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PENSKE AUTOMOTIVE GROUP, INC. - Quarter Report: 2012 March (Form 10-Q)

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 March 31, 2012

or

 

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

For the transition period from             to             

Commission file number 1-12297

 

 

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   22-3086739

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

2555 Telegraph Road,

Bloomfield Hills, Michigan

  48302-0954
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(248) 648-2500

 

 

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

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  þ    No  ¨

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   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

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

As of April 15, 2012, there were 90,322,045 shares of voting common stock outstanding.

 

 

 


Table of Contents

 

TABLE OF CONTENTS

 

     Page  

PART I — FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011

     3   

Consolidated Condensed Statements of Income for the three months ended March 31, 2012 and 2011

     4   

Consolidated Condensed Statements of Comprehensive Income for the three months ended March  31, 2012 and 2011

     5   

Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011

     6   

Consolidated Condensed Statement of Equity for the three months ended March 31, 2012

     7   

Notes to Consolidated Condensed Financial Statements

     8   

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

     22   

Item 3. Quantitative & Qualitative Disclosures About Market Risk

     36   

Item 4. Controls and Procedures

     37   

PART II — OTHER INFORMATION

  

Item 1. Legal Proceedings

     37   

Item 1A. Risk Factors

     38   

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

     38   

Item 5. Other Information

     39   

Item 6. Exhibits

     40   

 

2


Table of Contents

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

     March 31,     December 31,  
     2012     2011  
     (Unaudited)  
     (In thousands, except  
     per share amounts)  

ASSETS

    

Cash and cash equivalents

   $ 31,768      $ 28,490   

Accounts receivable, net of allowance for doubtful accounts of $2,171 and $2,161

     492,653        440,273   

Inventories

     1,770,235        1,581,586   

Other current assets

     91,869        80,269   

Assets held for sale

     29,075        67,776   
  

 

 

   

 

 

 

Total current assets

     2,415,600        2,198,394   

Property and equipment, net

     915,081        857,587   

Goodwill

     947,108        905,721   

Franchise value

     254,458        228,459   

Equity method investments

     288,242        298,640   

Other long-term assets

     14,276        13,498   
  

 

 

   

 

 

 

Total assets

   $ 4,834,765      $ 4,502,299   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Floor plan notes payable

   $ 1,114,070      $ 977,548   

Floor plan notes payable — non-trade

     701,242        700,571   

Accounts payable

     297,705        220,708   

Accrued expenses

     258,455        201,579   

Current portion of long-term debt

     13,264        3,414   

Liabilities held for sale

     29,928        45,852   
  

 

 

   

 

 

 

Total current liabilities

     2,414,664        2,149,672   

Long-term debt

     848,630        846,777   

Deferred tax liabilities

     222,409        217,902   

Other long-term liabilities

     166,865        147,535   
  

 

 

   

 

 

 

Total liabilities

     3,652,568        3,361,886   

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; 90,322 shares issued and outstanding at March 31, 2012; 90,277 shares issued and outstanding at December 31, 2011

     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

     695,582        702,335   

Retained earnings

     497,220        459,375   

Accumulated other comprehensive loss

     (15,033     (25,734
  

 

 

   

 

 

 

Total Penske Automotive Group stockholders’ equity

     1,177,778        1,135,985   

Non-controlling interest

     4,419        4,428   
  

 

 

   

 

 

 

Total equity

     1,182,197        1,140,413   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 4,834,765      $ 4,502,299   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  
     (In thousands, except per share amounts)  

Revenue:

    

New vehicle

   $ 1,578,319      $ 1,385,556   

Used vehicle

     969,732        791,734   

Finance and insurance, net

     79,894        66,463   

Service and parts

     369,727        341,542   

Fleet and wholesale vehicle

     244,616        165,741   
  

 

 

   

 

 

 

Total revenues

     3,242,288        2,751,036   
  

 

 

   

 

 

 

Cost of sales:

    

New vehicle

     1,446,281        1,275,804   

Used vehicle

     891,327        726,619   

Service and parts

     156,525        146,649   

Fleet and wholesale

     241,562        162,719   
  

 

 

   

 

 

 

Total cost of sales

     2,735,695        2,311,791   
  

 

 

   

 

 

 

Gross profit

     506,593        439,245   

Selling, general and administrative expenses

     398,637        355,391   

Depreciation

     13,349        11,798   
  

 

 

   

 

 

 

Operating income

     94,607        72,056   

Floor plan interest expense

     (9,725     (6,925

Other interest expense

     (12,210     (11,285

Debt discount amortization

     —          (1,718

Equity in earnings of affiliates

     4,410        22   
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     77,082        52,150   

Income taxes

     (26,902     (15,670
  

 

 

   

 

 

 

Income from continuing operations

     50,180        36,480   

Loss from discontinued operations, net of tax

     (3,174     (2,483
  

 

 

   

 

 

 

Net income

     47,006        33,997   

Less: Income attributable to non-controlling interests

     188        70   
  

 

 

   

 

 

 

Net income attributable to Penske Automotive Group common stockholders

   $ 46,818      $ 33,927   
  

 

 

   

 

 

 

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

    

Continuing operations

   $ 0.56      $ 0.39   

Discontinued operations

     (0.04     (0.03

Net income attributable to

   $ 0.52      $ 0.37   

Penske Automotive Group common stockholders

    

Shares used in determining basic earnings per share

     90,306        92,472   

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

    

Continuing operations

   $ 0.55      $ 0.39   

Discontinued operations

     (0.04     (0.03

Net income attributable to Penske Automotive Group common stockholders

   $ 0.52      $ 0.37   

Shares used in determining diluted earnings per share

     90,338        92,554   

Amounts attributable to Penske Automotive Group common stockholders:

    

Income from continuing operations

   $ 50,180      $ 36,480   

Less: Income attributable to non-controlling interests

     188        70   
  

 

 

   

 

 

 

Income from continuing operations, net of tax

     49,992        36,410   

Loss from discontinued operations, net of tax

     (3,174     (2,483
  

 

 

   

 

 

 

Net income attributable to Penske Automotive Group common stockholders

   $ 46,818      $ 33,927   

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  
     (In thousands, except per share amounts)  

Net Income

   $ 47,006      $ 33,997   

Other Comprehensive Income:

    

Foreign currency translation adjustment

     9,926        16,852   
  

 

 

   

 

 

 

Unrealized gain (loss) on interest rate swaps:

    

Unrealized gain(loss) arising during the period, net of tax benefit(provision) of $822 and ($139), respectively

     (1,257     212   

Reclassification adjustment for loss included in floor plan interest expense, net of tax provision of $669, and $46, respectively

     1,023        70   
  

 

 

   

 

 

 

Unrealized gain (loss) on interest rate swaps, net of tax

     (234     282   
  

 

 

   

 

 

 

Other adjustments to Comprehensive Income, net

     1,009        (612
  

 

 

   

 

 

 

Other Comprehensive Income, Net of Taxes

     10,701        16,522   
  

 

 

   

 

 

 

Comprehensive Income

   $ 57,707      $ 50,519   
  

 

 

   

 

 

 

Less: Net income attributable to non-controlling interest

     188        70   
  

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 57,519      $ 50,449   
  

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

     Three Months Ended  
     March 31,  
     2012     2011  
     (Unaudited)  
     (In thousands)  

Operating Activities:

    

Net income

   $ 47,006      $ 33,997   

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

    

Depreciation

     13,349        11,798   

Debt discount amortization

     —          1,718   

Earnings of equity method investments

     (4,410     (22

Loss from discontinued operations, net of tax

     3,174        2,483   

Deferred income taxes

     4,880        6,358   

Changes in operating assets and liabilities:

    

Accounts receivable

     (35,364     (29,178

Inventories

     (108,999     (38,497

Floor plan notes payable

     136,522        34,352   

Accounts payable and accrued expenses

     83,160        (2,993

Other

     (14,014     (10,204
  

 

 

   

 

 

 

Net cash from continuing operating activities

     125,304        9,812   
  

 

 

   

 

 

 

Investing Activities:

    

Purchase of equipment and improvements

     (26,466     (20,843

Dealership acquisitions net, including repayment of sellers’ floor plan notes payable of $36,906 and $5,862, respectively

     (108,106     (14,011

Other

     —          3,490   
  

 

 

   

 

 

 

Net cash from continuing investing activities

     (134,572     (31,364
  

 

 

   

 

 

 

Financing Activities:

    

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

     194,300        16,500   

Repayments under U.S. credit agreement revolving credit line

     (219,300     (16,500

Net borrowings of other long-term debt

     34,766        6,711   

Net borrowings of floor plan notes payable — non-trade

     671        29,419   

Repurchase of common stock

     (8,522     —     

Dividends

     (8,973     —     

Proceeds from exercises of options, including excess tax benefit

     —          1,645   
  

 

 

   

 

 

 

Net cash from continuing financing activities

     (7,058     37,775   
  

 

 

   

 

 

 

Discontinued operations:

    

Net cash from discontinued operating activities

     (3,638     3,522   

Net cash from discontinued investing activities

     34,769        2,265   

Net cash from discontinued financing activities

     (11,527     (1,280
  

 

 

   

 

 

 

Net cash from discontinued operations

     19,604        4,507   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     3,278        20,730   

Cash and cash equivalents, beginning of period

     28,490        19,705   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 31,768      $ 40,435   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid for:

    

Interest

   $ 14,061      $ 11,079   

Income taxes

     7,740        9,093   

Seller financed/assumed debt

     —          4,865   

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

 

                              Accumulated     Total              
     Common Stock      Additional           Other     Stockholders’ Equity              
     Issued            Paid-in     Retained     Comprehensive     Attributable to Penske     Non-controlling     Total  
     Shares     Amount      Capital     Earnings     Income (Loss)     Automotive Group     Interest     Equity  
                              (Unaudited)                    
                              (Dollars in thousands)                    

Balance, January 1, 2012

     90,277,356      $ 9       $ 702,335      $ 459,375      $ (25,734   $ 1,135,985      $ 4,428      $ 1,140,413   

Equity compensation

     394,689        —           1,769        —          —          1,769        —          1,769   

Distributions to non-controlling interests

     —          —           —          —          —          —          (197     (197

Foreign currency translation

     —          —           —          —          9,926        9,926        —          9,926   

Repurchase of common stock

     (350,000        (8,522         (8,522     —          (8,522

Dividends

     —          —           —          (8,973     —          (8,973     —          (8,973

Other

     —          —           —          —          775        775        —          775   

Net income

     —          —           —          46,818        —          46,818        188        47,006   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     90,322,045      $ 9       $ 695,582      $ 497,220      $ (15,033   $ 1,177,778      $ 4,419      $ 1,182,197   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In thousands, except per share amounts)

1. Interim Financial Statements

Business Overview

Penske Automotive Group, Inc. (the “Company”) is the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of March 31, 2012, the Company operated 335 retail franchises, of which 168 franchises are located in the U.S. and 167 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. Each of the Company’s dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, the Company generates higher-margin revenue at each of its 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. The Company also holds a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading transportation services provider.

During the three months ended March 31, 2012, we acquired the Agnew Group in the United Kingdom, representing thirteen franchises, and two other franchises. We also were awarded three franchises, including Nissan/Infiniti in San Francisco and Mini in Marin, CA, and disposed of three franchises, including Jaguar Land Rover in Gatwick, England and Lexus in Scottsdale, Arizona.

In April 2012, we acquired a 7% interest in NPA Holdco, LLC, an auctioneer of powersport vehicles for $3,000. Transportation Resource Partners, a related party, recently acquired a controlling interest in this company on the same financial terms as our investment.

Basis of Presentation

The following unaudited consolidated condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and 2011 is unaudited, but includes all adjustments which the management of the Company believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for prior periods have been revised for entities which have been treated as discontinued operations through March 31, 2012, and the results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011, which are included as part of the Company’s Annual Report on Form 10-K.

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, Presentation of Comprehensive Income, which requires the presentation of components of other comprehensive income with the components of net income. The adoption of this pronouncement on January 1, 2012 had no impact on our consolidated financial position or results of operations.

Discontinued Operations

The Company accounts for dispositions in its retail operations as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed of will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations.

In evaluating whether the cash flows of a dealership in its Retail reportable segment will be eliminated from ongoing operations, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at other dealerships it operates in the market and their proximity to the disposed dealership. When the Company disposes of franchises, it typically does not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of Company owned dealerships, the Company does not treat the disposition as a discontinued operation if it believes that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

Combined financial information regarding entities accounted for as discontinued operations follows:

 

     Three Months Ended March 31,  
     2012     2011  

Revenues

   $ 45,942      $ 129,462   

Pre-tax loss

     (11,458     (5,147

Gain on disposal

     10,160        1,071   
     March 31,     December 31,  
     2012     2011  

Inventories

   $ 24,052      $ 39,185   

Other assets

     5,023        28,591   
  

 

 

   

 

 

 

Total assets

   $ 29,075      $ 67,776   
  

 

 

   

 

 

 

Floor plan notes payable (including non-trade)

   $ 22,730      $ 36,186   

Other liabilities

     7,198        9,666   
  

 

 

   

 

 

 

Total liabilities

   $ 29,928      $ 45,852   
  

 

 

   

 

 

 

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, based on quoted, level one market data, follows:

 

     March 31, 2012  
     Carrying Value      Fair Value  

7.75% senior subordinated notes due 2016

   $ 375,000       $ 393,075   

3.5% senior subordinated convertible notes due 2026

     63,324         68,889   

2. Inventories

Inventories consisted of the following:

 

     March 31,      December 31,  
     2012      2011  

New vehicles

   $ 1,206,234       $ 1,058,371   

Used vehicles

     480,910         442,991   

Parts, accessories and other

     83,091         80,224   
  

 

 

    

 

 

 

Total inventories

   $ 1,770,235       $ 1,581,586   
  

 

 

    

 

 

 

The Company receives non-refundable credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $6,201 and $7,927 during the three months ended March 31, 2012 and 2011, respectively.

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

3. Business Combinations

The Company acquired thirteen and three franchises during the three months ended March 31, 2012 and 2011, respectively, in its retail operations. The Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in the Company’s consolidated condensed financial statements, and may be subject to adjustment pending completion of final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the three months ended March 31, 2012 and 2011 follows:

 

     March 31,  
     2012     2011  

Accounts receivable

   $ 16,976      $ 953   

Inventory

     79,650        7,923   

Property and equipment

     32,593        1,671   

Goodwill

     31,566        7,038   

Franchise Value

     23,426        —     

Other assets

     —          628   

Current liabilities

     (49,290     (2,491

Non-current liabilities

     (26,815     —     
  

 

 

   

 

 

 

Total consideration

     108,106        15,722   

Seller financed/assumed debt

     —          (1,711
  

 

 

   

 

 

 

Cash used in dealership acquisitions

   $ 108,106      $ 14,011   
  

 

 

   

 

 

 

In addition, in March 2012 the Company formed a joint venture which acquired a BMW/Mini dealership in Monza, Italy, a suburb of Milan.

The following unaudited consolidated pro forma results of operations of the Company for the three months ended March 31, 2012 and 2011 give effect to acquisitions consummated during 2012 and 2011 as if they had occurred on January 1, 2011:

 

     Three Months Ended March 31,  
     2012      2011  

Revenues

   $ 3,258,179       $ 2,908,036   

Income from continuing operations

     49,878         39,347   

Net income

     46,704         36,842   

Income from continuing operations per diluted common share

   $ 0.55       $ 0.43   

Net income per diluted common share

   $ 0.52       $ 0.40   

4. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the three months ended March 31, 2012:

 

            Franchise  
     Goodwill      Value  

Balance, January 1, 2012

   $ 905,721       $ 228,459   

Additions

     31,566         23,426   

Foreign currency translation

     9,821         2,573   
  

 

 

    

 

 

 

Balance, March 31, 2012

   $ 947,108       $ 254,458   
  

 

 

    

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

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, including the captive finance companies associated with automotive manufacturers. In the U.S., substantially all of our 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 of 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.

The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries, and in the U.S. are guaranteed by the Company. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Bank Rate, or the 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.

6. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, adjusted for any dilutive effects. The Company has senior subordinated convertible notes outstanding which, under certain circumstances discussed in Note 7, may be converted to voting common stock. As of March 31, 2012 and March 31, 2011, 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. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three months ended March 31, 2012 and 2011 follows:

 

     Three Months Ended  
     March 31,  
     2012      2011  

Weighted average number of common shares outstanding

     90,306         92,472   

Effect of non-participatory equity compensation

     32         82   
  

 

 

    

 

 

 

Weighted average number of common shares outstanding,including effect of dilutive securities

     90,338         92,554   
  

 

 

    

 

 

 

7. Long-Term Debt

Long-term debt consisted of the following:

 

     March 31,     December 31,  
     2012     2011  

U.S. credit agreement—revolving credit line

   $ 107,000      $ 132,000   

U.S. credit agreement—term loan

     127,000        127,000   

U.K. credit agreement—revolving credit line

     63,832        59,060   

U.K. credit agreement—term loan

     45,480        —     

U.K. credit agreement—overdraft line of credit

     —          13,333   

7.75% senior subordinated notes due 2016

     375,000        375,000   

3.5% senior subordinated convertible notes due 2026, net of debt discount

     63,324        63,324   

Mortgage facilities

     74,831        75,684   

Other

     5,427        4,790   
  

 

 

   

 

 

 

Total long-term debt

     861,894        850,191   

Less: current portion

     (13,264     (3,414
  

 

 

   

 

 

 

Net long-term debt

   $ 848,630      $ 846,777   
  

 

 

   

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

U.S. Credit Agreement

The Company is party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up to $375,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $127,000, and for an additional $10,000 of availability for letters of credit, through September 2014. The revolving loans bear interest at a defined LIBOR plus 2.50%, subject to an incremental 1.00% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be re-borrowed.

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. The Company is also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of March 31, 2012, the Company was in compliance with all covenants under the U.S. Credit Agreement.

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to the Company’s other material indebtedness. Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of March 31, 2012, $127,000 of term loans, and $500 of letters of credit and $107,000 of revolver borrowings were outstanding under the U.S. Credit Agreement.

U.K. Credit Agreement

The Company’s subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a £100,000 revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10,000 demand overdraft line of credit with RBS (collectively, the “U.K. credit agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of March 31, 2012, outstanding loans under the U.K. credit agreement amounted to £40,000 ($63,824).

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. 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 any amounts owed. As of March 31, 2012, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement.

The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries’ assets are subject to security interests granted to lenders under the U.K. credit agreement.

In January 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30,000 term loan which was used for working capital and an acquisition. The term loan is repayable in £1,500 quarterly installments through 2015 with a final payment of £7,500 due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries’ ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of March 31, 2012, the amount outstanding under the U.K. term loan was £28,500 ($45,480).

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

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 Company’s credit agreements, mortgages and floor plan indebtedness. The 7.75% Notes are guaranteed by substantially all of the Company’s wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. The Company can redeem all or some of the 7.75% Notes at its option at specified redemption prices (currently 103.875% of the principal amount of the notes). Upon certain sales of assets or specific kinds of changes of control the Company is required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of March 31, 2012, the Company was in compliance with all negative covenants and there were no events of default.

Senior Subordinated Convertible Notes

The Company currently has $63,324 of Convertible Notes outstanding. The Company issued the Convertible Notes in January 2006, and the notes mature on April 1, 2026, unless earlier converted, redeemed or purchased, as discussed below. The Convertible Notes are unsecured senior subordinated obligations and are subordinate to all future and existing debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The Convertible Notes are guaranteed on an unsecured senior subordinated basis by substantially all of the Company’s wholly-owned domestic subsidiaries. The guarantees are full and unconditional and joint and several. The Convertible Notes also contain customary negative covenants and events of default. As of March 31, 2012, 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 the Company’s common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share), subject to adjustment, only under the following circumstances: (1) in any quarterly period, if the closing price of our common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.05 (subject to adjustment), (2) for specified periods, if the trading price of the Convertible Notes falls below specific thresholds, (3) if the Convertible Notes are called for redemption, (4) if specified distributions to holders of our common stock are made or specified corporate transactions occur, (5) if a fundamental change (as defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity date.

Upon conversion of the Convertible Notes, for each $1,000 principal amount of the Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture covering the Convertible Notes, of the number of shares of common stock equal to the conversion rate. If the conversion value exceeds $1,000, 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. 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.

The Company may redeem the Convertible Notes, in whole or in part at any time or 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, plus any applicable conversion premium.

On issuance of the Convertible Notes, the Company recorded a debt discount which was amortized as additional interest expense through March 31, 2011. The annual effective interest rate on the liability component was 8.25% through March 31, 2011. Beginning April 1, 2011, the annual effective interest rate was 3.5%.

Mortgage Facilities

The Company is party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to the Company’s other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of March 31, 2012, the Company owed $74,831 of principal under our mortgage facilities.

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

8. Interest Rate Swaps

The Company periodically uses interest rate swaps to manage interest rate risk associated with the Company’s variable rate floor plan debt. The Company is party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt is fixed at 2.135% and $100,000 of the Company’s floating rate floor plan debt is fixed at a rate of 1.55%. The Company may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

Through January 2011, the Company was party to interest rate swap agreements pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt was fixed at 3.67%.

The Company used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of March 31, 2012 and 2011, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $16,322 and an asset of $351, respectively.

During the three months ended March 31, 2012 and 2011, there was no hedge ineffectiveness recorded on the Company’s income statement. During the three months ended March 31, 2012, the swaps increased the weighted average interest rate on the Company’s floor plan borrowings by approximately 40 basis points. The impact of the swaps on the weighted average interest rate of the Company’s floor plan borrowings during the three months ended March 31, 2011 was insignificant.

9. Commitments and Contingent Liabilities

The Company is involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of March 31, 2012, the Company is not party to any legal proceedings, including class action lawsuits, that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

The Company has historically structured its operations so as to minimize ownership of real property. As a result, the Company leases or subleases substantially all of its facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at the Company’s election. Pursuant to the leases for some of the Company’s larger facilities, the Company is required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require the Company to post collateral in the form of a letter of credit. A breach of the other lease covenants gives rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of March 31, 2012, the Company was in compliance with all covenants under these leases.

The Company has sold a number of dealerships to third parties and, as a condition to certain of those sales, remains liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. The Company is also party to lease agreements on properties that it no longer uses in its retail operations that it has sublet to third parties. The Company relies on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, the Company may not be able to recover amounts owed to it and the Company could be required to fulfill these obligations.

The Company holds a 9.0% limited partnership interest in PTL. In April and May 2012, PTL refinanced a significant amount of its indebtedness. As part of that refinancing, the Company and the other PTL partners created a new company (“Holdings”), which, together with General Electric Capital Corporation (“GECC”), co-issued $700,000 of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700,000 derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700,000 of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.

Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, the Company has agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $950 for acting as co-obligor. The maximum amount of the Company’s potential obligations to GECC under this agreement are 9% of the required principal repayment due in 2019 (which is expected to be $63,100) and 9% of interest payments under the Holdings Bonds, plus fees and default interest, if any.

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

The Company has $19,072 of letters of credit outstanding as of March 31, 2012, and has posted $13,718 of surety bonds in the ordinary course of business.

10. Equity

Share Repurchase

During the first quarter of 2012, the Company repurchased 350,000 shares of our outstanding common stock for $8,522, or an average of $24.35, under a program approved by the Company’s Board of Directors.

11. Segment Information

The Company’s operations are organized by management into operating segments by line of business and geography. The Company has determined it has two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of our automotive retail operations and (ii) PAG Investments, consisting of our investments in businesses other than automotive retail operations. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and the retail automotive joint ventures. The individual dealership operations included in the Retail reportable segment have been grouped into four 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).

Three Months Ended March 31

 

            PAG         
     Retail      Investments      Total  

Revenues

        

2012

   $ 3,242,288       $ —         $ 3,242,288   

2011

     2,751,036         —           2,751,036   

Segment income

        

2012

     73,248         3,834         77,082   

2011

     51,026         1,124         52,150   

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

12. Consolidating Condensed Financial Information

The following tables include condensed consolidating financial information as of March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and 2011 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 and cash flows of these entities on a stand-alone basis.

CONDENSED CONSOLIDATING BALANCE SHEET

March 31, 2012

 

     Total
Company
     Eliminations     Penske
Automotive
Group
     Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
 
    

(In thousands)

 

Cash and cash equivalents

   $ 31,768       $ —        $ —         $ 9,975      $ 21,793   

Accounts receivable, net

     492,653         (318,778     318,778         253,077        239,576   

Inventories

     1,770,235         —          —           975,050        795,185   

Other current assets

     91,869         —          2,395         41,248        48,226   

Assets held for sale

     29,075         —          —           1,434        27,641   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

     2,415,600         (318,778     321,173         1,280,784        1,132,421   

Property and equipment, net

     915,081         —          4,853         561,108        349,120   

Intangible assets

     1,201,566         —          —           705,484        496,082   

Equity method investments

     288,242         —          240,655         —          47,587   

Other long-term assets

     14,276         (1,367,480     1,377,436         (2,400     6,720   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,834,765       $ (1,686,258   $ 1,944,117       $ 2,544,976      $ 2,031,930   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Floor plan notes payable

   $ 1,114,070       $ —        $ —         $ 589,517      $ 524,553   

Floor plan notes payable — non-trade

     701,242         —          89,049         328,378        283,815   

Accounts payable

     297,705         —          462         109,964        187,279   

Accrued expenses

     258,455         (318,778     85         142,818        434,330   

Current portion of long-term debt

     13,264         —          —           3,689        9,575   

Liabilities held for sale

     29,928         —          —           524        29,404   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

     2,414,664         (318,778     89,596         1,174,890        1,468,956   

Long-term debt

     848,630         (37,026     672,324         74,774        138,558   

Deferred tax liabilities

     222,409         —          —           195,710        26,699   

Other long-term liabilities

     166,865         —          —           96,985        69,880   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities

     3,652,568         (355,804     761,920         1,542,359        1,704,093   

Total equity

     1,182,197         (1,330,454     1,182,197         1,002,617        327,837   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 4,834,765       $ (1,686,258   $ 1,944,117       $ 2,544,976      $ 2,031,930   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2011

 

                  Penske                
     Total            Automotive      Guarantor      Non-Guarantor  
     Company      Eliminations     Group      Subsidiaries      Subsidiaries  
    

(In thousands)

 

Cash and cash equivalents

   $ 28,490       $ —        $ —         $ 27,063       $ 1,427   

Accounts receivable, net

     440,273         (297,782     305,386         283,193         149,476   

Inventories

     1,581,586         —          —           903,264         678,322   

Other current assets

     80,269         —          2,306         40,411         37,552   

Assets held for sale

     67,776         —          —           23,296         44,480   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current assets

     2,198,394         (297,782     307,692         1,277,227         911,257   

Property and equipment, net

     857,587         —          6,730         548,644         302,213   

Intangible assets

     1,134,180         —          —           701,452         432,728   

Equity method investments

     298,640         —          246,658         —           51,982   

Other long-term assets

     13,498         (1,360,808     1,369,182         3,389         1,735   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total assets

   $ 4,502,299       $ (1,658,590   $ 1,930,262       $ 2,530,712       $ 1,699,915   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Floor plan notes payable

   $ 977,548       $ —        $ —         $ 560,999       $ 416,549   

Floor plan notes payable — non-trade

     700,571         —          90,892         344,304         265,375   

Accounts payable

     220,708         —          1,633         112,975         106,100   

Accrued expenses

     201,579         (297,782     —           99,492         399,869   

Current portion of long-term debt

     3,414         —          —           3,414         —     

Liabilities held for sale

     45,852         —          —           7,850         38,002   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total current liabilities

     2,149,672         (297,782     92,525         1,129,034         1,225,895   

Long-term debt

     846,777         (38,073     697,324         77,060         110,466   

Deferred tax liabilities

     217,902         —          —           198,348         19,554   

Other long-term liabilities

     147,535         —          —           93,328         54,207   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities

     3,361,886         (335,855     789,849         1,497,770         1,410,122   

Total equity

     1,140,413         (1,322,735     1,140,413         1,032,942         289,793   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 4,502,299       $ (1,658,590   $ 1,930,262       $ 2,530,712       $ 1,699,915   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2012

 

                 Penske              
     Total           Automotive     Guarantor     Non-Guarantor  
     Company     Eliminations     Group     Subsidiaries     Subsidiaries  
    

(In thousands)

 

Revenues

   $ 3,242,288      $ —        $ —        $ 1,842,665      $ 1,399,623   

Cost of sales

     2,735,695        —          —          1,545,231        1,190,464   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     506,593        —          —          297,434        209,159   

Selling, general and administrative expenses

     398,637        —          4,595        239,699        154,343   

Depreciation

     13,349        —          362        7,146        5,841   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     94,607        —          (4,957     50,589        48,975   

Floor plan interest expense

     (9,725     —          (2,198     (3,866     (3,661

Other interest expense

     (12,210     —          (7,563     (910     (3,737

Equity in earnings of affiliates

     4,410          3,760          650   

Equity in earnings of subsidiaries

     —          (87,852     87,852        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     77,082        (87,852     76,894        45,813        42,227   

Income taxes

     (26,902     30,736        (26,902     (20,557     (10,179
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     50,180        (57,116     49,992        25,256        32,048   

(Loss) income from discontinued operations, net of tax

     (3,174     3,174        (3,174     (1,622     (1,552
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     47,006        (53,942     46,818        23,634        30,496   

Less: Income attributable to the non-controlling interests

     188        —          —          —          188   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     46,818        (53,942     46,818        23,634        30,308   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     10,701        —          1,009        (234     9,926   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 57,519      $ (53,942   $ 47,827      $ 23,400      $ 40,234   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended March 31, 2011

 

                 Penske              
     Total           Automotive     Guarantor     Non-Guarantor  
     Company     Eliminations     Group     Subsidiaries     Subsidiaries  
    

(In thousands)

 

Revenues

   $ 2,751,036      $ —        $ —        $ 1,564,740      $ 1,186,296   

Cost of sales

     2,311,791        —          —          1,303,486        1,008,305   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     439,245        —          —          261,254        177,991   

Selling, general and administrative expenses

     355,391        —          4,949        215,973        134,469   

Depreciation

     11,798        —          285        6,324        5,189   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     72,056        —          (5,234     38,957        38,333   

Floor plan interest expense

     (6,925     —          (133     (3,919     (2,873

Other interest expense

     (11,285     —          (6,416     (611     (4,258

Debt discount amortization

     (1,718     —          (1,718     —          —     

Equity in earnings (losses) of affiliates

     22        —          1,231        —          (1,209

Equity in earnings of subsidiaries

     —          (64,350     64,350        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

     52,150        (64,350     52,080        34,427        29,993   

Income taxes

     (15,670     19,362        (15,670     (10,989     (8,373
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     36,480        (44,988     36,410        23,438        21,620   

(Loss) income from discontinued operations, net of tax

     (2,483     2,483        (2,483     (2,301     (182
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     33,997        (42,505     33,927        21,137        21,438   

Less: Income attributable to the non-controlling interests

     70        —          —          —          70   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

     33,927        (42,505     33,927        21,137        21,368   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     16,522        —          (663     282        16,903   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Penske Automotive Group common stockholders

   $ 50,449      $ (42,505   $ 33,264      $ 21,419      $ 38,271   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2012

 

           Penske              
     Total     Automotive     Guarantor     Non-Guarantor  
     Company     Group     Subsidiaries     Subsidiaries  
           (In thousands)        

Net cash from continuing operating activities

   $ 125,304      $ 44,856      $ 5,903      $ 74,545   
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Purchase of equipment and improvements

     (26,466     (518     (18,101     (7,847

Dealership acquisitions, net

     (108,106     —          —          (108,106
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing investing activities

     (134,572     (518     (18,101     (115,953
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Net borrowings (repayments) of other long-term debt

     9,766        (25,000     (963     35,729   

Net borrowings (repayments) of floor plan notes payable — non-trade

     671        (1,843     (15,926     18,440   

Repurchase of common stock

     (8,522     (8,522     —          —     

Dividends

     (8,973     (8,973     —          —     

Distributions from (to) parent

     —          —          636        (636
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing financing activities

     (7,058     (44,338     (16,253     53,533   

Net cash from discontinued operations

     19,604        —          11,363        8,241   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     3,278        —          (17,088     20,366   

Cash and cash equivalents, beginning of period

     28,490        —          27,063        1,427   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 31,768      $ —        $ 9,975      $ 21,793   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Three Months Ended March 31, 2011

 

           Penske              
     Total     Automotive     Guarantor     Non-Guarantor  
     Company     Group     Subsidiaries     Subsidiaries  
           (In thousands)        

Net cash from continuing operating activities

   $ 9,812      $ (1,050   $ 64,251      $ (53,389
  

 

 

   

 

 

   

 

 

   

 

 

 

Investing activities:

        

Purchase of equipment and improvements

     (20,843     (595     (7,641     (12,607

Dealership acquisitions, net

     (14,011     —          (12,331     (1,680

Other

     3,490        —          —          3,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing investing activities

     (31,364     (595     (19,972     (10,797
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities:

        

Net borrowings (repayments) of other long-term debt

     6,711        —          (11,469     18,180   

Net borrowings (repayments) of floor plan notes payable — non-trade

     29,419        —          (38,324     67,743   

Proceeds from exercises of options, including excess tax benefit

     1,645        1,645        —          —     

Distributions from (to) parent

     —          —          3,899        (3,899
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash from continuing financing activities

     37,775        1,645        (45,894     82,024   

Net cash from discontinued operations

     4,507        —          20,360        (15,853
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in cash and cash equivalents

     20,730        —          18,745        1,985   

Cash and cash equivalents, beginning of period

     19,705        —          15,212        4,493   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 40,435      $ —        $ 33,957      $ 6,478   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in “Forward Looking Statements.” We have acquired and initiated a number of businesses during the periods presented and addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements include the results of operations of those businesses from the date acquired or when they commenced operations. This Management’s Discussion and Analysis of Financial Condition and Results of Operations has also been updated to reflect the revision of our financial statements for entities which have been treated as discontinued operations through March 31, 2012.

Overview

We are the second largest automotive retailer headquartered in the U.S. as measured by the $11.6 billion in total revenue we generated in 2011. As of March 31, 2012, we operated 335 retail automotive franchises, of which 168 franchises are located in the U.S. and 167 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In 2011, we retailed and wholesaled more than 348,000 vehicles. We are diversified geographically, with 61% of our total revenues in 2012 generated in the U.S. and Puerto Rico and 39% generated outside the U.S. We offer approximately 40 brands with 96% of our total retail revenue in 2012 generated from brands of non-U.S. based manufacturers, and 68% generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products.

We also hold a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading transportation services provider. PTL leases, rents or maintains more than 200,000 vehicles and serves customers in North America, South America, Europe and Asia and is one of the largest purchasers of commercial trucks in North America through its approximately 1,000 corporate and 1,900 agent locations. Product lines include full-service leasing, contract maintenance, commercial and consumer truck rentals, used truck sales, transportation and warehousing management and supply chain management solutions. 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 General Electric Capital Corporation.

Outlook

The level of new automotive unit sales in our markets impacts our results. The new vehicle market and the amount of customer traffic visiting our dealerships have improved during the past few years, but the level of automotive sales in the U.S. remains below the last 10 years average sales level. There are market expectations for continued improvement in the automotive market in the U.S. over the next several years, although the level of such improvement is uncertain. During 2011, 12.8 million cars and light trucks were sold in the U.S., representing a 10% improvement over the 11.6 million cars and light trucks sold during the same period last year. We believe the U.S. automotive market will continue to recover based upon industry forecasts from companies such as JD Power, coupled with demand in the marketplace, an aging vehicle population, increased availability, lower cost of credit for consumers, and the planned introduction of new models by many different vehicle brands.

Vehicle registrations in the U.K were 1.94 million in 2011 compared to 2.03 million in 2010, representing a decline of 4.4%. According to the Society of Motor Manufacturers and Traders (www.smmt.co.uk), the U.K. market is expected to be challenging in 2012 as the economic outlook remains uncertain, however, in 2011, vehicle registrations of premium brands such as Audi, Bentley, BMW, Jaguar, Land Rover, Lexus, Mercedes-Benz, MINI and Porsche increased, indicating that registrations of premium/luxury vehicles have been more resilient than the market as a whole.

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, commissions relating to the sale of finance and lease contracts to third parties and the sales of certain other products. Service and parts revenues include fees paid for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories.

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, and service and parts transactions. 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 also impact the mix of our revenues, and therefore influence our gross profit margin. Aggregate gross profit increased $67 million, or 15.3%, during the three months ended March 31, 2012 compared to the same period in prior year. The increase in gross profit is largely attributable to same-store increases in new and used unit sales and service and parts revenues. Our retail gross margin percentage declined from 16.9% during the three months ended March 31, 2011 to 16.8% during the three months ended March 31, 2012, due primarily to an increase in the percentage of our revenues generated by vehicle sales which carry a lower gross margin than other parts of our business.

 

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Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities, and other expenses. As the majority of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, we believe our expenses can be adjusted over time to reflect economic trends.

Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing. The cost of our variable rate indebtedness is based on the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Bank of England Base Rate, the Finance House Base Rate, or the Euro Interbank Offered Rate. Our floor plan interest expense has increased during the three months ended March 31, 2012 as a result of higher applicable interest rates, due to the impact of interest rate swap transactions, as well as an increase in the amounts outstanding under floor plan arrangements. Our other interest expense has increased during the three months ended March 31, 2012 due the increase in borrowings under our revolving credit agreements in the U.S. and U.K. following acquisitions in 2011 and the first quarter of 2012.

Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTL. It is our expectation that operating conditions as outlined above in the Outlook section will similarly impact these businesses throughout 2012. However, because PTL is engaged in different businesses than we are, its operating performance may vary significantly from ours.

The future success of our business is dependent upon, among other things, general economic and industry conditions, our ability to consummate and integrate acquisitions, the level of vehicle sales in the markets where we operate, 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 dealership facilities, and the return realized from our investments in various joint ventures and other non-consolidated investments. See Item 1A — “Risk Factors” and “Forward-Looking Statements.”

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.

The following are the accounting policies applied in the preparation of our financial statements that management believes are most dependent upon the use of estimates and assumptions.

Revenue Recognition

Vehicle, Parts and Service Sales

We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is completed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general and administrative expenses. The amounts received under certain manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received, or upon attainment of the particular program goals if not associated with individual vehicles. During the three months ended March 31, 2012 and 2011, we earned $108.0 million and $90.3 million, respectively, of rebates, incentives and reimbursements from manufacturers, of which $105.2 million and $87.9 million, respectively, was recorded as a reduction of cost of sales.

 

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Finance and Insurance Sales

Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various 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.

Impairment Testing

Franchise value impairment is assessed as of October 1 every year and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. An indicator of impairment exists if the carrying value of a franchise exceeds its estimated fair value and an impairment loss may be recognized up to that excess. The fair value of franchise value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, franchise profit margins, and our cost of capital. We also evaluate our franchise agreements in connection with the annual impairment testing to determine whether events and circumstances continue to support our assessment that the franchise agreements have an indefinite life.

Goodwill impairment is assessed at the reporting unit level as of October 1 every year and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined we have two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of our automotive retail operations and (ii) PAG Investments, consisting of our investments in businesses other than automotive retail operations. We have determined that the dealerships in each of our operating segments within the Retail reportable segment are components that are aggregated into four geographical reporting units for the purpose of goodwill impairment testing, 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). There is no goodwill recorded in our PAG Investments reportable segment.

We prepare a qualitative assessment of the carrying value of goodwill in our reportable segments using the criteria in ASC 350-20-35-3 to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. If it were determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, additional analysis would be unnecessary. During 2011, we concluded that it is not more likely than not that any of the four reporting unit’s fair value is less than their carrying amount.

If the additional impairment testing was necessary, we would have estimated the fair value of our reporting units using an “income” valuation approach. The “income” valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using our weighted average cost of capital as the discount rate. This consideration would also include a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest and other significant assumptions including revenue and profitability growth, franchise profit margins, residual values and our cost of capital.

Investments

We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investee’s income each period. The net book value of our investments was $288.2 million and $298.6 million as of March 31, 2012 and December 31, 2011, 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, 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 any 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 $25.4 million and $25.9 million as of March 31, 2012 and December 31, 2011, respectively. Changes in the reserve estimate during 2012 relate primarily to our general liability and workers compensation programs.

 

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Income Taxes

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

Classification in Continuing and Discontinued Operations

We classify the results of our operations in our consolidated financial statements based on generally accepted accounting principles relating to discontinued operations, which requires judgments, including whether a business will be divested, the period required to complete the divestiture, and the likelihood of changes to the divestiture plans. If we determine that a business should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, our consolidated financial statements for prior periods are revised to reflect such reclassification.

New Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-05, Presentation of Comprehensive Income, which requires the presentation of components of other comprehensive income with the components of net income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The adoption of this pronouncement on January 1, 2012 had no impact on our consolidated financial position or results of operations.

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 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, 2010, the results of the acquired entity would be included in annual same store comparisons beginning with the year ended December 31, 2012 and in quarterly same store comparisons beginning with the quarter ended June 30, 2011.

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

New Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     %
Change
 

New retail unit sales

     43,099        38,668        4,431        11.5

Same store new retail unit sales

     39,437        38,368        1,069        2.8

New retail sales revenue

   $ 1,578.3      $ 1,385.6        192.7        13.9

Same store new retail sales revenue

   $ 1,447.6      $ 1,376.8        70.8        5.1

New retail sales revenue per unit

   $ 36,621      $ 35,832        789        2.2

Same store new retail sales revenue per unit

   $ 36,706      $ 35,883        823        2.3

Gross profit — new

   $ 132.0      $ 109.8        22.2        20.2

Same store gross profit — new

   $ 120.2      $ 108.9        11.3        10.4

Average gross profit per new vehicle retailed

   $ 3,064      $ 2,838        226        7.9

Same store average gross profit per new vehicle retailed

   $ 3,048      $ 2,839        209        7.4

Gross margin % — new

     8.4     7.9     0.5     6.3

Same store gross margin % — new

     8.3     7.9     0.4     5.1

 

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Units

Retail unit sales of new vehicles increased 4,431 units, or 11.5%, from 2011 to 2012. The increase is due to a 1,069 unit, or 2.8%, increase in same store retail unit sales during the period, coupled with a 3,362 unit increase from net dealership acquisitions. The same store increase was due primarily to unit sales increases in our premium brand stores in the U.K.

Revenues

New vehicle retail sales revenue increased $192.7 million, or 13.9%, from 2011 to 2012. The increase is due to a $70.8 million, or 5.1%, increase in same store revenues, coupled with a $121.9 million increase from net dealership acquisitions. The same store revenue increase is due primarily to the 2.8% increase in retail unit sales, which increased revenue by $39.2 million, coupled with an $823, or 2.3%, increase in average selling prices per unit which increased revenue by $31.6 million.

Gross Profit

Retail gross profit from new vehicle sales increased $22.2 million, or 20.2%, from 2011 to 2012. The increase is due to an $11.3 million, or 10.4%, increase in same store gross profit, coupled with a $10.9 million increase from net dealership acquisitions. The same store increase is due primarily to the 2.8% increase in retail unit sales, which increased gross profit by $3.3 million, coupled with a $209, or 7.4%, increase in the average gross profit per new vehicle retailed, which increased gross profit by $8.0 million.

Used Vehicle Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Used retail unit sales

     38,373        30,299        8,074        26.6

Same store used retail unit sales

     35,556        30,117        5,439        18.1

Used retail sales revenue

   $ 969.7      $ 791.7        178.0        22.5

Same store used retail sales revenue

   $ 897.7      $ 787.3        110.4        14.0

Used retail sales revenue per unit

   $ 25,271      $ 26,131        (860     -3.3

Same store used retail sales revenue per unit

   $ 25,248      $ 26,142        (894     -3.4

Gross profit — used

   $ 78.4      $ 65.1        13.3        20.4

Same store gross profit — used

   $ 73.6      $ 64.8        8.8        13.6

Average gross profit per used vehicle retailed

   $ 2,043      $ 2,149        (106     -4.9

Same store average gross profit per used vehicle retailed

   $ 2,069      $ 2,150        (81     -3.8

Gross margin % — used

     8.1     8.2     -0.1     -1.2

Same store gross margin % — used

     8.2     8.2     0.0     0.0

Units

Retail unit sales of used vehicles increased 8,074 units, or 26.6%, from 2011 to 2012. The increase is due to a 5,439 unit, or 18.1%, increase in same store retail unit sales, coupled with a 2,635 unit increase from net dealership acquisitions. The same store increase was due primarily to unit sales increases in premium brand stores in the U.S. and U.K. and volume foreign brand stores in the U.S.

Revenues

Used vehicle retail sales revenue increased $178.0 million, or 22.5%, from 2011 to 2012. The increase is due to a $110.4 million, or 14.0%, increase in same store revenues, coupled with a $67.6 million increase from net dealership acquisitions. The same store revenue increase is due to the 18.1% increase in same store retail unit sales which increased revenue by $137.3 million, somewhat offset by a $894, or 3.4%, decrease in comparative average selling prices per unit, which decreased revenue by $26.9 million.

Gross Profit

Retail gross profit from used vehicle sales increased $13.3 million, or 20.4%, from 2011 to 2012. The increase is due to an $8.8 million, or 13.6%, increase in same store gross profit, coupled with a $4.5 million increase from net dealership acquisitions. The increase in same store gross profit is due to the 18.1% increase in used retail unit sales, which increased gross profit by $11.2 million, somewhat offset by a $81, or 3.8%, decrease in average gross profit per used vehicle retailed, which decreased retail gross profit by $2.4 million.

 

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Finance and Insurance Data

 

Dollars in millions, except per unit amounts                  2012 vs. 2011  
     2012      2011      Change      % Change  

Finance and insurance revenue

   $ 79.9       $ 66.5       $ 13.4         20.2

Same store finance and insurance revenue

   $ 75.4       $ 66.0       $ 9.4         14.2

Finance and insurance revenue per unit

   $ 981       $ 964       $ 17         1.8

Same store finance and insurance revenue per unit

   $ 1,006       $ 964       $ 42         4.4

Finance and insurance revenue increased $13.4 million, or 20.2%, from 2011 to 2012. The increase is due to a $9.4 million, or 14.2%, increase in same store revenues during the period, coupled with a $4.0 million increase from net dealership acquisitions. The same store revenue increase is due to a 9.5% increase in same store retail unit sales, which increased revenue by $6.5 million, coupled with a $42, or 4.4%, increase in comparative average finance and insurance revenue per unit which increased revenue by $2.9 million.

Service and Parts Data

 

Dollars in millions, except per unit amounts                2012 vs. 2011  
     2012     2011     Change     % Change  

Service and parts revenue

   $ 369.7      $ 341.5        28.2        8.3

Same store service and parts revenue

   $ 342.0      $ 339.5        2.5        0.7

Gross profit

   $ 213.2      $ 194.9        18.3        9.4

Same store gross profit

   $ 197.1      $ 193.9        3.2        1.7

Gross margin

     57.7     57.1     0.6     1.1

Same store gross margin

     57.6     57.1     0.5     0.9

Revenues

Service and parts revenue increased $28.2 million, or 8.3%, from 2011 to 2012. The increase is due to a $2.5 million, or 0.7%, increase in same store revenues during the period, coupled with a $25.7 million increase from net dealership acquisitions. The same store increase relates primarily to our U.S. operations.

Gross Profit

Service and parts gross profit increased $18.3 million, or 9.4%, from 2011 to 2012. The increase is due to a $3.2 million, or 1.7%, increase in same store gross profit during the period, coupled with a $15.1 million increase from net dealership acquisitions. The same store gross profit increase is due to the $2.5 million, or 0.7%, increase in same store revenues, which increased gross profit by $1.4 million, coupled with a 0.9% increase in gross margin, which increased gross profit by $1.8 million.

Selling, General and Administrative

Selling, general and administrative expenses (“SG&A”) increased $43.2 million, or 12.2%, from $355.4 million to $398.6 million. The aggregate increase is due to a $17.3 million, or 4.9%, increase in same store SG&A, coupled with a $25.9 million increase from net dealership acquisitions. The increase in same store SG&A is due to a net increase in variable selling expenses, including increases in variable compensation, as a result of a 7.5% increase in same store retail gross profit versus the prior year. SG&A expenses decreased as a percentage of gross profit from 80.9% to 78.7%.

Floor Plan Interest Expense

Floor plan interest expense, including the impact of swap transactions, increased $2.8 million, or 40.4%, from $6.9 million to $9.7 million due to an increase in same store floor plan interest expense. The same store increase is due primarily to increases in applicable interest rates due to the impact of swap transactions, as well as increased amounts outstanding under floor plan arrangements.

Other Interest Expense

Other interest expense increased $0.9 million, or 8.2%, from $11.3 million to $12.2 million. The increase is due primarily to incremental borrowings made during the latter part of 2011 in the U.S. and the first quarter of 2012 in the U.K. to finance acquisitions.

 

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Debt Discount Amortization

There was no debt discount amortization during the first quarter of 2012 as we completed the amortization of the debt discount related to our Convertible Notes in 2011.

Equity in Earnings of Affiliates

Equity in earnings of affiliates increased $4.4 million. The increase is due primarily to improved operating performance by PTL compared to the same period a year ago.

Income Taxes

Income taxes increased $11.2 million, or 71.7%, from $15.7 million to $26.9 million. The increase from 2011 to 2012 is due to an increase in our pre-tax income versus the prior year which is compounded by a benefit recorded in the prior year relating to expected realization of deferred tax assets, due in large part to our exit from the distribution business.

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 purchase or construction of new facilities, debt service and repayments, and potentially for dividends and repurchases of our outstanding securities under the program discussed below. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions, mortgages, dividends and distributions from joint venture investments, or the issuance of equity securities.

We have historically expanded our retail automotive operations through organic growth and the acquisition of retail automotive dealerships. We believe that cash flow from operations, dividends and distributions from our joint venture investments and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our operations and commitments for at least the next twelve months. In the event we pursue 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.

As of March 31, 2012, we had $261.1 million and £70.0 million ($111.7 million) available for borrowing under our U.S. credit agreement and our U.K. credit agreement, respectively.

Securities Repurchases

From time to time, our Board of Directors has authorized securities repurchase programs pursuant to which we may, as market conditions warrant, purchase our outstanding common stock, debt or convertible debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. We have historically funded any such repurchases using 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 our consideration of any alternative uses of our capital, such as for strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy. During the three months ended March 31, 2012, we repurchased 350,000 shares of our common stock for $8.5 million, or $24.35 per share. As of March 31, 2012, we have $98.3 million in authorization under the existing securities repurchase program.

 

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Dividends

We paid the following cash dividends on our common stock in 2011 and 2012:

 

Per Share Dividends

 

2011

      

Second Quarter

   $ 0.07   

Third Quarter

     0.08   

Fourth Quarter

     0.09   

 

2012

      

First Quarter

   $ 0.10   

We also have announced a cash dividend of $0.11 per share payable on June 1, 2012 to shareholders of record on May 10, 2012. Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors which may include our earnings, capital requirements, restrictions relating to any then-existing indebtedness, financial condition, and other factors.

Inventory Financing

We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan arrangements with various lenders, including a majority through captive finance companies associated with automotive manufacturers. In the U.S., the floor plan arrangements are due on demand; however, we have not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. We typically make monthly interest payments on the amount financed. Outside of the U.S., substantially all of our floor plan arrangements are payable on demand or have an original maturity of 90 days or less and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.

The floor plan agreements typically 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, Finance House Base Rate, or Euro Interbank Offered Rate. 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 also receive non-refundable credits from certain of our vehicle manufacturers, which are treated as a reduction of cost of sales as vehicles are sold.

U.S. Credit Agreement

We are party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. credit agreement”), which provides for up to $375.0 million in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a balance of $127.0 million, and for an additional $10.0 million of availability for letters of credit, through September 2014. The revolving loans bear interest at a defined LIBOR plus 2.50%, subject to an incremental 1.00% 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 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 earnings before interest, taxes, depreciation and amortization (“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 any amounts owed. As of March 31, 2012, 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 considered the current margin of compliance with the covenants and our expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments. See “Forward Looking Statements.”

 

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The U.S. credit agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our domestic assets are subject to security interests granted to lenders under the U.S. credit agreement. As of March 31, 2012, $127.0 million of term loans, $0.5 million of letters of credit and $107.0 million of revolver borrowings were outstanding under the U.S. credit agreement.

U.K. Credit Agreement

Our subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a £100 million revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10 million demand overdraft line of credit with RBS (collectively, the “U.K. credit agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of March 31, 2012, outstanding loans under the U.K. credit agreement amounted to £40.0 million ($63.8 million).

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. 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 any amounts owed. As of March 31, 2012, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement and we believe they will remain in compliance with such covenants for the next twelve months. In making such determination, we 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. See “Forward Looking Statements”.

The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries’ assets are subject to security interests granted to lenders under the U.K. credit agreement.

In January 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30 million term loan which was used for working capital and an acquisition. The term loan is repayable in £1.5 million quarterly installments through 2015 with a final payment of £7.5 million due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries’ ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of March 31, 2012, the amount outstanding under the U.K. term loan was £28.5 million ($45.5 million).

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 of our wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. We can redeem all or some of the 7.75% Notes at our option at specified redemption prices (currently 103.875% of the principal amount of the notes). Upon certain sales of assets or specific kinds of changes of control, we are required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of March 31, 2012, we were in compliance with all negative covenants and there were no events of default. We expect to remain in compliance during the next twelve months.

Senior Subordinated Convertible Notes

We currently have $63.3 million of Convertible Notes outstanding. We issued the Convertible Notes in January 2006. The Notes, which mature on April 1, 2026 unless earlier converted, redeemed or purchased by us, as discussed below. The Convertible Notes are unsecured senior subordinated obligations and are subordinate to all future and existing debt under our credit agreements, mortgages and floor plan indebtedness. The Convertible Notes are guaranteed on an unsecured senior subordinated basis by substantially all of our wholly-owned domestic subsidiaries. The guarantees are full and unconditional and joint and several. The Convertible Notes also contain customary negative covenants and events of default. As of March 31, 2012, we were in compliance with all negative covenants and there were no events of default. We expect to remain in compliance during the next twelve months.

 

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Holders of the Convertible Notes may convert them based on a conversion rate of 42.7796 shares of our common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share), subject to adjustment, only under the following circumstances: (1) in any quarterly period, if the closing price of our common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.05 (subject to adjustment), (2) for specified periods, if the trading price of the Convertible Notes falls below specific thresholds, (3) if the Convertible Notes are called for redemption, (4) if specified distributions to holders of our common stock are made or specified corporate transactions occur, (5) if a fundamental change (as defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity date.

Upon conversion of the Convertible Notes, for each $1,000 principal amount of the Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture covering the Convertible Notes, of the number of shares of common stock equal to the conversion rate. If the conversion value exceeds $1,000, we will also deliver, at our election, cash, common stock or a combination of cash and common stock with respect to the remaining value deliverable upon conversion. 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.

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 plus any applicable conversion premium. The decision to redeem any of the notes will be based on factors such as the market price of the notes and our common stock, the potential impact of any redemptions on our capital structure, and consideration of alternate uses of capital, such as for strategic investments in our current business, in addition to any then-existing limits imposed by our finance agreements. In addition, holders of the Convertible Notes have the right to require us to purchase all or a portion of their Convertible Notes for cash on each of 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, plus any applicable conversion premium.

Mortgage Facilities

We are party to several mortgages, which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to our other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of March 31, 2012, we owed $74.8 million of principal under our mortgage facilities.

Short-term Borrowings

We have three principal sources of short-term borrowing: the revolving portion of the U.S. credit agreement, the revolving portion of the U.K. credit agreement, and the floor plan agreements in place that we utilize to finance our vehicle inventories. All of the cash generated in our operations is initially used to pay down our floor plan indebtedness. Over time, we are able to access availability under the floor plan agreements to fund our cash needs, including payments made relating to our higher interest rate revolving credit agreements.

During the first quarter of 2012, outstanding revolving commitments varied between $107.0 and $188.5 million under the U.S. credit agreement and between £28.0 million and £92.0 million under the U.K. credit agreement’s revolving credit line (excluding the overdraft facility), and the amounts outstanding under our floor plan agreements varied based on the timing of the receipt and expenditure of cash in our operations, driven principally by the levels of our vehicle inventories.

Interest Rate Swaps

We periodically 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 December 2014 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor plan debt is fixed at 2.135% and $100.0 million of our floating rate floor plan debt is fixed at1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements. During the three months ended March 31, 2012, the swaps increased the weighted average interest rate on our floor plan borrowing by 40 basis points.

PTL Dividends

We own a 9.0% limited partnership interest in Penske Truck Leasing. During the three months ended March 31, 2012 and 2011, respectively, we received $10.8 million and $7.8 million of pro rata cash distributions relating to this investment. We currently expect to continue to receive future distributions from PTL quarterly, subject to its financial performance.

 

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Operating Leases

We have historically structured our operations so as to minimize our ownership of real property. As a result, we lease or sublease substantially all of our facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at our election. Pursuant to the leases for some of our larger facilities, we are required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require us to post collateral in the form of a letter of credit. A breach of our other lease covenants give rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of March 31, 2012, we were in compliance with all covenants under these leases, and we believe we will remain in compliance with such covenants for the next twelve months.

Sale/Leaseback Arrangements

We have in the past and may in the future 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.

Off-Balance Sheet Arrangements

We have sold a number of dealerships to third parties and, as a condition to certain of those sales, remain liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. We are also party to lease agreements on properties that we no longer use in our retail operations that we have sublet to third parties. We rely on subtenants to pay the rent and maintain the property at these locations. In the event a subtenant does not perform as expected, we may not be able to recover amounts owed to us and we could be required to fulfill these obligations. We believe we have made appropriate reserves relating to these locations.

We hold a 9.0% limited partnership interest in PTL. In April and May 2012, PTL refinanced a significant amount of its indebtedness. As part of that refinancing, we and the other PTL partners created a new company (“Holdings”), which, together with General Electric Capital Corporation (“GECC”), co-issued $700 million of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700 million derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700 million of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.

Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, we have agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $0.95 million for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9% of interest payments under the Holdings Bonds, plus fees and default interest, if any. Although we do not currently expect to make material payments to GECC under this agreement, this outcome cannot be predicted with certainty. See Part II – Item 1A –Risk Factors.

Cash Flows

Cash and cash equivalents increased by $3.3 million and $20.7 million during the three months ended March 31, 2012 and 2011, respectively. The major components of these changes are discussed below.

Cash Flows from Continuing Operating Activities

Cash provided by continuing operating activities was $125.3 million and $9.8 million during the three months ended March 31, 2012 and 2011, respectively. Cash flows from continuing operating activities includes 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.

 

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In accordance with generally accepted 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 prepare the following reconciliation to highlight our operating cash flows with all changes in vehicle floor plan being classified as an operating activity for informational purposes:

 

     Three Months Ended March 31,  

Dollars in millions

   2012      2011  

Net cash from continuing operating activities as reported

   $ 125.3       $ 9.8   

Floor plan notes payable — non-trade as reported

     0.7         29.4   
  

 

 

    

 

 

 

Net cash from continuing operating activities including all floor plan notes payable

   $ 126.0       $ 39.2   
  

 

 

    

 

 

 

Cash Flows from Continuing Investing Activities

Cash used in continuing investing activities was $134.6 million and $31.4 million during the three months ended March 31, 2012 and 2011, respectively. Cash flows from continuing investing activities consist primarily of cash used for capital expenditures and net expenditures for acquisitions and other investments. Capital expenditures were $26.5 million and $20.8 million during the three months ended March 31, 2012 and 2011, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities and the construction of new facilities. As of March 31, 2012, we do not have material commitments related to our planned or ongoing capital projects. We currently expect to finance our capital expenditures with operating cash flows or borrowings under our U.S. or U.K. credit facilities. Cash used in acquisitions and other investments, net of cash acquired, was $108.1 million and $14.0 million during the three months ended March 31, 2012 and 2011, respectively, and included cash used to repay sellers floor plan liabilities in such business acquisitions of $36.9 million and $5.9 million, respectively. Additionally, proceeds from other investing activities during the three months ended March 31, 2011 were $3.5 million.

Cash Flows from Continuing Financing Activities

Cash used in continuing financing activities was $7.1 million during the three months ended March 31, 2012. Cash provided by continuing financing activities was $37.8 million during the three months ended March 31, 2011. Cash flows from continuing financing activities include net borrowings or repayments of long-term debt, repurchases of securities, net borrowings or repayments of floor plan notes payable non-trade, proceeds from the issuance of common stock and the exercise of stock options, and dividends. We had net borrowings of long-term debt of $10.0 million and $6.7 million during the three months ended March 31, 2012 and 2011, respectively, including net borrowings under revolving credit facilities. We had net borrowings of floor plan notes payable non-trade of $0.7 million and $29.4 million during the three months ended March 31, 2012 and 2011, respectively. During the three months ended March 31, 2012, we acquired 350,000 shares of common stock for $8.5 million, and also paid cash dividends to our stockholders of $9.0 million.

Cash Flows from Discontinued Operations

Cash flows relating to discontinued operations are not currently considered, nor are they expected to be, material to our liquidity or our capital resources. Management does not believe that the net impact of upcoming cash transactions relating to discontinued operations will be material.

Related Party Transactions

Stockholders Agreement

Several of our directors and officers are affiliated with Penske Corporation or related entities. Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is also Chairman of the Board and Chief Executive Officer of Penske Corporation, and through entities affiliated with Penske Corporation, our largest stockholder owning approximately 35% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) own approximately 17% of our outstanding common stock. Mitsui, Penske Corporation and certain other affiliates of Penske Corporation are parties to a stockholders agreement pursuant to which the Penske affiliated companies agreed to vote their shares for one director who is a representative of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates in March 2014, upon the mutual consent of the parties, or when either party no longer owns any of our common stock.

Other Related Party Interests and Transactions

Roger S. Penske is also a managing member of Transportation Resource Partners, an organization that invests in transportation-related industries. Richard J. Peters, one of our directors, is a managing director of Transportation Resource Partners and is a director of Penske Corporation. Robert H. Kurnick, Jr., our President and a director, is also the President and a director of Penske Corporation.

 

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We sometimes pay to and/or receive fees from Penske Corporation, its subsidiaries, and its affiliates for services rendered in the ordinary course of business, or to reimburse payments made to third parties on each other’s behalf. These transactions are reviewed periodically by our Audit Committee and reflect the provider’s cost or an amount mutually agreed upon by both parties.

As discussed above, we are a 9.0% limited partner of PTL, a leading global transportation services provider. 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 General Electric Capital Corporation. Among other things, the partnership agreement provides us with specified partner distribution and governance rights and restricts our ability to transfer our interests.

In April 2012, we acquired a 7% interest in NPA Holdco, LLC, an auctioneer of powersport vehicles in exchange for $3.0 million. Transportation Resource Partners, an organization discussed above, recently acquired a controlling interest in this company on the same financial terms as our investment.

We have also entered into other joint ventures with certain related parties as more fully discussed below.

Joint Venture Relationships

We are party to a number of joint ventures pursuant to which we own and operate automotive dealerships together with other investors. We may provide these dealerships with working capital and other debt financing at costs that are based on our incremental borrowing rate. As of March 31, 2012, our automotive retail joint venture relationships included:

 

          Ownership  

Location

  

Dealerships

   Interest  

Fairfield, Connecticut

   Audi, Mercedes-Benz, Porsche, smart      86.56 %(A) (B) 

Las Vegas, Nevada

   Ferrari, Maserati      50.00 %(C) 

Frankfurt, Germany

   Lexus, Toyota      50.00 %(C) 

Aachen, Germany

   Audi, Lexus, Skoda, Toyota, Volkswagen, Citroën      50.00 %(C) 

Monza, Italy

   BMW, Mini      70.00

 

(A) An entity controlled by one of our directors, Lucio A. Noto (the “Investor”), owns a 13.44% interest in this joint venture which entitles the Investor to 20% of the joint venture’s operating profits. In addition, the Investor has an option to purchase up to a 20% interest in the joint venture for specified amounts. In April 2012, the Investor puchased an additional 1.61% bringing its total ownership to 15.05%.
(B) Entity is consolidated in our financial statements.
(C) Entity is accounted for using the equity method of accounting.

In April 2011, we repurchased the remaining 30.0% interest in the Edison, New Jersey joint venture which is now a 100% owned subsidiary.

Cyclicality

Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, 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.

 

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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 and operating performance;

 

   

future acquisitions and dispositions;

 

   

future potential capital expenditures and securities repurchases;

 

   

our ability to realize cost savings and synergies;

 

   

our ability to respond to economic cycles;

 

   

trends in the automotive retail industry and in the general economy in the various countries in which we operate;

 

   

our ability to access the remaining availability under our credit agreements;

 

   

our liquidity;

 

   

performance of joint ventures, including PTL;

 

   

future foreign exchange rates;

 

   

the outcome of various legal proceedings;

 

   

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 2011 annual report on Form 10-K filed February 24, 2012. 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 adverse economic conditions, including changes in interest rates, foreign exchange rates, consumer demand, consumer confidence, fuel prices, unemployment rates and credit availability;

 

   

the number of new and used vehicles sold in our markets;

 

   

automobile manufacturers exercise significant control over our operations, and we depend on them and continuation of our franchise agreements in order to operate our business;

 

   

we depend on the success, popularity and availability of the brands we sell, and adverse conditions affecting one or more automobile manufacturers, including the adverse impact on the vehicle and parts supply chain due to natural disasters or other disruptions that interrupt the supply of vehicles and parts to us, may negatively impact our revenues and profitability;

 

   

a restructuring of any significant automotive manufacturers or automotive suppliers;

 

   

our dealership operations may be affected by severe weather or other periodic business interruptions;

 

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we may not be able to satisfy our capital requirements for acquisitions, dealership renovation projects, financing the purchase of our inventory, or refinancing of our debt when it becomes due;

 

   

our level of indebtedness may limit our ability to obtain financing generally and may require that a significant portion of our cash flow be used for debt service;

 

   

non-compliance with the financial ratios and other covenants under our credit agreements and operating leases;

 

   

our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign currency valuations;

 

   

import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;

 

   

with respect to PTL, changes in the financial health of its customers, labor strikes or work stoppages by its employees, a reduction in PTL’s asset utilization rates and industry competition which could impact distributions to us;

 

   

we are dependent on continued availability of our information technology systems;

 

   

if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional qualified personnel;

 

   

new or enhanced regulations relating to automobile dealerships;

 

   

changes in tax, financial or regulatory rules or requirements;

 

   

we are subject to numerous legal and administrative proceedings which, if the outcomes are adverse to us, could have a material adverse effect on our business;

 

   

if state dealer laws in the U.S. are repealed or weakened, our automotive dealerships may be subject to increased competition and may be more susceptible to termination, non-renewal or renegotiation of their franchise agreements; and

 

   

some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests.

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 and further information under Item 1A “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 federal securities laws and the Securities and Exchange Commission’s rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rates. We are exposed to market risk from changes in interest rates on a significant portion of our debt. Outstanding revolving balances under our credit agreements bear interest at variable rates based on a margin over defined LIBOR or the Bank of England Base Rate. Based on the amount outstanding under these facilities as of March 31, 2012, a 100 basis point change in interest rates would result in an approximate $3.0 million change to our annual other interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over the prime rate, defined LIBOR, the Finance House Base Rate, or the Euro Interbank Offered Rate. In 2012, we are party to swap agreements pursuant to which a notional $400.0 million of our floating rate floor plan debt is exchanged for fixed rate debt through December 2014. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements subject to variable interest payments during the trailing twelve months ended March 31, 2012 considering the swap agreements, a 100 basis point change in interest rates would result in an approximate $14.5 million change to our annual floor plan interest expense.

 

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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 which we are unable to reliably value, or for which we are unable to obtain a market quotation.

Interest rate fluctuations affect the fair market value of our fixed rate debt, including our swaps, mortgages, the 7.75% Notes, the Convertible Notes, and certain seller financed promissory notes, but, with respect to such fixed rate debt instruments, do not impact our earnings or cash flows.

Foreign Currency Exchange Rates. As of March 31, 2012, we had dealership operations in the U.K., Germany and Italy. 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 $127.8 million change to our revenues for the three months ended March 31, 2012.

In common with other automotive retailers, we purchase certain of our new vehicle and parts inventories from foreign manufacturers. Although we purchase the majority of our inventories in the local functional currency, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the principal executive and financial officers, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive and financial officers, to allow timely discussions regarding required disclosure.

Based upon this evaluation, the Company’s principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, we maintain internal controls designed to provide us with the information required for accounting and financial reporting purposes. There were no changes in our internal control over financial reporting that occurred during the most recent quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation which may relate to claims brought by governmental authorities, customers, vendors, or employees, including class action claims and purported class action claims. 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 us. 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.

 

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Item 1A. Risk Factors

In addition to the information set forth in this Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition, or future results. The following updates the risk factors included in our 2011 Form 10-K:

Restructuring, bankruptcy or other adverse conditions affecting a significant automotive manufacturer or supplier. Our success depends on the overall success of the automotive industry generally, and in particular on the success of the brands of vehicles that each of our dealerships sell. In 2011, revenue generated at our BMW/MINI, Audi/Volkswagen/Bentley, Toyota/Lexus/Scion, Honda/Acura, and Mercedes-Benz/Sprinter/smart dealerships represented 25%, 15%, 15%, 13%, and 10%, respectively, of our total revenues. Significant adverse events, such as natural disasters or other disruptions to the vehicle or parts supply chain, or other future events that interrupt vehicle or parts supply to our dealerships, would likely have a significant and adverse impact on the industry as a whole, including us, particularly if the events relate to any of the manufacturers whose franchises generate a significant percentage of our revenue. An explosion at an automotive supplier’s plant in March 2012 has led to a shortage of a type of nylon resin commonly used in vehicle production. We cannot predict at this time predict the effect of this shortage on the supply of vehicles or parts to us.

We may be required to make payments to General Electric Capital Corporation (“GECC”) under our agreement to indemnify them for nine percent of any payments by GECC under bonds co-issued by them in connection with Penske Truck Leasing (“PTL”).

We hold a 9.0% limited partnership interest in PTL. In May 2012, PTL refinanced a significant amount of its indebtedness. As part of that refinancing, we and the other PTL partners created a new company (“Holdings”), which issued $700 million of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700 million derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700 million of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds. We have agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $0.95 million for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9% of interest payments under the Holdings Bonds, plus fees and default interest, if any.

We have also granted GECC a first priority security interest in our newly issued Holdings interests and their related distributions. In the event of a default by us under this agreement, GECC is entitled to retain or sell our Holdings interests and any distributions related to those interests, in addition to any other remedies available to GECC. As described below, although we do not currently expect to make material payments to GECC under this agreement, this outcome cannot be predicted with certainty. We expect that distributions from PTL to Holdings, or, if necessary, capital contributions from the PTL partners, will be sufficient to pay the interest payments on the Holdings Bonds. It is not currently expected that at maturity of the Holdings Bonds in 2019, absent voluntary contributions by the PTL partners, Holdings will have received distributions from PTL sufficient to pay the principal of the notes. Accordingly, the PTL partners may need to make additional capital contributions to Holdings at maturity, seek additional equity financing or refinance all or a portion of the Holdings Bonds in order to satisfy the principal amount of those notes. Such additional financing may not be available at terms satisfactory to the members, if at all.

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

In February 2010, our Board of Directors authorized the repurchase of up to $150.0 million of our outstanding common stock, debt or convertible debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. The program has an indefinite duration. During the first quarter of 2012, we repurchased 350,000 shares of common stock under this program for a total of $8.5 million. As of March 31, 2012, our remaining authorization under the program was $98.3 million.

 

                   Total Number of      Approximate Dollar  
                   Shares Purchased as      Value of Shares  
                   Part of Publicly      that May Yet be  
     Total Number of      Average Price Paid      Announced Plans      Purchased Under  

Period

   Shares Purchased      per Share      or Programs      the Plans or Program  

January 1 to January 31, 2012

     —         $ —           —         $ 106,778,845   

February 1 to February 29, 2012

     131,250       $ 24.05         131,250       $ 103,622,283   

March 1 to March 31, 2012

     218,750         24.53         218,750         98,257,266   
  

 

 

    

 

 

    

 

 

    
     350,000       $ 24.35         350,000      
  

 

 

    

 

 

    

 

 

    

 

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Item 5. Other Information

Summary

Since 2008, we have held a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading transportation services provider. The general partner of PTL is Penske Truck Leasing Corporation, a wholly-owned indirect subsidiary of Penske Corporation (“PTLC”), which owns 41.1% of PTL. The remaining 49.9% of PTL is owned by direct and indirect wholly-owned subsidiaries of General Electric Capital Corporation (“GECC”, and, together with PTLC and us, the “PTL partners”).

PTL has historically relied on GECC to provide funding for its business and as of March 31, 2012, GECC provided over $6.4 billion of funding to PTL on terms and conditions that were the same or no less favorable than those extended to GECC’s wholly-owned subsidiaries. These funding agreements allow GECC to reset the interest rates and other economic terms of the agreement on June 30, 2013 to market rates and terms.

The PTL partners have agreed, subject to debt market conditions, to cause PTL to engage in additional refinancing activities to fund its operations and its repay in full its debt to GECC as soon as reasonably practicable. As a result, PTL and the PTL partners have entered into a series of transactions discussed below to begin to refinance the debt owed by PTL to GECC and over time plan to move PTL’s debt structure to independent market-based financing in an efficient manner. In order to achieve lower interest rates on this market-based debt financing, the PTL partners contributed additional equity to PTL using the structure outlined below.

Bond Offering by a New PTL Ownership Vehicle to Raise Equity for PTL

On April 30, 2012, the PTL partners restructured the ownership of PTL to facilitate the investment of additional equity into PTL (the “Equity Infusion”). In lieu of cash investments by the PTL partners directly into PTL, a new company was created, LJ VP Holdings, LLC (“Holdings”), which is owned by the PTL partners in the same percentages as their ownership of PTL prior to the Equity Infusion, and of which PTLC is the sole managing member. On April 30, 2012, Holdings and GECC, as co-issuers, issued $700 million of 3.8% senior unsecured notes due 2019 to certain investors through an offering pursuant to Rule 144A of the Securities Act of 1933, as amended (the “Holdings Bonds”). A wholly-owned subsidiary of Holdings contributed $700 million derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700 million of proceeds from this equity infusion to reduce its outstanding debt owed to GECC. Because the PTL partners hold the same relative percentage ownership in Holdings as they did of PTL immediately prior to the Equity Infusion, the ultimate economic ownership of PTL did not change as a result of the Equity Infusion.

GECC agreed to be a co-obligor of the Holdings Bonds in order to obtain lower interest rates on the Holdings Bonds. Therefore, either Holdings or GECC may make the payments required under the Holdings Bonds. However, in the event GECC is required to make any payments, we agreed to indemnify GECC for our pro rata 9.0% of any principal and interest funded by GECC in respect of the Holdings Bonds, and, to accommodate GECC for the credit enhancement, we agreed to pay GECC an annual fee of approximately $0.95 million pursuant to the Co-obligation Fee, Indemnity and Security Agreement filed as Exhibit 10.1 hereto and incorporated herein by reference. The maximum amount of our potential obligations to GECC under this agreement is 9.0% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9.0% of interest payments under the Holdings Bonds, plus fees and default interest, if any. Although we do not currently expect to make material payments to GECC under this agreement, this outcome cannot be predicted with certainty. See “Item 1A. Risk Factors”. We have also granted GECC a first priority security interest in our newly issued Holdings ownership interests and any distributions with respect thereto. In the event of a default by us under this agreement, GECC is entitled to retain or sell our Holdings ownership interests and any distributions related to those ownership interests, in addition to any other remedies available to GECC. PTLC and an affiliate entered into a similar agreement with respect to 41.1% of any payments made by GECC under the Holdings Bonds.

Holdings LLC Agreement

The limited liability company agreement of Holdings is filed as Exhibit 10.2 hereto and is incorporated herein by reference. This agreement extends through 2023 and required an initial capital contribution from us of $0.45 million to acquire 9.0% of Holdings. Any cash distributed to Holdings by PTL, except for an amount up to $0.1 million, is required to be used to service the Holdings Bonds, unless otherwise agreed to in certain circumstances by the Holdings members. The members expect to contribute amounts to Holdings relating to the debt service of the Holdings Bonds if necessary. See “Item 1A. Risk Factors”. We have governance rights in Holdings typical of a minority investor and, in light of our indemnification requirements related to the Holdings Bonds noted above, we have the right to approve certain additional debt obligations before incurrence by Holdings to the extent such incurrence would affect our indemnification requirements, any change in Holdings’ business activities and changes to the maturity, interest rate and principal amount of the Holdings Bonds. The agreement contains restrictions on our ability to transfer our interests similar to those in the existing and revised PTL partnership agreement discussed below.

Amended and Restated PTL Partnership Agreement

We amended and restated the PTL partnership agreement to admit Holdings’ wholly-owned subsidiary as a partner. Under the amended and restated partnership agreement, subject to applicable law and the terms of any applicable finance agreements, PTL is required to make quarterly pro rata distributions to its partners, including Holdings’ wholly-owned subsidiary, equal to 50% of its consolidated net income (calculated without regard to most currency translation adjustments and goodwill impairment charges). The amended agreement, which now extends through 2023, also allows GECC or PTLC, beginning December 31, 2017, to give notice to require PTL to begin to effect an initial public offering of equity securities, subject to certain limitations, as soon as practicable after the first anniversary of the initial notice. The party that is not exercising this right may seek to find a third party to purchase all of the partnership interests from the exercising party or to propose another alternative to such equity offers. The amended and restated partnership agreement is filed as Exhibit 10.3 hereto and incorporated herein by reference. In connection with the right to cause PTL to conduct an initial public offering, the PTL partners have agreed to customary demand and piggyback registration rights.

 

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Amendment of our U.S. Credit Agreement

In connection with the transaction noted above, we have amended certain covenants and other provisions of our existing U.S. credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation to allow the incurrence of the obligations, and grant of a first priority security interest to GECC, noted above. These changes are further described in the amendment to the credit agreement, which is filed as Exhibit 4.1 hereto and incorporated herein by reference.

Other Information

The descriptions of the transaction agreements above are not complete and are qualified in their entirety by the actual terms of those agreements, copies of which are filed as Exhibits 4.1, 10.1, 10.2, and 10.3 hereto, and are incorporated by reference herein. These transactions were approved by the disinterested members of our Board of Directors. We purchase motor vehicles from Daimler AG and Toyota Motor Corporation, affiliates of the respective lenders under the U. S. Credit Agreement, for sale at certain of our dealerships. The lenders also provide certain of our dealerships with “floor-plan” and consumer financing. For the Item 404(a) of Regulation S-K “related party” disclosure between us, PTL and Penske Corporation, see the “Related Party Transactions” section of our proxy statement filed on March 19, 2012, which is incorporated herein by reference.

Item 6. Exhibits

 

  4.1      

Sixth Amendment dated April 30, 2012 to the Third Amended and Restated Credit Agreement dated September 30, 2008 by and among us, Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit, which also amends the Second Amended and Restated Security Agreement dated as of September 4, 2004 among these same parties.

  10.1      

Co-obligation Fee, Indemnity and Security Agreement dated April 30, 2012 between General Electric Capital Corporation and us.

  10.2      

Amended and Restated Limited Liability Company Agreement of LJ VP Holdings LLC dated April 30, 2012 by and among Penske Truck Leasing Corporation, GE Capital Truck Leasing Holding Corp., Logistics Holding Corp., General Electric Credit Corporation of Tennessee, and us.

  10.3      

Fourth Amended and Restated Agreement of Limited Partnership of Penske Truck Leasing Co., L.P. dated April 30, 2012 by and among Penske Truck Leasing Corporation, LJ VP LLC, GE Capital Truck Leasing Holding Corp., Logistics Holding Corp., General Electric Credit Corporation of Tennessee, and us.

  10.4       Form of Restricted Stock Agreement**
  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.
  101          The following materials from Penske Automotive Group’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Condensed Statements of Income for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011, (iv) the Consolidated Condensed Statement of Equity for the three months ended March 31, 2012, and (v) the Notes to Consolidated Condensed Financial Statements.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
** Compensatory plan or contract

 

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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.

Date: May 4, 2012

     

By:

 

/s/ Roger S. Penske

       

Roger S. Penske

Chief Executive Officer

Date: May 4, 2012

     

By:

 

/s/ David K. Jones

       

David K. Jones

Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit     

No.

  

Description

4.1   

Sixth Amendment dated April 30, 2012 to the Third Amended and Restated Credit Agreement dated September 30, 2008 by and among us, Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit, which also amends the Second Amended and Restated Security Agreement dated as of September 4, 2004 among these same parties.

10.1   

Co-obligation Fee, Indemnity and Security Agreement dated April 30, 2012 between General Electric Capital Corporation and us.

10.2   

Amended and Restated Limited Liability Company Agreement of LJ VP Holdings LLC dated April 30, 2012 by and among Penske Truck Leasing Corporation, GE Capital Truck Leasing Holding Corp., Logistics Holding Corp., General Electric Credit Corporation of Tennessee, and us.

10.3   

Fourth Amended and Restated Agreement of Limited Partnership of Penske Truck Leasing Co., L.P. dated April 30, 2012 by and among Penske Truck Leasing Corporation, LJ VP LLC, GE Capital Truck Leasing Holding Corp., Logistics Holding Corp., General Electric Credit Corporation of Tennessee, and us.

10.4    Form of Restricted Stock Agreement **
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.
101    The following materials from Penske Automotive Group’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Condensed Balance Sheets as of March 31, 2012 and December 31, 2011, (ii) the Consolidated Condensed Statements of Income for the three months ended March 31, 2012 and 2011, (iii) the Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2012 and 2011, (iv) the Consolidated Condensed Statement of Equity for the three months ended March 31, 2012, and (v) the Notes to Consolidated Condensed Financial Statements.*

 

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
** Compensatory plan or contract

 

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