22,018 | ) | 119,745 |
8
Table of Contents
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 Income for
the three months ended
September 30: |
||||||||||||||||||||||||
Other interest expense |
$ | 13,560 | $ | (92 | ) | $ | 13,468 | $ | 16,271 | $ | (112 | ) | $ | 16,159 | ||||||||||
Debt discount amortization |
| 3,135 | 3,135 | | 3,496 | 3,496 | ||||||||||||||||||
Income tax expense |
16,264 | (1,231 | ) | 15,033 | 14,500 | (1,350 | ) | 13,150 | ||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders |
29,369 | (1,812 | ) | 27,557 | 25,899 | (2,034 | ) | 23,865 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders |
29,235 | (1,812 | ) | 27,423 | 24,217 | (2,034 | ) | 22,183 | ||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per basic common share |
0.32 | (0.02 | ) | 0.30 | 0.28 | (0.03 | ) | 0.25 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders
per basic common share |
0.32 | (0.02 | ) | 0.30 | 0.26 | (0.02 | ) | 0.24 | ||||||||||||||||
Shares used in
determining basic
earnings per share |
90,991 | 537 | 91,528 | 92,995 | 742 | 93,737 | ||||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per diluted common share |
0.32 | (0.02 | ) | 0.30 | 0.28 | (0.03 | ) | 0.25 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders
per diluted common share |
0.32 | (0.02 | ) | 0.30 | 0.26 | (0.02 | ) | 0.24 | ||||||||||||||||
Shares used in
determining diluted
earnings per share |
91,284 | 341 | 91,625 | 93,134 | 667 | 93,801 |
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 nine months ended
September 30: |
||||||||||||||||||||||||
Other interest expense |
$ | 41,906 | $ | (296 | ) | $ | 41,610 | $ | 40,787 | $ | (336 | ) | $ | 40,451 | ||||||||||
Debt discount amortization |
| 9,908 | 9,908 | | 10,488 | 10,488 | ||||||||||||||||||
Income tax expense |
38,927 | (3,868 | ) | 35,059 | 56,105 | (4,050 | ) | 52,055 | ||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders |
69,322 | (5,744 | ) | 63,578 | 100,757 | (6,102 | ) | 94,655 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders |
63,528 | (5,744 | ) | 57,784 | 98,010 | (6,102 | ) | 91,908 | ||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per basic common share |
0.76 | (0.07 | ) | 0.69 | 1.07 | (0.07 | ) | 1.00 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders
per basic common share |
0.70 | (0.07 | ) | 0.63 | 1.04 | (0.07 | ) | 0.97 | ||||||||||||||||
Shares used in
determining basic
earnings per share |
90,856 | 648 | 91,504 | 93,943 | 800 | 94,743 |
9
Table of Contents
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 Income for
the nine months ended
September 30 (continued): |
||||||||||||||||||||||||
Income from continuing
operations attributable
to Penske Automotive
Group common stockholders
per diluted common share |
0.76 | (0.07 | ) | 0.69 | 1.07 | (0.07 | ) | 1.00 | ||||||||||||||||
Net income attributable
to Penske Automotive
Group common stockholders
per diluted common share |
0.70 | (0.07 | ) | 0.63 | 1.04 | (0.07 | ) | 0.97 | ||||||||||||||||
Shares used in
determining diluted
earnings per share |
91,033 | 530 | 91,563 | 94,215 | 626 | 94,841 | ||||||||||||||||||
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 nine months ended
September 30: |
||||||||||||||||||||||||
Net income |
63,775 | (5,744 | ) | 58,031 | 99,062 | (6,102 | ) | 92,960 | ||||||||||||||||
Debt discount amortization |
| 9,908 | 9,908 | | 10,488 | 10,488 | ||||||||||||||||||
Deferred income taxes |
37,788 | (3,868 | ) | 33,920 | 14,465 | (4,050 | ) | 10,415 | ||||||||||||||||
Other |
(12,765 | ) | (296 | ) | (13,061 | ) | 40,455 | (336 | ) | 40,119 |
New Accounting Pronouncement
A new accounting pronouncement amending the consolidation guidance relating to
variable interest entities (VIE) will be effective for the Company on January 1, 2010.
The new guidance replaces the current quantitative model for determining the primary
beneficiary of a variable interest entity with a qualitative approach that considers
which entity has the power to direct activities that most significantly impact the
variable interest entitys performance and whether the entity has an obligation to absorb
losses or the right to receive benefits that could potentially be significant to the
variable interest entity. The new guidance also requires: an additional reconsideration
event for determining whether an entity is a VIE when holders of an at risk equity
investment lose voting or similar rights to direct the activities that most significantly
impact the entities economic performance; ongoing assessments of whether an enterprise is
the primary beneficiary of a VIE; separate presentation of the assets and liabilities of
the VIE on the balance sheet; and additional disclosures about an entitys involvement
with a VIE. The adoption of the accounting pronouncement will not impact the Companys
Consolidated Financial Statements.
2. Inventories
Inventories consisted of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
New vehicles |
$ | 781,356 | $ | 1,247,897 | ||||
Used vehicles |
313,217 | 259,274 | ||||||
Parts, accessories and other |
79,820 | 81,934 | ||||||
Total inventories |
$ | 1,174,393 | $ | 1,589,105 | ||||
The Company receives non-refundable credits from certain vehicle manufacturers
that reduce cost of sales when the vehicles are sold. Such credits amounted to $22,811
and $20,549 during the nine months ended September 30, 2009 and 2008, respectively.
10
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3. Business Combinations
The Company acquired five and eight automotive franchises during the nine months
ended September 30, 2009 and 2008, respectively. The Companys financial statements
include the results of operations of the acquired dealerships from the date of
acquisition. The fair value of the assets acquired and liabilities assumed have been
recorded in the Companys Consolidated Condensed Financial Statements, and may be subject
to adjustment pending completion of final valuation. A summary of the aggregate
consideration paid and the aggregate amounts of the assets acquired and liabilities
assumed for the nine months ended September 30, 2009 and 2008 follows:
September 30, | ||||||||
2009 | 2008 | |||||||
Accounts receivable |
$ | | $ | 4,845 | ||||
Inventory |
5,921 | 68,561 | ||||||
Other current assets |
129 | 1,043 | ||||||
Property and equipment |
3,250 | 3,918 | ||||||
Goodwill |
1,746 | 56,852 | ||||||
Franchise value |
749 | 20,164 | ||||||
Current liabilities |
(319 | ) | (13,329 | ) | ||||
Cash used in dealership acquisitions |
$ | 11,476 | $ | 142,054 | ||||
4. Intangible Assets
Following is a summary of the changes in the carrying amount of goodwill and
franchise value during the nine months ended September 30, 2009:
Franchise | ||||||||
Goodwill | Value | |||||||
Balance January 1, 2009 |
$ | 777,677 | $ | 196,358 | ||||
Additions |
1,746 | 749 | ||||||
Deletions |
| (1,032 | ) | |||||
Foreign currency translation |
29,068 | 5,336 | ||||||
Balance September 30, 2009 |
$ | 808,491 | $ | 201,411 | ||||
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 Company. Interest rates under the
floor plan arrangements are variable and increase or decrease based on changes in the
prime rate, defined LIBOR or defined 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.
11
Table of Contents
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 the number of weighted average shares of voting
common stock outstanding, including outstanding unvested share-based payment awards which
contain rights to non-forfeitable dividends. Diluted earnings per share is computed using
net income attributable to Penske Automotive Group common stockholders and the number of
weighted average shares of voting common stock outstanding, adjusted for the dilutive
effect of stock options. A reconciliation of the number of shares used in the calculation
of basic and diluted earnings per share for the three and nine months ended September 30,
2009 and 2008 follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Weighted average
number of common
shares outstanding |
91,528 | 93,737 | 91,504 | 94,743 | ||||||||||||
Effect of stock options |
97 | 64 | 59 | 98 | ||||||||||||
Weighted average
number of common
shares outstanding,
including effect of
dilutive securities |
91,625 | 93,801 | 91,563 | 94,841 | ||||||||||||
There were no anti-dilutive stock options outstanding during the three or nine
months ended September 30, 2009 and 2008 which were excluded from the calculation of
diluted earnings per share. 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 September 30, 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 anti-dilutive.
7. Long-Term Debt
Long-term debt consisted of the following:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
U.S. credit agreement term loan |
$ | 159,000 | $ | 209,000 | ||||
U.K. credit agreement revolving credit line |
65,514 | 59,831 | ||||||
U.K. credit agreement term loan |
22,558 | 25,752 | ||||||
U.K. credit agreement overdraft line of credit |
17,960 | 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 |
286,208 | 339,128 | ||||||
Mortgage facilities |
41,585 | 42,243 | ||||||
Other |
2,766 | 2,909 | ||||||
Total long-term debt |
970,591 | 1,063,365 | ||||||
Less: current portion |
(15,122 | ) | (11,305 | ) | ||||
Net long-term debt |
$ | 955,469 | $ | 1,052,060 | ||||
U.S. Credit Agreement
The Company is party to a $419,000 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 credit agreement was amended to increase the
margin on the interest rate on the revolving loans by 75 basis points from 1.75% to 2.50%
effective October 1, 2009 and the term of the credit agreement was extended by one year
through September 30, 2012. Prior to October 1, 2009, the revolving loans bore 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 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 September 30, 2009, the Company was
in compliance with all covenants under the U.S. Credit Agreement.
12
Table of Contents
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 September 30, 2009,
$159,000 of term loans and $1,250 of letters of credit were outstanding under this
facility. There were no revolving loans outstanding as of September 30, 2009.
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, 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 was
amended in the third quarter to increase the revolving borrowing capacity under the
agreement by £20,000; extend the maturity date on the revolving facility from August 31,
2011 to August 31, 2013; increase the minimum required ratio of consolidated earnings
before interest and taxes plus rental payments (EBITDAR) to consolidated interest and
rental payable (as defined); and increase the interest rate margin (as defined). The
amended U.K. Credit Agreement provides for (1) up to £100,000 in revolving loans through
August 31, 2013, which bears interest between a defined LIBOR plus 1.1% and defined LIBOR
plus 3.0%, (2) a term loan originally funded for £30,000 which bears interest between
6.39% and 8.29% and is payable ratably in quarterly intervals until fully repaid on
June 30, 2011, and (3) a demand seasonally adjusted overdraft line of credit for up to
£20,000 that bears interest at the Bank of England Base Rate plus 1.75%.
The amended 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 amended U.K. Credit Agreement, including: a
ratio of EBITDAR to interest plus rental payments (as defined), a measurement of maximum
capital expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most severe of
which is the termination of the agreement and acceleration of the amounts owed. As of
September 30, 2009, the U.K. subsidiaries were in compliance with all covenants under the
amended U.K. Credit Agreement.
The amended 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 amended U.K. Credit
Agreement. As of September 30, 2009, outstanding loans under the amended U.K. Credit
Agreement amounted to £66,357 ($106,032), including £14,117 ($22,558) under the term
loan.
7.75% Senior Subordinated Notes
In December 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 September 30, 2009, the Company was in compliance with all negative covenants and
there were no events of default.
13
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Senior Subordinated Convertible Notes
In January 2006, the Company issued $375,000 aggregate principal amount of 3.50%
senior subordinated convertible notes due 2026 (the Convertible Notes), of which
$306,260 are currently outstanding. 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
September 30, 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.
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, net of debt discount, of $62,831 for $51,425.
In connection with the transaction, the Company wrote off $5,909 of unamortized debt
discount and $672 of unamortized deferred financing costs, and incurred $305 of
transaction costs. No element of the consideration was allocated to the reacquisition of
the equity component because the consideration paid was less than the fair value of the
liability component prior to extinguishment. As a result, the Company recorded a $10,429
pre-tax gain in connection with the repurchase.
The liability and equity components related to the Convertible Notes consist of the
following:
September 30, | 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 |
20,052 | 35,872 | ||||||
Net carrying amount of the liability component |
$ | 286,208 | $ | 339,128 | ||||
The remaining unamortized debt discount will be amortized as additional interest
expense through the date the Company expects to be required to redeem the Convertible
Notes, approximately $13,204 of which will be recognized as an increase of interest
expense over the next twelve months. The annual effective interest rate on the liability
component is 8.25%.
14
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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
September 30, 2009, $41,585 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.
Prior to the third quarter of 2009, the swaps were designated as cash flow hedges of
future interest payments of LIBOR based U.S. floor plan borrowings and the effective
portion of the gain or loss on the derivative was reported as a component of other
comprehensive income and reclassified into earnings when the hedged transaction affected
earnings. During the quarter ended September 30, 2009, the Company experienced declines
in outstanding floor plan debt balances related to certain floor plan lenders due to
significant declines in vehicle inventory levels which caused hedged floor plan balances
to fall below the notional
value of the swap agreements. The Company elected to de-designate these cash flow
hedges on September 30, 2009, and recorded a net loss of $1,057 in floor plan interest
expense in the Condensed Consolidated Statement of Income.
The Company re-designated $290,000 of the swap agreements as cash flow hedges of
future interest payments of LIBOR based U.S. floor plan borrowings and the effective
portion of the gain or loss on the derivative will be reported as a component of other
comprehensive income and reclassified into earnings when the hedged transaction affects
earnings. Future settlements and changes in the fair value related to the undesignated
$10,000 of the swap agreements will be recorded as realized and unrealized gains/losses
within interest expense in the Condensed Consolidated Statement of Income.
As of September 30, 2009, the Company used Level 2 inputs to estimate the fair value
of the interest rate contracts designated as hedging instruments to be a liability of
$11,779, of which $9,368 and $2,411 are recorded in accrued expenses and other long-term
liabilities, respectively, in the Condensed Consolidated Balance Sheet. The Company used
Level 2 inputs to estimate the fair value of the interest rate contracts not designated
as hedging instruments as of September 30, 2009 to be a liability of $406, of which $323
and $83 are recorded in accrued expenses and other long-term liabilities, respectively,
in the Condensed Consolidated Balance Sheet.
During the nine months ended September 30, 2009, the Company recognized a net gain
of $1,929 related to the effective portion of the interest rate swaps designated as
hedging instruments in accumulated other comprehensive income, and reclassified $8,549 of
the existing derivative losses, including the $1,057 loss on de-designation, from
accumulated other comprehensive income into floor plan interest expense in the Condensed
Consolidated Statement of Income. The Company expects approximately $8,850 associated
with the swaps to be recognized as an increase of interest expense over the next twelve
months as the hedged interest payments become due. During the nine months ended September
30, 2009, the swaps increased the weighted average interest rate on the Companys floor
plan borrowings by approximately 0.6%.
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 September 30,
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
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 an acceleration of the payments due
under the lease.
15
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The Company has sold a number of dealerships to third parties and, as a condition to
certain of those sales, remains liable for the lease payments relating to the properties
on which those franchises operate in the event of non-payment by the buyer. In this
event, the Company could be required to fulfill that buyers rent and other obligations,
which could materially adversely affect its results of operations, financial condition or
cash flows.
The Company is potentially subject to additional purchase commitments pursuant to
its smart distribution agreement, smart franchise agreement and state franchise laws in
the event of franchise terminations, none of which have historically had a material
adverse effect on its results of operations, financial condition or cash flows. The
Company does not anticipate that the purchase commitments will have a material adverse
effect on its future results of operations, financial condition or cash flows, although
such outcome is possible.
10. Equity
Share Repurchase
During August 2008, the Company repurchased 3.6 million shares of its outstanding
common stock for $50,061 under the $150,000 outstanding securities repurchase program.
Comprehensive Income (Loss)
Other comprehensive income (loss) 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 (loss) is summarized as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Attributable to Penske Automotive Group: |
||||||||||||||||
Net income |
$ | 27,423 | $ | 22,183 | $ | 57,784 | $ | 91,908 | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Foreign currency translation |
(9,167 | ) | (62,953 | ) | 45,398 | (57,187 | ) | |||||||||
Other |
1,284 | (886 | ) | 2,919 | (1,807 | ) | ||||||||||
Total attributable to Penske Automotive Group |
19,540 | (41,656 | ) | 106,101 | 32,914 | |||||||||||
Attributable to the non-controlling interest: |
||||||||||||||||
Net income |
239 | 189 | 247 | 1,052 | ||||||||||||
Total comprehensive income (loss) |
$ | 19,779 | $ | (41,467 | ) | $ | 106,348 | $ | 33,966 | |||||||
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 general accounting principles for segment reporting, including:
(i) Retail, consisting of our automotive retail operations, (ii) Distribution, consisting
of our distribution of the smart fortwo vehicle, parts and accessories in the U.S. and
Puerto Rico, and (iii) PAG Investments, consisting of our investments in non-automotive
retail operations. The Retail reportable segment includes all automotive dealerships and
all departments relating to the operation of the dealerships. The individual dealership
operations included in the Retail segment have been grouped into five geographic
operating segments, which have been aggregated into one reportable segment as their
operations (A) have similar economic characteristics (all are automotive dealerships
having similar margins), (B) offer similar products and services (all sell new and used
vehicles, service, parts and third-party finance and insurance products), (C) have
similar target markets and customers (generally individuals) and (D) have similar
distribution and marketing practices (all distribute products and services through
dealership facilities that market to customers in similar fashions). In connection with
the addition of PAG Investments, we have reclassified historical amounts to conform to
our current segment presentation.
16
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 in the
table below in order to enhance the comparability of segment income from period to
period.
Three Months Ended September 30
PAG | Intersegment | |||||||||||||||||||
Retail | Distribution | Investments | Elimination | Total | ||||||||||||||||
Revenues |
||||||||||||||||||||
2009 |
$ | 2,551,468 | $ | 44,904 | $ | | $ | (8,450 | ) | $ | 2,587,922 | |||||||||
2008 |
2,884,848 | 101,125 | | (15,558 | ) | 2,970,415 | ||||||||||||||
Adjusted segment income |
||||||||||||||||||||
2009 |
42,194 | (5,896 | ) | 6,464 | 67 | 42,829 | ||||||||||||||
2008 |
20,960 | 7,736 | 8,511 | (3 | ) | 37,204 |
Nine Months Ended September 30
PAG | Intersegment | |||||||||||||||||||
Retail | Distribution | Investments | Elimination | Total | ||||||||||||||||
Revenues |
||||||||||||||||||||
2009 |
$ | 6,893,041 | $ | 192,413 | $ | | $ | (22,776 | ) | $ | 7,062,678 | |||||||||
2008 |
9,222,389 | 293,486 | | (45,728 | ) | 9,470,147 | ||||||||||||||
Adjusted segment income |
||||||||||||||||||||
2009 |
77,644 | 1,376 | 9,590 | (155 | ) | 88,455 | ||||||||||||||
2008 |
116,481 | 21,990 | 9,872 | (581 | ) | 147,762 |
The following table reconciles total adjusted segment income to consolidated income
from continuing operations before income taxes for the nine month periods ended September
30, 2009 and 2008. There were no reconciling items in the three month periods ended
September 30, 2009 and 2008.
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Adjusted segment income |
$ | 88,455 | $ | 147,762 | ||||
Gain on debt repurchase |
10,429 | | ||||||
Income from continuing operations before income taxes |
$ | 98,884 | $ | 147,762 | ||||
17
Table of Contents
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
September 30, 2009 and December 31, 2008 and for the three and nine month periods ended
September 30, 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
September 30, 2009
September 30, 2009
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 29,540 | $ | | $ | | $ | 27,403 | $ | 2,137 | ||||||||||
Accounts receivable, net |
322,539 | (221,187 | ) | 221,187 | 153,265 | 169,274 | ||||||||||||||
Inventories |
1,174,393 | | | 652,283 | 522,110 | |||||||||||||||
Other current assets |
102,805 | | 1,148 | 58,578 | 43,079 | |||||||||||||||
Assets held for sale |
6,780 | | | | 6,780 | |||||||||||||||
Total current assets |
1,636,057 | (221,187 | ) | 222,335 | 891,529 | 743,380 | ||||||||||||||
Property and equipment, net |
711,766 | | 6,043 | 441,307 | 264,416 | |||||||||||||||
Intangible assets |
1,009,902 | | | 571,756 | 438,146 | |||||||||||||||
Equity method investments |
297,249 | | 227,059 | | 70,190 | |||||||||||||||
Other long-term assets |
17,926 | (1,280,696 | ) | 1,286,344 | 10,856 | 1,422 | ||||||||||||||
Total assets |
$ | 3,672,900 | $ | (1,501,883 | ) | $ | 1,741,781 | $ | 1,915,448 | $ | 1,517,554 | |||||||||
Floor plan notes payable |
$ | 708,014 | $ | | $ | | $ | 330,860 | $ | 377,154 | ||||||||||
Floor plan notes payable non-trade |
380,453 | | | 221,465 | 158,988 | |||||||||||||||
Accounts payable |
183,143 | | 2,240 | 71,711 | 109,192 | |||||||||||||||
Accrued expenses |
251,076 | (221,187 | ) | 364 | 136,969 | 334,930 | ||||||||||||||
Current portion of long-term debt |
15,122 | | | 1,022 | 14,100 | |||||||||||||||
Liabilities held for sale |
7,718 | | | | 7,718 | |||||||||||||||
Total current liabilities |
1,545,526 | (221,187 | ) | 2,604 | 762,027 | 1,002,082 | ||||||||||||||
Long-term debt |
955,469 | (62,866 | ) | 820,208 | 43,330 | 154,797 | ||||||||||||||
Other long-term liabilities |
252,936 | | | 232,387 | 20,549 | |||||||||||||||
Total liabilities |
2,753,931 | (284,053 | ) | 822,812 | 1,037,744 | 1,177,428 | ||||||||||||||
Total equity |
918,969 | (1,217,830 | ) | 918,969 | 877,704 | 340,126 | ||||||||||||||
Total liabilities and equity |
$ | 3,672,900 | $ | (1,501,883 | ) | $ | 1,741,781 | $ | 1,915,448 | $ | 1,517,554 | |||||||||
18
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2008
December 31, 2008
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Cash and cash equivalents |
$ | 20,108 | $ | | $ | | $ | 14,060 | $ | 6,048 | ||||||||||
Accounts receivable, net |
294,048 | (196,465 | ) | 196,465 | 182,583 | 111,465 | ||||||||||||||
Inventories |
1,589,105 | | | 1,001,571 | 587,534 | |||||||||||||||
Other current assets |
88,251 | | 2,711 | 59,931 | 25,609 | |||||||||||||||
Assets held for sale |
15,534 | | | 1,643 | 13,891 | |||||||||||||||
Total current assets |
2,007,046 | (196,465 | ) | 199,176 | 1,259,788 | 744,547 | ||||||||||||||
Property and equipment, net |
662,121 | | 6,927 | 416,277 | 238,917 | |||||||||||||||
Intangible assets |
974,035 | | | 542,185 | 431,850 | |||||||||||||||
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 | $ | 2,230,419 | $ | 1,487,526 | |||||||||
Floor plan notes payable |
$ | 964,783 | $ | | $ | | $ | 659,531 | $ | 305,252 | ||||||||||
Floor plan notes payable non-trade |
506,688 | | | 268,988 | 237,700 | |||||||||||||||
Accounts payable |
178,282 | | 2,183 | 80,002 | 96,097 | |||||||||||||||
Accrued expenses |
195,994 | (196,465 | ) | 368 | 94,983 | 297,108 | ||||||||||||||
Current portion of long-term debt |
11,305 | | | 978 | 10,327 | |||||||||||||||
Liabilities held for sale |
23,060 | | | 1,460 | 21,600 | |||||||||||||||
Total current liabilities |
1,880,112 | (196,465 | ) | 2,551 | 1,105,942 | 968,084 | ||||||||||||||
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 | 1,351,750 | 1,211,105 | ||||||||||||||
Total equity |
808,421 | (1,155,090 | ) | 808,421 | 878,669 | 276,421 | ||||||||||||||
Total liabilities and equity |
$ | 3,962,149 | $ | (1,489,896 | ) | $ | 1,734,100 | $ | 2,230,419 | $ | 1,487,526 | |||||||||
19
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 30, 2009
Three Months Ended September 30, 2009
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues |
$ | 2,587,922 | $ | | $ | | $ | 1,532,398 | $ | 1,055,524 | ||||||||||
Cost of sales |
2,164,967 | | | 1,275,088 | 889,879 | |||||||||||||||
Gross profit |
422,955 | | | 257,310 | 165,645 | |||||||||||||||
Selling, general, and
administrative expenses |
347,968 | | 3,980 | 215,372 | 128,616 | |||||||||||||||
Depreciation and amortization |
14,011 | | 290 | 8,672 | 5,049 | |||||||||||||||
Operating income (loss) |
60,976 | | (4,270 | ) | 33,266 | 31,980 | ||||||||||||||
Floor plan interest expense |
(9,080 | ) | | | (6,860 | ) | (2,220 | ) | ||||||||||||
Other interest expense |
(13,468 | ) | | (9,614 | ) | (34 | ) | (3,820 | ) | |||||||||||
Debt discount amortization |
(3,135 | ) | | (3,135 | ) | | | |||||||||||||
Equity in income of affiliates |
7,536 | | 6,392 | | 1,144 | |||||||||||||||
Equity in earnings of subsidiaries |
| (53,217 | ) | 53,217 | | | ||||||||||||||
Income from continuing operations
before income taxes |
42,829 | (53,217 | ) | 42,590 | 26,372 | 27,084 | ||||||||||||||
Income taxes |
(15,033 | ) | 18,784 | (15,033 | ) | (11,162 | ) | (7,622 | ) | |||||||||||
Income from continuing operations |
27,796 | (34,433 | ) | 27,557 | 15,210 | 19,462 | ||||||||||||||
(Loss) income from discontinued
operations, net of tax |
(134 | ) | 134 | (134 | ) | (645 | ) | 511 | ||||||||||||
Net income |
27,662 | (34,299 | ) | 27,423 | 14,565 | 19,973 | ||||||||||||||
Less: Income attributable to the
non-controlling interests |
239 | | | | 239 | |||||||||||||||
Net income attributable to Penske
Automotive Group common
stockholders |
$ | 27,423 | $ | (34,299 | ) | $ | 27,423 | $ | 14,565 | $ | 19,734 | |||||||||
20
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended September 30, 2008
Three Months Ended September 30, 2008
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues |
$ | 2,970,415 | $ | | $ | | $ | 1,783,113 | $ | 1,187,302 | ||||||||||
Cost of sales |
2,513,097 | | | 1,494,024 | 1,019,073 | |||||||||||||||
Gross profit |
457,318 | | | 289,089 | 168,229 | |||||||||||||||
Selling, general, and
administrative expenses |
380,176 | | 12,503 | 227,394 | 140,279 | |||||||||||||||
Depreciation and amortization |
13,966 | | 290 | 8,374 | 5,302 | |||||||||||||||
Operating income (loss) |
63,176 | | (12,793 | ) | 53,321 | 22,648 | ||||||||||||||
Floor plan interest expense |
(15,312 | ) | | | (8,801 | ) | (6,511 | ) | ||||||||||||
Other interest expense |
(16,159 | ) | | (11,846 | ) | (37 | ) | (4,276 | ) | |||||||||||
Debt discount amortization |
(3,496 | ) | | (3,496 | ) | | | |||||||||||||
Equity in income of affiliates |
8,995 | | 7,853 | | 1,142 | |||||||||||||||
Equity in earnings of subsidiaries |
| (57,297 | ) | 57,297 | | | ||||||||||||||
Income from continuing operations
before income taxes |
37,204 | (57,297 | ) | 37,015 | 44,483 | 13,003 | ||||||||||||||
Income taxes |
(13,150 | ) | 20,355 | (13,150 | ) | (16,077 | ) | (4,278 | ) | |||||||||||
Income from continuing operations |
24,054 | (36,942 | ) | 23,865 | 28,406 | 8,725 | ||||||||||||||
Loss from discontinued
operations, net of tax |
(1,682 | ) | 1,682 | (1,682 | ) | (745 | ) | (937 | ) | |||||||||||
Net income |
22,372 | (35,260 | ) | 22,183 | 27,661 | 7,788 | ||||||||||||||
Less: Income attributable to the
non-controlling interests |
189 | | | | 189 | |||||||||||||||
Net income attributable to Penske
Automotive Group common
stockholders |
$ | 22,183 | $ | (35,260 | ) | $ | 22,183 | $ | 27,661 | $ | 7,599 | |||||||||
21
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 30, 2009
Nine Months Ended September 30, 2009
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues |
$ | 7,062,678 | $ | | $ | | $ | 4,181,184 | $ | 2,881,494 | ||||||||||
Cost of sales |
5,877,674 | | | 3,456,671 | 2,421,003 | |||||||||||||||
Gross profit |
1,185,004 | | | 724,513 | 460,491 | |||||||||||||||
Selling, general, and
administrative expenses |
988,522 | | 13,527 | 615,098 | 359,897 | |||||||||||||||
Depreciation and amortization |
40,654 | | 870 | 25,579 | 14,205 | |||||||||||||||
Operating income (loss) |
155,828 | | (14,397 | ) | 83,836 | 86,389 | ||||||||||||||
Floor plan interest expense |
(27,571 | ) | | | (19,395 | ) | (8,176 | ) | ||||||||||||
Other interest expense |
(41,610 | ) | | (31,840 | ) | (76 | ) | (9,694 | ) | |||||||||||
Debt discount amortization |
(9,908 | ) | | (9,908 | ) | | | |||||||||||||
Equity in income of affiliates |
11,716 | | 9,356 | | 2,360 | |||||||||||||||
Gain on debt repurchase |
10,429 | | 10,429 | | | |||||||||||||||
Equity in earnings of subsidiaries |
| (134,997 | ) | 134,997 | | | ||||||||||||||
Income from continuing operations
before income taxes |
98,884 | (134,997 | ) | 98,637 | 64,365 | 70,879 | ||||||||||||||
Income taxes |
(35,059 | ) | 47,983 | (35,059 | ) | (28,103 | ) | (19,880 | ) | |||||||||||
Income from continuing operations |
63,825 | (87,014 | ) | 63,578 | 36,262 | 50,999 | ||||||||||||||
Loss from discontinued
operations, net of tax |
(5,794 | ) | 5,794 | (5,794 | ) | (4,032 | ) | (1,762 | ) | |||||||||||
Net income |
58,031 | (81,220 | ) | 57,784 | 32,230 | 49,237 | ||||||||||||||
Less: Income attributable to the
non-controlling interests |
247 | | | | 247 | |||||||||||||||
Net income attributable to Penske
Automotive Group common
stockholders |
$ | 57,784 | $ | (81,220 | ) | $ | 57,784 | $ | 32,230 | $ | 48,990 | |||||||||
22
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Nine Months Ended September 30, 2008
Nine Months Ended September 30, 2008
Penske | ||||||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||||||
Company | Eliminations | Group, Inc. | Subsidiaries | Subsidiaries | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Revenues |
$ | 9,470,147 | $ | | $ | | $ | 5,472,279 | $ | 3,997,868 | ||||||||||
Cost of sales |
8,029,265 | | | 4,601,430 | 3,427,835 | |||||||||||||||
Gross profit |
1,440,882 | | | 870,849 | 570,033 | |||||||||||||||
Selling, general, and
administrative expenses |
1,166,368 | | 19,276 | 702,409 | 444,683 | |||||||||||||||
Depreciation and amortization |
40,623 | | 943 | 23,168 | 16,512 | |||||||||||||||
Operating income (loss) |
233,891 | | (20,219 | ) | 145,272 | 108,838 | ||||||||||||||
Floor plan interest expense |
(48,512 | ) | | | (27,555 | ) | (20,957 | ) | ||||||||||||
Other interest expense |
(40,451 | ) | | (27,168 | ) | (183 | ) | (13,100 | ) | |||||||||||
Debt discount amortization |
(10,488 | ) | | (10,488 | ) | | | |||||||||||||
Equity in income of affiliates |
13,322 | | 7,853 | | 5,469 | |||||||||||||||
Equity in earnings of subsidiaries |
| (196,732 | ) | 196,732 | | | ||||||||||||||
Income from continuing operations
before income taxes |
147,762 | (196,732 | ) | 146,710 | 117,534 | 80,250 | ||||||||||||||
Income taxes |
(52,055 | ) | 72,158 | (52,055 | ) | (48,205 | ) | (23,953 | ) | |||||||||||
Income from continuing operations |
95,707 | (124,574 | ) | 94,655 | 69,329 | 56,297 | ||||||||||||||
(Loss) income from discontinued
operations, net of tax |
(2,747 | ) | 2,747 | (2,747 | ) | (1,887 | ) | (860 | ) | |||||||||||
Net income |
92,960 | (121,827 | ) | 91,908 | 67,442 | 55,437 | ||||||||||||||
Less: Income attributable to the
non-controlling interests |
1,052 | | | | 1,052 | |||||||||||||||
Net income attributable to Penske
Automotive Group common
stockholders |
$ | 91,908 | $ | (121,827 | ) | $ | 91,908 | $ | 67,442 | $ | 54,385 | |||||||||
23
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2009
Nine Months Ended September 30, 2009
Penske | ||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||
Company | Group, Inc. | Subsidiaries | Subsidiaries | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash from continuing operating activities |
$ | 316,770 | $ | 32,620 | $ | 128,146 | $ | 156,004 | ||||||||
Investing activities: |
||||||||||||||||
Purchase of property and equipment |
(71,077 | ) | 14 | (55,083 | ) | (16,008 | ) | |||||||||
Proceeds from sale-leaseback transactions |
2,338 | | 2,338 | | ||||||||||||
Dealership acquisitions, net |
(11,476 | ) | | (3,556 | ) | (7,920 | ) | |||||||||
Other |
11,729 | 11,485 | | 244 | ||||||||||||
Net cash from continuing investing activities |
(68,486 | ) | 11,499 | (56,301 | ) | (23,684 | ) | |||||||||
Financing activities: |
||||||||||||||||
Repayments under U.S. credit agreement term loan |
(50,000 | ) | (50,000 | ) | | | ||||||||||
Repurchase 3.5% senior subordinated convertible notes |
(51,424 | ) | (51,424 | ) | | | ||||||||||
Net borrowings (repayments) of long-term debt |
1,113 | 57,305 | (6,013 | ) | (50,179 | ) | ||||||||||
Net repayments of floor plan notes payable non-trade |
(126,235 | ) | | (47,523 | ) | (78,712 | ) | |||||||||
Proceeds from exercises of options, including excess tax benefit |
76 | | 76 | | ||||||||||||
Distributions from (to) parent |
| | 430 | (430 | ) | |||||||||||
Net cash from continuing financing activities |
(226,470 | ) | (44,119 | ) | (53,030 | ) | (129,321 | ) | ||||||||
Net cash from discontinued operations |
(12,382 | ) | | (5,472 | ) | (6,910 | ) | |||||||||
Net change in cash and cash equivalents |
9,432 | | 13,343 | (3,911 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
20,108 | | 14,060 | 6,048 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 29,540 | $ | | $ | 27,403 | $ | 2,137 | ||||||||
24
Table of Contents
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, 2008
Nine Months Ended September 30, 2008
Penske | ||||||||||||||||
Total | Automotive | Guarantor | Non-Guarantor | |||||||||||||
Company | Group, Inc. | Subsidiaries | Subsidiaries | |||||||||||||
(In thousands) | ||||||||||||||||
Net cash from continuing operating activities |
$ | 365,715 | $ | 3,319 | $ | 199,692 | $ | 162,704 | ||||||||
Investing activities: |
||||||||||||||||
Purchase of property and equipment |
(164,285 | ) | (3,319 | ) | (87,589 | ) | (73,377 | ) | ||||||||
Proceeds from sale leaseback transactions |
19,740 | | 5,964 | 13,776 | ||||||||||||
Dealership acquisitions, net |
(142,054 | ) | | (94,759 | ) | (47,295 | ) | |||||||||
Purchase of Penske Truck Leasing Co., L.P. partnership interest |
(219,000 | ) | (219,000 | ) | | | ||||||||||
Other |
(1,500 | ) | | | (1,500 | ) | ||||||||||
Net cash from continuing investing activities |
(507,099 | ) | (222,319 | ) | (176,384 | ) | (108,396 | ) | ||||||||
Financing activities: |
||||||||||||||||
Proceeds from U.S. credit agreement term loan |
219,000 | 219,000 | | | ||||||||||||
Proceeds from mortgage facility |
32,875 | | 32,875 | | ||||||||||||
Net (repayments) borrowings of long-term debt |
(13,909 | ) | 75,395 | (38,801 | ) | (50,503 | ) | |||||||||
Net repayments of floor plan notes payable non-trade |
(35,671 | ) | | (20,992 | ) | (14,679 | ) | |||||||||
Payment of deferred financing costs |
(661 | ) | (521 | ) | | (140 | ) | |||||||||
Proceeds from exercises of options, including excess tax benefit |
820 | 820 | | | ||||||||||||
Repurchases of common stock |
(50,061 | ) | (50,061 | ) | | | ||||||||||
Distributions (to) from parent |
| | (306 | ) | 306 | |||||||||||
Dividends |
(25,633 | ) | (25,633 | ) | | | ||||||||||
Net cash from continuing financing activities |
126,760 | 219,000 | (27,224 | ) | (65,016 | ) | ||||||||||
Net cash from discontinued operations |
31,057 | | 20,571 | 10,486 | ||||||||||||
Net change in cash and cash equivalents |
16,433 | | 16,655 | (222 | ) | |||||||||||
Cash and cash equivalents, beginning of period |
14,797 | | 480 | 14,317 | ||||||||||||
Cash and cash equivalents, end of period |
$ | 31,230 | $ | | $ | 17,135 | $ | 14,095 | ||||||||
25
Table of Contents
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 September 30, 2009.
Overview
We are the second largest automotive retailer headquartered in the U.S. as measured
by total revenues. As of September 30, 2009, we owned and operated 160 franchises in the
U.S. and 150 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, including 64% from premium brands
such as Audi, BMW, Cadillac and Porsche. Each of our dealerships offers a wide selection
of new and used vehicles for sale. In addition to selling new and used vehicles, we
generate higher-margin revenue at each of our dealerships through maintenance and repair
services and the sale and placement of higher-margin products, such as third party
finance and insurance products, third-party extended service contracts and replacement
and aftermarket automotive products. We are also, 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 more than 40
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 more than
75 smart dealerships, nine of which are owned and operated by us. The smart fortwo offers
five different versions, the pure, passion coupe, passion cabriolet, BRABUS coupe and
BRABUS cabriolet, with base prices ranging from $11,990 to $20,990. We currently expect
to distribute approximately 15,700 smart fortwo vehicles in 2009. We are also diversified
geographically, with 64% of our total revenues in 2009 generated by operations in the
U.S. and 36% generated from our operations outside the U.S. (predominately in the U.K.).
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). PTL
operates and maintains more than 200,000 vehicles and serves customers in North America,
South America, Europe and Asia. Product lines include full-service leasing, contract
maintenance, commercial and consumer truck rental and logistics services, including,
transportation and distribution center management and supply chain management. The
general partner of PTL is Penske Truck Leasing Corporation, a wholly-owned subsidiary of
Penske Corporation, which, together with other wholly-owned subsidiaries of Penske
Corporation, owns 41.1% of PTL. The remaining 49.9% of PTL is owned by GE Capital.
Outlook
There has been reduced consumer confidence and spending in the markets in which we
operate, which we believe has resulted in reduced customer traffic in our dealerships,
particularly since September 2008. We expect our business to remain significantly
impacted by current economic conditions throughout 2009.
In addition, the captive finance subsidiaries that provide us financing for our
inventory procurement have experienced increases to their cost of capital over the last
twelve months. 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 historically low, certain of our lenders have raised the spread charged
to us, or have established minimum lending rates over the last twelve months. These
increases varied between 50 and 250 basis points. Due to these relative increases, we
have not realized 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.
In response to the challenging operating environment, we undertook significant cost
saving initiatives in 2008, including the elimination of approximately 1,400 positions,
representing approximately 10.0% of our worldwide workforce, and the amendment of pay
plans. Other cost curtailment initiatives included a reduction in advertising
activities, suspension of matching contributions to certain of our defined contribution
plans, although we intend to reinstate matching contributions to such plans relating to
employees 2010 contributions, and the suspension of our quarterly cash dividends to
stockholders. We continue to monitor the business climate, and are taking such further
actions as needed to respond to current business conditions.
26
Table of Contents
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 and nine months ended
September 30, 2009, the challenging operating environment has resulted in 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 these periods, 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 inventory and
vehicle availability, customer demand, consumer confidence, unemployment, general
economic conditions, seasonality, weather, credit availability, fuel prices and
manufacturers advertising and incentives may impact the mix of our revenues, and
therefore influence our gross profit margin. Although our total gross margin improved for
the three and nine months ended September 30, 2009, certain components of our business
have experienced margin declines as shown in the following table. We expect similar
margin trends for the remainder of 2009.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
New vehicles |
8.4 | % | 8.2 | % | 7.9 | % | 8.3 | % | ||||||||
Used vehicles |
8.8 | % | 7.3 | % | 9.0 | % | 7.7 | % | ||||||||
Service and parts |
55.2 | % | 55.6 | % | 54.8 | % | 55.9 | % | ||||||||
Finance and insurance ($ per unit) |
$ | 905 | $ | 950 | $ | 891 | $ | 983 | ||||||||
Total gross margin |
16.3 | % | 15.4 | % | 16.8 | % | 15.2 | % | ||||||||
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, due diligence in connection with acquisition activity, 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 and nine months ended September 30, 2009, due in part to lower
vehicle sales volumes, coupled with the cost saving initiatives outlined above. Our rent
expense is expected to grow as a result of cost of living indexes outlined in our lease
agreements; however, a portion of the rent increase has been offset by concessions
granted by certain landlords in recognition of current market conditions. 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 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 due to 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 three and nine months ended September 30, 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, including
PTL. It is our expectation that the 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. See Part II Item 1A Risk Factors and Forward-Looking
Statements.
27
Table of Contents
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 certain manufacturer rebate and incentive programs
are based on the attainment of program objectives, and such earnings are recognized
either upon the sale of the vehicle for which the award was received, or upon attainment
of the particular program goals if not associated with individual vehicles. During the
nine months ended September 30, 2009 and 2008, we earned $238.0 million and
$259.9 million, respectively, of rebates, incentives and reimbursements from
manufacturers, of which $234.3 million and $254.1 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:
| Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers; | ||
| There are no known changes or events that would alter the automotive retailing franchise environment; | ||
| Certain franchise agreement terms are indefinite; | ||
| Franchise agreements that have limited terms have historically been renewed by us without substantial cost; and | ||
| 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 amount and
estimated fair value. An indicator of impairment exists if the carrying value of a
franchise exceeds its estimated fair value, and an impairment loss may be recognized up
to that excess. We also evaluate our franchise agreements in connection with the annual
impairment testing to determine whether events and circumstances continue to support our
assessment that the franchise value has an indefinite life.
28
Table of Contents
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 relating to 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.
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 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.
The net book value of our investments was $297.2 million and $297.8 million as of
September 30, 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 is identified, management
estimates the fair value of the investment using a discounted cash flow approach, which
includes assumptions relating to revenue and profitability growth, profit margins,
residual values and our cost of capital. Declines in investment values that are deemed to
be other than temporary may result in an impairment charge reducing the investments
carrying value to fair value.
Self-Insurance
We retain risk relating to certain of our general liability insurance, workers
compensation insurance, auto physical damage insurance, property insurance, employment
practices liability insurance, directors and officers insurance and employee medical
benefits in the U.S. As a result, we are likely to be responsible for a significant
portion of the claims and losses incurred under these programs. The amount of risk we
retain varies by program, and, for certain exposures, we have pre-determined maximum loss
limits for certain individual claims and/or insurance periods. Losses, if any, above 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
$25.6 million and $19.2 million as of September 30, 2009 and December 31, 2008,
respectively. Changes in the reserve estimate during 2009 relate primarily to the
inclusion of additional participants in our self-insured 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 $2.9 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 general accounting principles for discontinued operations, which requires
judgment in determining whether a franchise will be reported within continuing or
discontinued operations. Such judgments include whether a franchise will be divested, the
period required to complete the divestiture, and the likelihood of changes to the
divestiture plans. If we determine that a franchise should be 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.
29
Table of Contents
New Accounting Pronouncement
A new accounting pronouncement amending the consolidation guidance relating to
variable interest entities (VIE) will be effective for us on January 1, 2010. The new
guidance replaces the current quantitative model for determining the primary beneficiary
of a variable interest entity with a qualitative approach that considers which entity has
the power to direct activities that most significantly impact the variable interest
entitys performance and whether the entity has an obligation to absorb losses or the
right to receive benefits that could potentially be significant to the variable interest
entity. The new guidance also requires: an additional reconsideration event for
determining whether an entity is a VIE when holders of an at risk equity investment lose
voting or similar rights to direct the activities that most significantly impact the
entities economic performance; ongoing assessments of whether an enterprise is the
primary beneficiary of a VIE; separate presentation of the assets and liabilities of the
VIE on the balance sheet; and additional disclosures about an entitys involvement with a
VIE. The adoption of the accounting pronouncement will not impact our Consolidated
Financial Statements.
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 September 30, 2009 Compared to Three Months Ended September 30,
2008 (dollars in millions, except per unit amounts)
Our results for the three months ended September 30, 2009 include charges of $5.2
million ($3.4 million after-tax), or $0.04 per share, relating to costs associated with
the termination of the acquisition of the Saturn brand, our election to close three
franchises in the U.S. and charges relating to our interest rate hedges of variable rate
floor plan notes payable as a result of decreases in our vehicle inventories, and
resulting decreases in outstanding floor plan notes payable, below
hedged levels.
Retail unit sales of new vehicles during the three months ended September 30, 2009
include 5,944 units sold under the cash for clunkers program in the U.S.
Our results for the three months ended September 30, 2008 include charges of $4.3
million ($2.7 million after-tax), or $0.03 per share, relating to severance costs, costs
associated with the termination of an acquisition agreement and insurance deductibles
relating to damage sustained in the Houston market during Hurricane Ike.
New Vehicle Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
New retail unit sales |
41,486 | 45,177 | (3,691 | ) | (8.2 | %) | ||||||||||
Same store new retail unit sales |
40,404 | 44,806 | (4,402 | ) | (9.8 | %) | ||||||||||
New retail sales revenue |
$ | 1,339.0 | $ | 1,548.5 | $ | (209.5 | ) | (13.5 | %) | |||||||
Same store new retail sales revenue |
$ | 1,304.9 | $ | 1,539.0 | $ | (234.1 | ) | (15.2 | %) | |||||||
New retail sales revenue per unit |
$ | 32,276 | $ | 34,276 | $ | (2,000 | ) | (5.8 | %) | |||||||
Same store new retail sales revenue per unit |
$ | 32,295 | $ | 34,348 | $ | (2,053 | ) | (6.0 | %) | |||||||
Gross profit new |
$ | 112.9 | $ | 126.6 | $ | (13.7 | ) | (10.8 | %) | |||||||
Same store gross profit new |
$ | 109.4 | $ | 125.9 | $ | (16.5 | ) | (13.1 | %) | |||||||
Average gross profit per new vehicle retailed |
$ | 2,721 | $ | 2,802 | $ | (81 | ) | (2.9 | %) | |||||||
Same store average gross profit per new
vehicle retailed |
$ | 2,708 | $ | 2,810 | $ | (102 | ) | (3.6 | %) | |||||||
Gross margin % new |
8.4 | % | 8.2 | % | 0.2 | % | 2.4 | % | ||||||||
Same store gross margin % new |
8.4 | % | 8.2 | % | 0.2 | % | 2.4 | % |
Units
Retail unit sales of new vehicles decreased 3,691 units, or 8.2%, from 2008 to 2009.
The decrease is due a 4,402 unit, or 9.8%, decrease in same store retail unit sales
during the period, offset by a 711 unit increase from net dealership acquisitions. The
same store decrease was due primarily to unit sales decreases in our volume foreign and
premium brand stores in the U.S. and premium brand stores in the U.K., partially offset
by a same-store increase in volume foreign unit sales in the U.K. During the third
quarter, unit sales in the U.S. market declined 10.2% and registrations in the U.K.
market increased 8%. The decline in our unit sales is associated with overall weak demand
for new vehicles and the associated decline in consumer traffic in our showrooms,
particularly in the U.S. market.
30
Table of Contents
Revenues
New vehicle retail sales revenue decreased $209.5 million, or 13.5%, from 2008 to
2009. The decrease is due to a $234.1 million, or 15.2%, decrease in same store revenues,
offset by a $24.6 million increase from net dealership acquisitions. The same store
revenue decrease is due primarily to the 9.8% decrease in retail unit sales, which
reduced revenue by $151.2 million, coupled with a $2,053, or 6.0%, decrease in average
selling price per unit which decreased revenue by $82.9 million.
Gross Profit
Retail gross profit from new vehicle sales decreased $13.7 million, or 10.8%, from
2008 to 2009. The decrease is due to a $16.5 million, or 13.1%, decrease in same store
gross profit, offset by a $2.8 million increase from net dealership acquisitions. The
same store decrease is due primarily to the 9.8% decrease in retail unit sales, which
reduced gross profit by $12.4 million, coupled with a $102, or 3.6%, decrease in the
average gross profit per new vehicle retailed, which decreased gross profit by
$4.1 million.
Used Vehicle Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Used retail unit sales |
25,636 | 25,997 | (361 | ) | (1.4 | %) | ||||||||||
Same store used retail unit sales |
24,703 | 25,813 | (1,110 | ) | (4.3 | %) | ||||||||||
Used retail sales revenue |
$ | 672.8 | $ | 711.8 | $ | (39.0 | ) | (5.5 | %) | |||||||
Same store used retail sales revenue |
$ | 646.4 | $ | 707.4 | $ | (61.0 | ) | (8.6 | %) | |||||||
Used retail sales revenue per unit |
$ | 26,243 | $ | 27,378 | $ | (1,135 | ) | (4.1 | %) | |||||||
Same store used retail sales revenue per unit |
$ | 26,168 | $ | 27,404 | $ | (1,236 | ) | (4.5 | %) | |||||||
Gross profit used |
$ | 59.4 | $ | 51.9 | $ | 7.5 | 14.5 | % | ||||||||
Same store gross profit used |
$ | 57.5 | $ | 51.8 | $ | 5.7 | 11.0 | % | ||||||||
Average gross profit per used vehicle retailed |
$ | 2,316 | $ | 1,998 | $ | 318 | 15.9 | % | ||||||||
Same store average gross profit per used
vehicle retailed |
$ | 2,326 | $ | 2,005 | $ | 321 | 16.0 | % | ||||||||
Gross margin % used |
8.8 | % | 7.3 | % | 1.5 | % | 20.5 | % | ||||||||
Same store gross margin % used |
8.9 | % | 7.3 | % | 1.6 | % | 21.9 | % |
Units
Retail unit sales of used vehicles decreased 361 units, or 1.4%, from 2008 to 2009.
The decrease is due to a 1,110 unit, or 4.3%, decrease in same store retail unit sales,
offset by a 749 unit increase from net dealership acquisitions. The same store decrease
was due primarily to unit sales decreases in volume foreign brand stores in the U.S. and
premium brand stores in the U.K., partially offset by an increase in used unit vehicle
sales at premium brand stores in the U.S. We believe our sales of used vehicle units were
influenced by the reduction in traffic in our stores resulting from the decline in
consumer confidence, offset by customers electing to purchase used vehicles as a less
expensive alternative to new vehicles due to the challenging economic climate.
Revenues
Used vehicle retail sales revenue decreased $39.0 million, or 5.5%, from 2008 to
2009. The decrease is due to a $61.0 million, or 8.6%, decrease in same store revenues,
offset by a $22.0 million increase from net dealership acquisitions. The same store
revenue decrease is due to a $1,236, or 4.5%, decrease in comparative average selling
price per unit, which decreased revenue by $30.6 million, coupled with the 4.3% decrease
in same store retail unit sales which decreased revenue by $30.4 million.
Gross Profit
Retail gross profit from used vehicle sales increased $7.5 million, or 14.5%, from
2008 to 2009. The increase is due to a $5.7 million, or 11.0%, increase in same store
gross profit, coupled with a $1.8 million increase from net dealership acquisitions. The
increase in same store gross profit is due to the $321, or 16.0%, increase in average
gross profit per used vehicle retailed, which increased retail gross profit by
$7.9 million, offset by the 4.3% decrease in used retail unit sales, which decreased
gross profit by $2.2 million. We believe used vehicle margins have increased as a result
of customers electing to purchase used vehicles as a less expensive alternative to new
vehicles due to the challenging economic climate.
31
Table of Contents
Finance and Insurance Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Finance and insurance revenue |
$ | 60.8 | $ | 67.6 | $ | (6.8 | ) | (10.1 | %) | |||||||
Same store finance and insurance revenue |
$ | 59.1 | $ | 67.2 | $ | (8.1 | ) | (12.1 | %) | |||||||
Finance and insurance revenue per unit |
$ | 905 | $ | 950 | $ | (45 | ) | (4.7 | %) | |||||||
Same store finance and insurance revenue per unit |
$ | 907 | $ | 952 | $ | (45 | ) | (4.7 | %) |
Finance and insurance revenue decreased $6.8 million, or 10.1%, from 2008 to 2009.
The decrease is due to an $8.1 million, or 12.1%, decrease in same store revenues during
the period, offset by a $1.3 million increase from net dealership acquisitions. The same
store revenue decrease is due to a 7.8% decrease in retail unit sales, which decreased
revenue by $5.2 million, coupled with a $45, or 4.7%, decrease in comparative average
finance and insurance revenue per unit which decreased revenue by $2.9 million. The $45
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.
Service and Parts Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Service and parts revenue |
$ | 336.3 | $ | 359.2 | $ | (22.9 | ) | (6.4 | %) | |||||||
Same store service and parts revenue |
$ | 328.4 | $ | 356.2 | $ | (27.8 | ) | (7.8 | %) | |||||||
Gross profit |
$ | 185.8 | $ | 199.7 | $ | (13.9 | ) | (7.0 | %) | |||||||
Same store gross profit |
$ | 181.1 | $ | 197.9 | $ | (16.8 | ) | (8.5 | %) | |||||||
Gross margin |
55.2 | % | 55.6 | % | (0.4 | %) | (0.7 | %) | ||||||||
Same store gross margin |
55.1 | % | 55.6 | % | (0.5 | %) | (0.9 | %) |
Revenues
Service and parts revenue decreased $22.9 million, or 6.4%, from 2008 to 2009. The
decrease is due to a $27.8 million, or 7.8%, decrease in same store revenues during the
period, offset by a $4.9 million increase from net dealership acquisitions. The same
store decrease is due in part to a decline in pre-inspection and delivery work on new
vehicle inventories due to the 9.8% decrease in same store new vehicle retail unit sales,
coupled with a 7.1% same store decrease in body shop revenue.
Gross Profit
Service and parts gross profit decreased $13.9 million, or 7.0%, from 2008 to 2009.
The decrease is due to a $16.8 million, or 8.5%, decrease in same store gross profit
during the period, offset by a $2.9 million increase from net dealership acquisitions.
The same store gross profit decrease is due to the $27.8 million, or 7.8%, decrease in
same store revenues, which decreased gross profit by $15.3 million, coupled with a 0.5%
decrease in gross margin, which decreased gross profit by $1.5 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 decreased 3,282
units, or 49.1%, from 6,683 during the three months ended September 30, 2008 to 3,401
during the three months ended September 30, 2009. Total distribution segment revenue
decreased $56.2 million, or 55.6%, from $101.1 million during the three months ended
September 30, 2008 to $44.9 million during the three months ended September 30, 2009.
Segment gross profit, which includes gross profit on vehicle and parts sales, was
breakeven during the three months ended September 30, 2009 and totaled $13.2 million
during the three months ended September 30, 2008. Total gross profit for the three months
ended September 30, 2009 includes $4.8 million related to finance and marketing campaigns
designed to spur sales of the balance of the 2009 model year inventory.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) decreased $32.2 million, or
8.5%, from $380.2 million to $348.0 million. The aggregate decrease is due primarily to a
$36.7 million, or 9.7%, decrease in same store SG&A, offset by a $4.5 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 8.1% 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 decreased as a percentage of gross profit from 83.1% to 82.3%.
32
Table of Contents
Depreciation and Amortization
Depreciation and amortization was $14.0 million during the three months ended
September 30, 2009 and 2008.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, decreased
$6.2 million, or 40.7%, from $15.3 million to $9.1 million. The decrease is due to a
$6.3 million, or 41.4%, 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 our floor plan
arrangements were generally lower in 2009 versus 2008, 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.
Other Interest Expense
Other interest expense decreased $2.7 million, or 16.7%, from $16.2 million to
$13.5 million. The decrease is due primarily to decreases in benchmark lending rates.
Debt Discount Amortization
Debt discount amortization decreased $0.4 million, from $3.5 million to $3.1
million, due primarily to the write off of a portion of our aggregate debt discount in
connection with the repurchase of a portion of our outstanding 3.5% senior subordinated
convertible notes in March 2009.
Equity in Earnings of Affiliates
Equity in earnings of affiliates decreased $1.5 million, from $9.0 million to $7.5
million. The decrease from 2008 to 2009 is primarily related to the impact of the
difficult operating conditions outlined above.
Income Taxes
Income taxes increased $1.8 million, or 14.3%, from $13.2 million to $15.0 million.
The increase from 2008 to 2009 is primarily due to the increase in our pre-tax income
versus the prior year.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30,
2008 (dollars in millions, except per unit amounts)
Our results for the nine months ended September 30, 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 and
include charges of $5.2 million ($3.4 million after-tax), or $0.04 per share, relating to
costs associated with the termination of the acquisition of the Saturn brand, our
election to close three franchises in the U.S. and charges relating to our interest rate
hedges of variable rate floor plan notes payable as a result of decreases in our vehicle
inventories, and resulting decreases in outstanding floor plan notes payable, below
hedged levels.
Retail unit sales of new vehicles during the nine months ended September 30, 2009
include 5,944 units sold under the cash for clunkers program in the U.S.
Our results for the nine months ended September 30, 2008 include charges of $4.3
million ($2.7 million after-tax), or $0.03 per share relating to severance costs, costs
associated with the termination of an acquisition agreement and insurance deductibles
relating to damage sustained in the Houston market during Hurricane Ike.
33
Table of Contents
New Vehicle Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
New retail unit sales |
105,246 | 140,402 | (35,156 | ) | (25.0 | %) | ||||||||||
Same store new retail unit sales |
99,596 | 137,334 | (37,738 | ) | (27.5 | %) | ||||||||||
New retail sales revenue |
$ | 3,401.5 | $ | 4,899.3 | $ | (1,497.8 | ) | (30.6 | %) | |||||||
Same store new retail sales revenue |
$ | 3,206.6 | $ | 4,790.5 | $ | (1,583.9 | ) | (33.1 | %) | |||||||
New retail sales revenue per unit |
$ | 32,319 | $ | 34,895 | $ | (2,576 | ) | (7.4 | %) | |||||||
Same store new retail sales revenue per unit |
$ | 32,196 | $ | 34,882 | $ | (2,686 | ) | (7.7 | %) | |||||||
Gross profit new |
$ | 270.3 | $ | 407.5 | $ | (137.2 | ) | (33.7 | %) | |||||||
Same store gross profit new |
$ | 253.8 | $ | 397.3 | $ | (143.5 | ) | (36.1 | %) | |||||||
Average gross profit per new vehicle retailed |
$ | 2,568 | $ | 2,902 | $ | (334 | ) | (11.5 | %) | |||||||
Same store average gross profit per new
vehicle retailed |
$ | 2,549 | $ | 2,893 | $ | (344 | ) | (11.9 | %) | |||||||
Gross margin % new |
7.9 | % | 8.3 | % | (0.4 | %) | (4.8 | %) | ||||||||
Same store gross margin % new |
7.9 | % | 8.3 | % | (0.4 | %) | (4.8 | %) |
Units
Retail unit sales of new vehicles decreased 35,156 units, or 25.0%, from 2008 to
2009. The decrease is due a 37,738 unit, or 27.5%, decrease in same store retail unit
sales during the period, offset by a 2,582 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 brand stores in the U.S. and U.K.
During the nine months ended September 30, 2009, unit sales in the U.S. market declined
27% while registrations in the U.K. market declined 15%. The decline in our unit sales is
associated with overall weak demand for new vehicles and the associated decline in
consumer traffic in our showrooms.
Revenues
New vehicle retail sales revenue decreased $1,497.8 million, or 30.6%, from 2008 to
2009. The decrease is due to a $1,583.9 million, or 33.1%, decrease in same store
revenues, offset by an $86.1 million increase from net dealership acquisitions. The same
store revenue decrease is due primarily to the 27.5% decrease in retail unit sales, which
reduced revenue by $1,316.4 million, coupled with a $2,686, or 7.7%, decrease in average
selling price per unit which decreased revenue by $267.5 million.
Gross Profit
Retail gross profit from new vehicle sales decreased $137.2 million, or 33.7%, from
2008 to 2009. The decrease is due to a $143.5 million, or 36.1%, decrease in same store
gross profit, offset by a $6.3 million increase from net dealership acquisitions. The
same store decrease is due primarily to the 27.5% decrease in retail unit sales, which
reduced gross profit by $109.2 million, coupled with a $344, or 11.9%, decrease in the
average gross profit per new vehicle retailed, which decreased gross profit by
$34.3 million.
Used Vehicle Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Used retail unit sales |
78,425 | 79,954 | (1,529 | ) | (1.9 | %) | ||||||||||
Same store used retail unit sales |
73,241 | 78,259 | (5,018 | ) | (6.4 | %) | ||||||||||
Used retail sales revenue |
$ | 1,944.1 | $ | 2,309.5 | $ | (365.4 | ) | (15.8 | %) | |||||||
Same store used retail sales revenue |
$ | 1,801.1 | $ | 2,253.8 | $ | (452.7 | ) | (20.1 | %) | |||||||
Used retail sales revenue per unit |
$ | 24,789 | $ | 28,885 | $ | (4,096 | ) | (14.2 | %) | |||||||
Same store used retail sales revenue per unit |
$ | 24,591 | $ | 28,799 | $ | (4,208 | ) | (14.6 | %) | |||||||
Gross profit used |
$ | 174.6 | $ | 177.7 | $ | (3.1 | ) | (1.7 | %) | |||||||
Same store gross profit used |
$ | 162.7 | $ | 174.0 | $ | (11.3 | ) | (6.5 | %) | |||||||
Average gross profit per used vehicle retailed |
$ | 2,226 | $ | 2,223 | $ | 3 | 0.1 | % | ||||||||
Same store average gross profit per used
vehicle retailed |
$ | 2,222 | $ | 2,224 | $ | (2 | ) | (0.1 | %) | |||||||
Gross margin % used |
9.0 | % | 7.7 | % | 1.3 | % | 16.9 | % | ||||||||
Same store gross margin % used |
9.0 | % | 7.7 | % | 1.3 | % | 16.9 | % |
34
Table of Contents
Units
Retail unit sales of used vehicles decreased 1,529 units, or 1.9%, from 2008 to
2009. The decrease is due to a 5,018 unit, or 6.4%, decrease in same store retail unit
sales, offset by a 3,489 unit increase from net dealership acquisitions. The same store
decrease was due primarily to unit sales decreases in volume foreign brand stores in the
U.S. and premium brand stores in the U.K., partially offset by increases in unit sales at
premium brand stores in the U.S. We believe our sales of used vehicle units were
influenced by the reduction in traffic in our stores resulting from the decline in
consumer confidence, offset by customers electing to purchase used vehicles as a less
expensive alternative to new vehicles due to the challenging economic climate.
Revenues
Used vehicle retail sales revenue decreased $365.4 million, or 15.8%, from 2008 to
2009. The decrease is due to a $452.7 million, or 20.1%, decrease in same store revenues,
offset by an $87.3 million increase from net dealership acquisitions. The same store
revenue decrease is due to a $4,208, or 14.6%, decrease in comparative average selling
price per unit, which decreased revenue by $308.2 million, coupled with the 6.4% decrease
in same store retail unit sales which decreased revenue by $144.5 million.
Gross Profit
Retail gross profit from used vehicle sales decreased $3.1 million, or 1.7%, from
2008 to 2009. The decrease is due to an $11.3 million, or 6.5%, decrease in same store
gross profit, offset by an $8.2 million increase from net dealership acquisitions. The
decrease in same store gross profit is primarily due to the 6.4% decrease in used retail
unit sales, which decreased gross profit by $11.2 million.
Finance and Insurance Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Finance and insurance revenue |
$ | 163.7 | $ | 216.6 | $ | (52.9 | ) | (24.4 | %) | |||||||
Same store finance and insurance revenue |
$ | 155.3 | $ | 212.6 | $ | (57.3 | ) | (27.0 | %) | |||||||
Finance and insurance revenue per unit |
$ | 891 | $ | 983 | $ | (92 | ) | (9.4 | %) | |||||||
Same store finance and insurance revenue per unit |
$ | 898 | $ | 986 | $ | (88 | ) | (8.9 | %) |
Finance and insurance revenue decreased $52.9 million, or 24.4%, from 2008 to 2009.
The decrease is due to a $57.3 million, or 27.0%, decrease in same store revenues during
the period, offset by a $4.4 million increase from net dealership acquisitions. The same
store revenue decrease is due to a 19.8% decrease in retail unit sales, which decreased
revenue by $42.1 million, coupled with an $88, or 8.9%, decrease in comparative average
finance and insurance revenue per unit which decreased revenue by $15.2 million. The $88
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.
Service and Parts Data
2009 vs. 2008 | ||||||||||||||||
2009 | 2008 | Change | % Change | |||||||||||||
Service and parts revenue |
$ | 995.5 | $ | 1,076.9 | $ | (81.4 | ) | (7.6 | %) | |||||||
Same store service and parts revenue |
$ | 936.5 | $ | 1,046.5 | $ | (110.0 | ) | (10.5 | %) | |||||||
Gross profit |
$ | 545.6 | $ | 602.0 | $ | (56.4 | ) | (9.4 | %) | |||||||
Same store gross profit |
$ | 514.4 | $ | 585.9 | $ | (71.5 | ) | (12.2 | %) | |||||||
Gross margin |
54.8 | % | 55.9 | % | (1.1 | %) | (2.0 | %) | ||||||||
Same store gross margin |
54.9 | % | 56.0 | % | (1.1 | %) | (2.0 | %) |
Revenues
Service and parts revenue decreased $81.4 million, or 7.6%, from 2008 to 2009. The
decrease is due to a $110.0 million, or 10.5%, decrease in same store revenues during the
period, offset by a $28.6 million increase from net dealership acquisitions. The same
store decrease is due in part to a decline in pre-inspection and delivery work on new
vehicle inventories due to the 27.5% decrease in same store new vehicle retail unit
sales, coupled with an 11.0% same store decrease in body shop revenue.
Gross Profit
Service and parts gross profit decreased $56.4 million, or 9.4%, from 2008 to 2009.
The decrease is due to a $71.5 million, or 12.2%, decrease in same store gross profit
during the period, offset by a $15.1 million increase from net dealership acquisitions.
The same store gross profit decrease is due to the $110.0 million, or 10.5%, decrease in
same store revenues, which
decreased gross profit by $60.4 million, coupled with a 1.1% decrease in gross
margin, which decreased gross profit by $11.1 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.
35
Table of Contents
Distribution
smart USA, a wholly-owned subsidiary, began distributing the smart fortwo vehicle
in the U.S. in 2008. Distribution units wholesaled during the period decreased 6,553
units, or 33.9%, from 19,327 during the nine months ended September 30, 2008 to 12,774
during the nine months ended September 30, 2009. Total distribution segment revenue
decreased $101.1 million, or 34.4%, from $293.5 million during the nine months ended 2008
to $192.4 million during the nine months ended 2009. Segment gross profit, which includes
gross profit on vehicle and parts sales, totaled $19.5 million and $39.8 million during
the nine months ended September 30, 2009 and 2008, respectively. Total gross profit for
the nine months ended September 30, 2009 includes $4.8 million related to finance and
marketing campaigns designed to spur sales of the balance of the 2009 model year
inventory.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) decreased $177.9 million, or
15.2%, from $1,166.4 million to $988.5 million. The aggregate decrease is due primarily
to a $199.5 million, or 17.6%, decrease in same store SG&A, offset by a $21.6 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 20.7% 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
80.9% to 83.4%.
Depreciation and Amortization
Depreciation and amortization increased $0.1 million, or 0.1%, from $40.6 million to
$40.7 million. The increase is due to a $0.5 million increase from net dealership
acquisitions, offset by a $0.4 million, or 0.9%, decrease in same store depreciation and
amortization.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, decreased
$20.9 million, or 43.2%, from $48.5 million to $27.6 million. The decrease is primarily
due to a $20.7 million, or 43.9%, decrease in same store floor plan interest expense. 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 our floor plan arrangements were generally lower in 2009 versus 2008, 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.
Other Interest Expense
Other interest expense increased $1.1 million, or 2.9%, from $40.5 million to
$41.6 million. The increase is due primarily to an increase in average outstanding
indebtedness in 2009 as a result of our investment in PTL in June 2008, offset by
decreases in benchmark lending rates.
Debt Discount Amortization
Debt discount amortization decreased $0.6 million, from $10.5 million to $9.9
million, due primarily to the write off of a portion of our aggregate debt discount in
connection with the repurchase of a portion of our outstanding 3.5% senior subordinated
convertible notes in March 2009.
Equity in Earnings of Affiliates
Equity in earnings of affiliates decreased $1.6 million, from $13.3 million to $11.7
million. The decrease from 2008 to 2009 is primarily related to the impact of the
difficult operating conditions outlined above, offset by earnings associated with our
investment in PTL in June 2008.
Gain on Debt Repurchase
In March 2009, we repurchased $68.7 million principal amount of our outstanding 3.5%
senior subordinated convertible notes, which had a book value, net of debt discount, of
$62.8 million for $51.4 million. In connection with the transaction, we wrote off $5.9
million of unamortized debt discount and $0.7 million of unamortized deferred financing
costs, and incurred $0.3 million of transaction costs. No element of the consideration
was allocated to the reacquisition of the equity component because
the consideration paid was less than the fair value of the liability component prior
to extinguishment. As a result, we recorded a $10.4 million pre-tax gain in connection
with the repurchase.
36
Table of Contents
Income Taxes
Income taxes decreased $17.0 million, or 32.7%, from $52.1 million to $35.1 million.
The decrease from 2008 to 2009 is due to the decrease in our pre-tax income versus the
prior year.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing, the
acquisition of new businesses, the improvement and expansion of existing facilities, the
construction of new facilities 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
September 30, 2009, we had working capital of $90.5 million, including $29.5 million of
cash, available to fund our operations and capital commitments. In addition, we had
$250.0 million and £67.8 million ($108.3 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 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.
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 us. Interest rates under the
floor plan arrangements are variable and increase or decrease based on changes in the
prime rate, defined LIBOR or defined 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.
37
Table of Contents
U.S. Credit Agreement
We are party to a $419.0 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 credit agreement was
amended to increase the margin on the interest rate on the revolving loans by 75 basis
points from 1.75% to 2.50% effective October 1, 2009 and the term of the credit agreement
was extended by one year through September 30, 2012. Prior to October 1, 2009, the
revolving loans bore 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 $40.0 million of this term loan in the third
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 September 30, 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
September 30, 2009, $159.0 million of
term loans and $1.3 million of letters of credit were outstanding under this facility.
There were no revolving loans outstanding as of September 30, 2009.
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 was amended in the third quarter to increase the revolving borrowing capacity
under the agreement by £20.0 million; extend the maturity date on the revolving facility from
August 31, 2011 to August 31, 2013; increase the minimum required ratio of consolidated
earnings before interest and taxes plus rental payments (EBITDAR) to consolidated
interest and rental payable (as defined); and increase the interest rate margin (as
defined). The amended U.K. credit agreement provides for (1) up to £100.0 million in
revolving loans through August 31, 2013, which bears interest between a defined LIBOR
plus 1.1% and defined LIBOR plus 3.0%, (2) a term loan originally funded for £30.0
million which bears interest between 6.39% and 8.29% and is payable ratably in quarterly
intervals until fully repaid on June 30, 2011, and (3) a demand seasonally adjusted
overdraft line of credit for up to £20.0 million that bears interest at the Bank of
England Base Rate plus 1.75%.
The amended 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 amended U.K. credit agreement, including: a
ratio of EBITDAR to interest plus rental payments (as defined), a measurement of maximum
capital expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most severe of
which is the termination of the agreement and acceleration of the amounts owed. As of
September 30, 2009, our U.K. subsidiaries were in compliance with all covenants under the
amended 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 amended 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 amended U.K. credit
agreement. As of September 30, 2009, outstanding loans under the amended U.K. credit
agreement amounted to £66.4 million ($106.0 million), including £14.1 million ($22.6
million) under the term loan.
38
Table of Contents
7.75% Senior Subordinated Notes
In December 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 September 30, 2009, we were in compliance with all negative
covenants and there were no events of default.
Senior Subordinated Convertible Notes
In January 2006, we issued $375.0 million aggregate principal amount of 3.50% senior
subordinated convertible notes due 2026 (the Convertible Notes), of which $306.3
million are currently outstanding. 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 September 30, 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.
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, net of debt discount, of $62.8 million for
$51.4 million. In connection with the transaction, we wrote off $5.9 million of
unamortized debt discount and $0.7 million of unamortized deferred financing costs, and
incurred $0.3 million of transaction costs. No element of the consideration was allocated
to the reacquisition of the equity component because the consideration paid was less than
the fair value of the liability component prior to extinguishment. As a result, we
recorded a $10.4 million pre-tax gain in connection with the repurchase.
39
Table of Contents
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 September 30,
2009, $41.6 million was outstanding under this facility.
Interest Rate Swaps
We use interest rate swaps to manage interest rate risk associated with our variable
rate floor plan debt. We are party to interest rate swap agreements through January 7,
2011 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor
plan debt was fixed at 3.67%. We may terminate these arrangements at any time, subject to
the settlement of the then current fair value of the swap arrangements.
Prior to the third quarter of 2009, the swaps were designated as cash flow hedges of
future interest payments of LIBOR based U.S. floor plan borrowings and the effective
portion of the gain or loss on the derivative was reported as a component of other
comprehensive income and reclassified into earnings when the hedged transaction affected
earnings. During the quarter ended September 30, 2009, we experienced declines in
outstanding floor plan debt balances related to certain floor plan lenders due to
significant declines in vehicle inventory levels which caused hedged floor plan balances
to fall below the notional value of the swap agreements. We elected to de-designate these
cash flow hedges on September 30, 2009, and recorded a net loss of $1.1 million in floor
plan interest expense in the Condensed Consolidated Statement of Income.
We re-designated $290.0 million of the swap agreements as cash flow hedges of future
interest payments of LIBOR based U.S. floor plan borrowings and the effective portion of
the gain or loss on the derivative will be reported as a component of other comprehensive
income and reclassified into earnings when the hedged transaction affects earnings.
Future settlements and changes in the fair value related to the undesignated $10.0
million of the swap agreements will be recorded as realized and unrealized gains/losses
within interest expense in the Condensed Consolidated Statement of Income.
As of September 30, 2009, we used Level 2 inputs to estimate the fair value of the
interest rate contracts designated as hedging instruments to be a liability of $11.8
million, of which $9.4 million and $2.4 million are recorded in accrued expenses and
other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheet.
We used Level 2 inputs to estimate the fair value of the interest rate contracts not
designated as hedging instruments as of September 30, 2009 to be a liability of $0.4
million, of which $0.3 million and $0.1 million are recorded in accrued expenses and
other long-term liabilities, respectively, in the Condensed Consolidated Balance Sheet.
During the nine months ended September 30, 2009, we recognized a net gain of $1.9
million related to the effective portion of the interest rate swaps designated as hedging
instruments in accumulated other comprehensive income, and reclassified $8.5 million of
the existing derivative losses, including the $1.1 million loss on de-designation, from
accumulated other comprehensive income into floor plan interest expense in the Condensed
Consolidated Statement of Income. We expect approximately $8.9 million associated with
the swaps to be recognized as an increase of interest expense over the next twelve months
as the hedged interest payments become due. During the nine months ended September 30,
2009, the swaps increased the weighted average interest rate on our floor plan borrowings
by approximately 0.6%.
Operating Leases
We have historically structured our operations so as to minimize our ownership of
real property. As a result, we lease or sublease substantially all of our facilities.
These leases are generally for a period between five and 20 years, and are typically
structured to include renewal options at our election. Pursuant to the leases for some of
our larger facilities, we are required to comply with specified financial ratios,
including a rent coverage ratio and a debt to EBITDA ratio, each as defined. For these
leases, non-compliance with the ratios may require us to post collateral in the form of a
letter of credit. A breach of our other lease covenants give rise to certain remedies by
the landlord, the most severe of which include the termination of the applicable lease
and an acceleration of the payments due under the lease.
Sale/Leaseback Arrangements
We have in the past and expect in the future to enter into sale-leaseback
transactions to finance certain property acquisitions and capital expenditures, pursuant
to which we sell property and/or leasehold improvements to third parties and agree to
lease those assets back for a certain period of time. Such sales generate proceeds which
vary from period to period. In light of current market conditions, this financing option
has become more expensive and thus we may utilize these arrangements less in the near
term.
40
Table of Contents
Off-Balance Sheet Arrangements
We have sold a number of dealerships to third parties and, as a condition to certain
of those sales, remain liable for the lease payments relating to the properties on which
those franchises operate in the event of non-payment by the buyer. In this event, we
could be required to fulfill that buyers rent and other obligations, which could
materially adversely affect our results of operations, financial condition or cash flows.
Cash Flows
Cash and cash equivalents increased by $9.4 million and $16.4 million during the
nine months ended September 30, 2009 and 2008, respectively. The major components of
these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by operating activities was $316.8 million and $365.7 million during
the nine months ended September 30, 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 we
utilize this financing. Historically, our floor plan finance source has been based on
aggregate pricing considerations.
In accordance with general accounting principles relating to the statement of cash
flows, we report all cash flows arising in connection with floor plan notes payable with
the manufacturer of a particular new vehicle as an operating activity in our statement of
cash flows, and all cash flows arising in connection with floor plan notes payable to a
party other than the manufacturer of a particular new vehicle and all floor plan notes
payable relating to pre-owned vehicles as a financing activity in our statement of cash
flows. Currently, the majority of our non-trade vehicle financing is with other
manufacturer captive lenders. To date, we have not experienced any material limitation
with respect to the amount or availability of financing from any institution providing us
vehicle financing.
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:
Nine Months Ended | ||||||||
September 30, | ||||||||
2009 | 2008 | |||||||
Net cash from operating activities as reported |
$ | 316,770 | $ | 365,715 | ||||
Floor plan notes payable non-trade as reported |
(126,235 | ) | (35,671 | ) | ||||
Net cash from operating activities, including all floor plan notes payable |
$ | 190,535 | $ | 330,044 | ||||
Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $68.5 million and $507.1 million
during the nine months ended September 30, 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 $71.1 million and $164.3 million during the
nine months ended September 30, 2009 and 2008, respectively. Capital expenditures relate
primarily to improvements to our existing dealership facilities and the construction of
new facilities. As of September 30, 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 $2.3 million and $19.7 million
during the nine months ended September 30, 2009 and 2008, respectively. Cash used in
acquisitions and other investments, net of cash acquired, was $11.5 million and $142.1
million during the nine months ended September 30, 2009 and 2008, respectively, which
includes cash used to repay sellers floor plan liabilities in such business acquisitions
of $5.8 million during the nine months ended September 30, 2009 and $30.7 million during
the nine months ended September 30, 2008. The nine months ended September 30, 2009 and
2008 include $11.7 million of proceeds from other investing activities and $220.5 million
of cash used in other investing activities, which includes $219.0 million for the
purchase of the PTL limited partnership interest in June 2008, respectively.
41
Table of Contents
Cash Flows from Continuing Financing Activities
Cash used in continuing financing activities was $226.5 million during the nine
months ended September 30, 2009, and cash provided by continuing financing activities was
$126.8 million during the nine months ended September 30, 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, proceeds from the issuance of common stock, including
proceeds from the exercise of stock options, and dividends. We had net repayments of
long-term debt of $48.9 million during the nine months ended September 30, 2009, which
included repayments of $50.0 million on our U.S. credit agreement term loan. We had net
borrowings of long-term debt of $238.0 during the nine months ended September 30, 2008,
which included the $219.0 million loan to finance the purchase of the PTL limited
partnership interest and the $32.9 million mortgage facility. In March 2009, 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 $126.2 million and $35.7 million during the nine months ended September 30,
2009 and 2008, respectively. During the nine months ended September 30, 2009 and 2008,
respectively, we received proceeds of $0.1 million and $0.8 million from the exercise of
stock options. We used $50.1 million to repurchase 3.6 million shares of common stock
during the nine months ended September 30, 2008. During the nine months ended September
30, 2008 we paid $25.6 million of cash dividends to our stockholders. No cash dividends
were paid to our stockholders during the nine months ended September 30, 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 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.
42
Table of Contents
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 September 30,
2009, our automotive joint venture relationships were as follows:
Ownership | ||||||||
Location | 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:
| our future financial performance; | ||
| future acquisitions; | ||
| future capital expenditures and share repurchases; | ||
| our ability to obtain cost savings and synergies; | ||
| our ability to respond to economic cycles; |
43
Table of Contents
| trends in the automotive retail industry and in the general economy in the various countries in which we operate dealerships; | ||
| our ability to access the remaining availability under our credit agreements; | ||
| our liquidity; | ||
| interest rates; | ||
| trends affecting our future financial condition or results of operations; and | ||
| our business strategy. |
Forward-looking statements involve known and unknown risks and uncertainties and are
not assurances of future performance. Actual results may differ materially from
anticipated results due to a variety of factors, including the factors identified in our
2008 annual report on Form 10-K filed March 11, 2009 and elsewhere in this report.
Important factors that could cause actual results to differ materially from our
expectations include the following:
| our business and the automotive retail industry in general are susceptible to further or continued adverse economic conditions, including changes in interest rates, foreign exchange rates, consumer confidence, fuel prices and credit availability; | ||
| the ability of automobile manufacturers to exercise significant control over our operations, since we depend on them in order to operate our business; | ||
| 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; | ||
| the restructuring of the U.S. based automotive manufacturers may adversely affect our operations, as well as the automotive sector as a whole; | ||
| we may not be able to satisfy our capital requirements for acquisitions, dealership renovation projects, refinancing of our debt when it becomes due, or financing the purchase of our inventory; | ||
| 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; | ||
| although we typically purchase vehicles and parts in the local functional currency, changes in foreign exchange rates may impact manufacturers, as many of the component parts of vehicles are manufactured in foreign markets, which could lead to an increase in our costs which we may not be able to pass on to the consumer; | ||
| 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; | ||
| substantial competition in automotive sales and services may adversely affect our profitability; | ||
| if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional qualified personnel, our business could be adversely affected; | ||
| changes in foreign exchange rates that may result in increased vehicle and parts prices for vehicles manufactured in other countries; | ||
| our business may be adversely affected by import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably; | ||
| automobile dealerships are subject to substantial regulation which may adversely affect our profitability; |
44
Table of Contents
| 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; | ||
| non-compliance with the financial ratios and other covenants under our credit agreements and operating leases may materially adversely affect us; | ||
| the success of our smart distribution depends upon continued availability and customer demand for those vehicles; | ||
| our dealership operations may be affected by severe weather or other periodic business interruptions; | ||
| our principal stockholders have substantial influence over us and may make decisions with which other stockholders may disagree; | ||
| some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests; | ||
| 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; | ||
| we may be involved in legal proceedings that could have a material adverse effect on our business; | ||
| our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign currency valuations; and | ||
| 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:
| the price of our common stock is subject to substantial fluctuation, which may be unrelated to our performance; and | ||
| 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.
45
Table of Contents
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 September 30, 2009, a 100 basis point change in interest rates would result in an
approximate $2.4 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 September 30, 2009, adjusted to exclude the notional value of the swap agreements,
a 100 basis point change in interest rates would result in an approximate $9.7 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:
| the maintenance of our overall debt portfolio with targeted fixed and variable rate components; | ||
| the use of authorized derivative instruments; | ||
| the prohibition of using derivatives for trading or other speculative purposes; and | ||
| the prohibition of highly leveraged derivatives or derivatives for which we are unable to reliably estimate a fair value or obtain a market quotation. |
Interest rate fluctuations affect the fair market value of our fixed rate debt,
including our swaps, the 7.75% Notes, the Convertible Notes, mortgages 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 September 30, 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 $255.0 million change to our revenues for the nine months ended
September 30, 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.
46
Table of Contents
PART II OTHER INFORMATION
Item 1. | Legal Proceedings |
We are involved in litigation which may relate to claims brought by governmental
authorities, issues with customers, and employment related matters, including class
action claims and purported class action claims. As of September 30, 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 |
4.1 | First Amendment dated October 30, 2009 to Amended and Restated
Credit Agreement dated as of October 30, 2008 among the Company,
Toyota Motor Credit Corporation and DCFS USA LLC, as agent. |
|||
4.2 | Supplemental Agreement dated September 4, 2009 to Multi-Option
Credit Agreement dated as of August 31, 2006 between Sytner Group
Limited and RBS (incorporated by reference to Exhibit 4.1 filed
on September 8, 2009 on Form 8-K) |
|||
4.3 | Supplemental Agreement dated September 4, 2009 to Fixed Rate
Credit Agreement dated as of August 31, 2006 between Sytner Group
Limited and RBS (incorporated by reference to Exhibit 4.2 filed
on September 8, 2009 on Form 8-K) |
|||
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. |
47
Table of Contents
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.
PENSKE AUTOMOTIVE GROUP, INC. |
||||
By: | /s/ Roger S. Penske | |||
Roger S. Penske | ||||
Date: November 3, 2009 | Chief Executive Officer | |||
By: | /s/ Robert T. OShaughnessy | |||
Robert T. OShaughnessy | ||||
Date: November 3, 2009 | Chief Financial Officer |
48
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
No. | Description | |||
4.1 | First Amendment dated October 30, 2009 to Amended and
Restated Credit Agreement dated as of October 30, 2008
among the Company, Toyota Motor Credit Corporation and
DCFS USA LLC, as agent. |
|||
4.2 | Supplemental Agreement dated September 4, 2009 to
Multi-Option Credit Agreement dated as of August 31,
2006 between Sytner Group Limited and RBS (incorporated
by reference to Exhibit 4.1 filed on September 8, 2009
on Form 8-K) |
|||
4.3 | Supplemental Agreement dated September 4, 2009 to Fixed
Rate Credit Agreement dated as of August 31, 2006
between Sytner Group Limited and RBS (incorporated by
reference to Exhibit 4.2 filed on September 8, 2009 on
Form 8-K) |
|||
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. |