PENSKE AUTOMOTIVE GROUP, INC. - Quarter Report: 2013 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

For the quarterly period ended June 30, 2013

 

or

 

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

 

For the transition period from            to          

 

Commission file number 1-12297

 

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

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 x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

 

 

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

 

As of July 22, 2013, there were 90,201,959 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 June 30, 2013 and December 31, 2012	3
	Consolidated Condensed Statements of Income for the three and six months ended June 30, 2013 and 2012	4
	Consolidated Condensed Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	5
	Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2013 and 2012	6
	Consolidated Condensed Statement of Equity for the six months ended June 30, 2013	7
	Notes to Consolidated Condensed Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3. Quantitative & Qualitative Disclosures About Market Risk		43
Item 4. Controls and Procedures		44
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 5. Other Information		44
Item 6. Exhibits		45

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

 

		June 30, 2013			December 31, 2012
		(Unaudited)
		(In thousands, except per share amounts)
ASSETS
Cash and cash equivalents		$	26,254		$	43,447
Accounts receivable, net of allowance for doubtful accounts of $2,522 and $2,979		530,647			554,851
Inventories		2,125,771			2,000,206
Other current assets		90,352			90,485
Assets held for sale		33,849			73,398
Total current assets		2,806,873			2,762,387
Property and equipment, net		1,148,495			1,031,188
Goodwill		956,180			978,147
Franchise value		274,986			283,152
Equity method investments		332,503			303,160
Other long-term assets		18,595			20,956
Total assets		$	5,537,632		$	5,378,990
LIABILITIES AND EQUITY
Floor plan notes payable		$	1,474,440		$	1,408,362
Floor plan notes payable — non-trade		753,130			725,526
Accounts payable		314,050			263,881
Accrued expenses		226,968			223,972
Current portion of long-term debt		44,896			19,493
Liabilities held for sale		23,547			51,279
Total current liabilities		2,837,031			2,692,513
Long-term debt		875,307			918,024
Deferred tax liabilities		313,756			287,818
Other long-term liabilities		155,273			164,314
Total liabilities		4,181,367			4,062,669
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; 90,202 shares issued and outstanding at June 30, 2013; 90,295 shares issued and outstanding at December 31, 2012		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		689,020			700,013
Retained earnings		704,516			611,026
Accumulated other comprehensive income (loss)		(41,505		)	(6,833		)
Total Penske Automotive Group stockholders’ equity		1,352,040			1,304,215
Non-controlling interest		4,225			12,106
Total equity		1,356,265			1,316,321
Total liabilities and equity		$	5,537,632		$	5,378,990

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

 

		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2013			2012			2013			2012
		(Unaudited)
		(In thousands, except per share amounts)
Revenue:
New vehicle		$	1,930,040		$	1,711,868		$	3,678,822		$	3,261,792
Used vehicle		1,082,310			936,978			2,084,338			1,872,273
Finance and insurance, net		95,849			81,279			182,595			159,242
Service and parts		391,554			362,194			776,919			723,314
Other		199,422			222,732			381,100			462,143
Total revenues		3,699,175			3,315,051			7,103,774			6,478,764
Cost of sales:
New vehicle		1,786,015			1,574,457			3,399,029			2,994,512
Used vehicle		1,000,703			864,454			1,924,164			1,723,791
Service and parts		156,358			150,160			317,196			303,002
Other		187,076			221,009			360,155			457,524
Total cost of sales		3,130,152			2,810,080			6,000,544			5,478,829
Gross profit		569,023			504,971			1,103,230			999,935
Selling, general and administrative expenses		440,331			400,637			854,770			788,619
Depreciation		14,985			13,319			29,516			26,310
Operating income		113,707			91,015			218,944			185,006
Floor plan interest expense		(10,900		)	(9,845		)	(21,168		)	(19,368		)
Other interest expense		(12,066		)	(11,478		)	(23,793		)	(23,572		)
Equity in earnings of affiliates		8,901			8,168			11,249			12,578
Income from continuing operations before income taxes		99,642			77,860			185,232			154,644
Income taxes		(35,164		)	(27,093		)	(63,571		)	(53,926		)
Income from continuing operations		64,478			50,767			121,661			100,718
Income (Loss) from discontinued operations, net of tax		(1,983		)	(1,155		)	(1,147		)	(4,100		)
Net income		62,495			49,612			120,514			96,618
Less: Income attributable to non-controlling interests		453			520			808			708
Net income attributable to Penske Automotive Group common stockholders		$	62,042		$	49,092		$	119,706		$	95,910
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.71		$	0.56		$	1.34		$	1.11
Discontinued operations		(0.02		)	(0.01		)	(0.01		)	(0.05		)
Net income attributable to Penske Automotive Group common stockholders		$	0.69		$	0.54		$	1.33		$	1.06
Shares used in determining basic earnings per share		90,269			90,305			90,344			90,363
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.71		$	0.56		$	1.34		$	1.11
Discontinued operations		(0.02		)	(0.01		)	(0.01		)	(0.05		)
Net income attributable to Penske Automotive Group common stockholders		$	0.69		$	0.54		$	1.32		$	1.06
Shares used in determining diluted earnings per share		90,305			90,337			90,380			90,395
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations		$	64,478		$	50,767		$	121,661		$	100,718
Less: Income attributable to non-controlling interests		453			520			808			708
Income from continuing operations, net of tax		64,025			50,247			120,853			100,010
Income (Loss) from discontinued operations, net of tax		(1,983		)	(1,155		)	(1,147		)	(4,100		)
Net income attributable to Penske Automotive Group common stockholders		$	62,042		$	49,092		$	119,706		$	95,910

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2012			2013			2012
		(Unaudited)
		(In thousands, except per share amounts)
Net Income		$	62,495		$	49,612		$	120,514		$	96,618
Other Comprehensive Income:
Foreign currency translation adjustment		1,556			(11,415		)	(35,097		)	(1,489		)
Unrealized gain (loss) on interest rate swaps:
Unrealized gain(loss) arising during the period, net of tax benefit(provision) of ($370), $701, ($335), and $1,524, respectively		566			(1,072		)	512			(2,329		)
Reclassification adjustment for loss included in floor plan interest expense, net of tax provision of $364, $692, $1,087, and $1,361, respectively		556			1,057			1,661			2,080
Unrealized gain (loss) on interest rate swaps, net of tax		1,122			(15		)	2,173			(249		)
Other adjustments to Comprehensive Income, net		303			534			(1,214		)	1,543
Other Comprehensive Income (Loss), Net of Taxes		2,981			(10,896		)	(34,138		)	(195		)
Comprehensive Income		65,476			38,716			86,376			96,423
Less: Comprehensive income attributable to non-controlling interests		453			520			1,342			708
Comprehensive income attributable to Penske Automotive Group common stockholders		$	65,023		$	38,196		$	85,034		$	95,715

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
		2013			2012
		(Unaudited)
		(In thousands)
Operating Activities:
Net income		$	120,514		$	96,618
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation		29,516			26,310
Earnings of equity method investments		(10,226		)	(12,578		)
Loss from discontinued operations, net of tax		1,147			4,100
Deferred income taxes		25,839			7,793
Changes in operating assets and liabilities:
Accounts receivable		4,405			(8,400		)
Inventories		(144,875		)	(175,406		)
Floor plan notes payable		81,365			176,164
Accounts payable and accrued expenses		62,132			93,237
Other		5,826			(5,885		)
Net cash from continuing operating activities		175,643			201,953
Investing Activities:
Purchase of equipment and improvements		(143,591		)	(57,322		)
Acquisitions net, including repayment of sellers’ floor plan notes payable of $1,758 and $37,779, respectively		(30,734		)	(111,522		)
Other		(9,695		)	(3,653		)
Net cash from continuing investing activities		(184,020		)	(172,497		)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line		491,700			396,800
Repayments under U.S. credit agreement revolving credit line		(519,700		)	(414,800		)
Repayments under U.S. credit agreement term loan		(12,000		)	—
Repurchase of 3.5% senior subordinated convertible notes		—			(37,778		)
Net borrowings (repayments) of car rental revolver		82,115			—
Net borrowings (repayments) of other long-term debt		(53,286		)	11,573
Net borrowings (repayments) of floor plan notes payable — non-trade		33,478			35,218
Repurchases of common stock		(15,813		)	(9,829		)
Dividends		(26,216		)	(18,918		)
Other		235			—
Net cash from continuing financing activities		(19,487		)	(37,734		)
Discontinued operations:
Net cash from discontinued operating activities		15,708			(1,073		)
Net cash from discontinued investing activities		2,820			35,311
Net cash from discontinued financing activities		(7,857		)	(17,010		)
Net cash from discontinued operations		10,671			17,228
Net change in cash and cash equivalents		(17,193		)	8,950
Cash and cash equivalents, beginning of period		43,447			26,997
Cash and cash equivalents, end of period		$	26,254		$	35,947
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	47,019		$	43,780
Income taxes		11,377			19,180

 

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			Penske Automotive
		Issued Shares		Amount			Paid-in Capital			Retained Earnings			Comprehensive Income (Loss)			Group Stockholders’  Equity			Non-controlling Interest			Total Equity
		(Unaudited)
		(Dollars in thousands)
Balance, January 1, 2013		90,294,765		$	9		$	700,013		$	611,026		$	(6,833	)	$	1,304,215		$	12,106		$	1,316,321
Equity compensation		414,755		—			4,585			—			—			4,585			—			4,585
Repurchase of common stock		(507,561	)	—			(15,813		)	—			—			(15,813		)	—			(15,813		)
Dividends		—		—			—			(26,216		)	—			(26,216		)	—			(26,216		)
Distributions to non-controlling interests		—		—			—			—			—			—			(1,057		)	(1,057		)
Sale of subsidiary shares to non-controlling interests		—		—			235			—			—			235			143			378
Deconsolidation of subsidiary		—		—			—			—			—			—			(8,309		)	(8,309		)
Foreign currency translation		—		—			—			—			(35,631		)	(35,631		)	534			(35,097		)
Interest rate swaps		—		—			—			—			2,173			2,173			—			2,173
Other		—		—			—			—			(1,214		)	(1,214		)	—			(1,214		)
Net income		—		—			—			119,706			—			119,706			808			120,514
Balance, June 30, 2013		90,201,959		$	9		$	689,020		$	704,516		$	(41,505	)	$	1,352,040		$	4,225		$	1,356,265

 

See Notes to Consolidated Condensed Financial Statements

 

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PENSKE AUTOMOTIVE GROUP, INC.

 

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)
(In thousands, except per share amounts)

 

1. Interim Financial Statements

 

Business Overview

 

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

 

We are the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of June 30, 2013, we operated 329 retail franchises, of which 172 franchises are located in the U.S. and 157 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K.

 

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% ownership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading provider of transportation services and supply chain management.

 

We are the Hertz rental car franchisee in the Memphis, Tennessee market and certain Indiana markets. We currently operate more than fifty on and off-airport Hertz rental car locations.

 

In June 2013, we acquired a 27% interest in Around-The Clock Freightliner (“ATC”), a retailer of Daimler branded medium, heavy and light-duty trucks in Texas and Oklahoma for $15,900. ATC operates five full service retail locations and three additional parts and service locations. We are using the equity method to account for our investment in ATC.

 

In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218,900 (approximately $200,000), which includes a targeted amount of AU $73,300 (approximately $67,000) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using cash flow from operations and available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.

 

Basis of Presentation

 

The following unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of June 30, 2013 and December 31, 2012 and for the three and six month periods ended June 30, 2013 and 2012 is unaudited, but includes all adjustments which the management of PAG 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 June 30, 2013, 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 our audited financial statements for the year ended December 31, 2012, which are included as part of our Annual Report on Form 10-K.

 

Recent Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2013-02, “Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, we are required to present either on the face of the statement of income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. We complied with the disclosure requirements of this ASU beginning with the quarter ended March 31, 2013.

 

In March 2013, the FASB issued ASU No. 2013-05, “Foreign Currency Matters (Topic 830) — Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity.” ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, Consolidation—Overall, or Subtopic 830-

 

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30, Foreign Currency Matters—Translation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. This ASU is effective prospectively for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-05 to affect our consolidated financial position, results of operations, or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-10, “Derivatives and Hedging (Topic 815) — Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in ASU No. 2013-10 permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. This ASU is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect the adoption of ASU No. 2013-10 to affect our consolidated financial position, results of operations, or cash flows.

 

In July 2013, the FASB issued ASU No. 2013-11, “Income Taxes (Topic 740) — Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” ASU No. 2013-11 resolves the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-11 to affect our consolidated financial position, results of operations, or cash flows.

 

Discontinued Operations

 

We account for dispositions in our 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 we will not have any significant continuing involvement in its operations.

 

In evaluating whether the cash flows of a dealership in our Retail reportable segment will be eliminated from ongoing operations, we consider whether it is likely that customers will migrate to similar franchises that we own in the same geographic market. Our consideration includes an evaluation of the brands sold at other dealerships we operate in the market and their proximity to the disposed dealership. When we dispose of franchises, we typically do not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of PAG owned dealerships, we do not treat the disposition as a discontinued operation if we believe that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2012			2013			2012
Revenues		$	66,766		$	100,970		$	147,795		$	225,487
Pre-tax income (loss)		(2,923		)	(1,697		)	(1,655		)	(12,856		)
Gain on disposal		840			—			840			10,160

 

		June 30, 2013			December 31, 2012
Inventories		$	14,338		$	44,649
Other assets		19,511			28,749
Total assets		$	33,849		$	73,398
Floor plan notes payable (including non-trade)		$	12,695		$	36,689
Other liabilities		10,852			14,590
Total liabilities		$	23,547		$	51,279

 

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

 

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

 

Level 1		Quoted prices in active markets for identical assets or liabilities
Level 2		Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair

 

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value of the assets or liabilities

 

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

 

Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on our current market interest rates for similar types of financial instruments (Level 2). A summary of the carrying values and fair values of our 5.75% senior subordinated notes and our fixed rate mortgage facilities are as follows:

 

		June 30, 2013
		Carrying Value			Fair Value
5.75% senior subordinated notes due 2022		$	550,000		$	561,000
Mortgage facilities		102,290			99,549

 

2. Inventories

 

Inventories consisted of the following:

 

		June 30, 2013			December 31, 2012
New vehicles		$	1,531,040		$	1,429,255
Used vehicles		508,109			484,269
Parts, accessories and other		86,622			86,682
Total inventories		$	2,125,771		$	2,000,206

 

We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $8,797 and $7,057 during the six months ended June 30, 2013 and 2012, respectively.

 

3. Business Combinations

 

We acquired one Hertz car rental franchise market area and one automotive retail franchise during the six months ended June 30, 2013. We acquired sixteen automotive retail franchises during the six months ended June 30, 2012. Our financial statements include the results of operations of the acquired dealerships and the rental car franchises from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in our 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 six months ended June 30, 2013 and 2012 follows:

 

		June 30,
		2013			2012
Accounts receivable		$	300		$	17,025
Inventory		1,905			80,766
Other current assets		158			—
Property and equipment		20,131			32,599
Indefinite-lived intangibles		7,303			57,310
Other non-current assets		—			—
Current liabilities		(55		)	(49,362		)
Non-current liabilities		992			(26,816		)
Total consideration		30,734			111,522
Seller financed/assumed debt		—			—
Cash used in acquisitions		$	30,734		$	111,522

 

The following unaudited consolidated pro forma results of operations of PAG for the three and six months ended June 30, 2013 and 2012 give effect to acquisitions consummated during 2013 and 2012 as if they had occurred on January 1, 2012:

 

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		Three Months Ended June 30,						Six Months Ended June 30,
		2013			2012			2013			2012
Revenues		$	3,704,215		$	3,408,230		$	7,121,402		$	6,661,073
Income from continuing operations		64,528			52,803			121,614			103,517
Net income		62,092			51,128			119,659			98,709
Income from continuing operations per diluted common share		$	0.71		$	0.58		$	1.34		$	1.14
Net income per diluted common share		$	0.69		$	0.57		$	1.32		$	1.09

 

4. Intangible Assets

 

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the six months ended June 30, 2013:

 

		Goodwill			Franchise Value
Balance, January 1, 2013		$	978,147		$	283,152
Additions		7,303			—
Deconsolidation of Italian investment		(7,231		)	(2,908		)
Foreign currency translation		(22,039		)	(5,258		)
Balance, June 30, 2013		$	956,180		$	274,986

 

Goodwill additions of $5,780 were related to our Hertz rental car operations within our Other reportable segment. All other changes were within our Retail reportable segment. As of June 30, 2013, the goodwill balance within our Retail and Other reportable segments was $948,431 and $7,749, respectively.

 

5. Floor Plan Notes Payable — Trade and Non-trade

 

We finance substantially all of our new and a portion of our 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, 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 the 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 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 London Interbank Offered Rate (“LIBOR”), the Finance House Bank Rate, or the Euro Interbank Offer Rate. We classify 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 our consolidated condensed balance sheets and classify related cash flows as a financing activity on our 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. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 follows:

 

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		Three Months Ended June 30,				Six Months Ended June 30,
		2013		2012		2013		2012
Weighted average number of common shares outstanding		90,269		90,305		90,344		90,363
Effect of non-participatory equity compensation		36		32		36		32
Weighted average number of common shares outstanding, including effect of dilutive securities		90,305		90,337		90,380		90,395

 

7. Long-Term Debt

 

Long-term debt consisted of the following:

 

		June 30, 2013			December 31, 2012
U.S. credit agreement - revolving credit line		$	22,000		$	50,000
U.S. credit agreement - term loan		98,000			110,000
U.K. credit agreement - revolving credit line		—			48,741
U.K. credit agreement - term loan		31,943			38,993
U.K. credit agreement - overdraft line of credit		—			6,838
5.75% senior subordinated notes due 2022		550,000			550,000
Rental car revolver		105,286			23,171
Mortgage facilities		102,290			104,043
Other		10,684			5,731
Total long-term debt		920,203			937,517
Less: current portion		(44,896		)	(19,493		)
Net long-term debt		$	875,307		$	918,024

 

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 $375,000 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 $98,000, and for an additional $10,000 of availability for letters of credit, through September 2015. The revolving loans bear interest at a defined LIBOR plus 2.25%, subject to an incremental 1.25% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.25%, 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 the amounts owed. As of June 30, 2013, we were 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 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 June 30, 2013, $22,000 of revolver borrowings, $98,000 of term loans and no letters of credit were outstanding under the U.S. Credit Agreement. We repaid $12,000 under the term loan during the six months ended June 30, 2013.

 

U.K. Credit Agreement

 

Our 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 June 30, 2013, no amounts were outstanding under the U.K. credit agreement.

 

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,

 

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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 June 30, 2013, 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 July 2013, we amended the U.K. credit agreement and U.K. term loan to provide the U.K. subsidiaries with covenant flexibility to fund the purchase of Western Star Trucks Australia (discussed above) and operate the subsidiaries to be acquired.

 

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 June 30, 2013, the amount outstanding under the U.K. term loan was £21,000 ($31,943).

 

5.75% Senior Subordinated Notes

 

In August 2012, we issued $550,000 in aggregate principal amount of 5.75% Senior Subordinated Notes due 2022 (the “5.75% Notes”).

 

Interest on the 5.75% Notes is payable semiannually on April 1 and October 1 of each year, beginning on April 1, 2013. The 5.75% Notes mature on October 1, 2022, unless earlier redeemed or purchased by us. The 5.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our existing 100% owned domestic subsidiaries. The 5.75% Notes also contain customary negative covenants and events of default. As of June 30, 2013, we were in compliance with all negative covenants, and there were no events of default.

 

On or after October 1, 2017, we may redeem the 5.75% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. We may also redeem up to 40% of the 5.75% Notes using the proceeds of specified equity offerings at any time prior to October 1, 2015 at a price specified in the indenture.

 

If we experience certain “change of control” events specified in the indenture, holders of the 5.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

 

Rental Car Revolver

 

We are party to a credit agreement with Toyota Motor Credit Corporation that currently provides us with up to $150,000 in revolving loans for the acquisition of rental vehicles. The revolving loans bear interest at three-month LIBOR plus 2.50%. This agreement provides the lender with a secured interest in the vehicles and our rental car operations’ other assets, requires us to make monthly curtailment payments and expires in October 2014. As of June 30, 2013 outstanding loans under the rental car revolver amounted to $105,286.

 

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 June 30, 2013, we owed $102,290 of principal under our mortgage facilities.

 

8. 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 $300,000 of our floating rate floor plan debt is fixed at 2.135% and $100,000 of our floating rate floor plan debt is fixed at a rate of 1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

 

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We used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of June 30, 2013 and December 31, 2012, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $10,743 and $14,337, respectively. During 2013 and 2012, there was no hedge ineffectiveness recorded in our income statement. During the three and six months ended June 30, 2013, the swaps increased the weighted average interest rate on our floor plan borrowings by approximately 35 and 37 basis points, respectively.

 

9. Commitments and Contingent Liabilities

 

We are involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of June 30, 2013, we were 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 our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.

 

We have historically structured our operations so as to minimize 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 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 June 30, 2013, we were in compliance with all covenants under these leases.

 

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 the 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 hold a 9.0% ownership interest in PTL. Historically General Electric Capital Corporation (“GECC”) has provided PTL with a majority of its financing. PTL has refinanced all of its GECC indebtedness. As part of that refinancing, we and the other PTL partners created a new company (“Holdings”), which, together with GECC, co-issued $700,000 of 3.8% senior unsecured notes due 2019 (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, 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 $950 for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9.0% of the required principal repayment due in 2019 (which is expected to be $63,100) and 9.0% of interest payments under the Holdings Bonds, plus fees and default interest, if any.

 

In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218,900 (approximately $200,000), which includes a targeted amount of AU $73,300 (approximately $67,000) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using cash flow from operations and available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.

 

We have $18,197 of letters of credit outstanding as of June 30, 2013, and have posted $9,110 of surety bonds in the ordinary course of business.

 

10. Equity

 

Share Repurchase

 

During the six months ended June 30, 2013, we repurchased 410 shares of our outstanding common stock for $12,680, or an average of $30.93 per share, under a program approved by our Board of Directors. During the second quarter of 2013, we acquired 98 shares of our common stock for $3,133, or an average of $32.11, from employees in connection with a net share settlement feature of employee restricted stock awards.

 

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11. Accumulated Other Comprehensive Income / (Loss)

 

The following tables below present the changes in accumulated other comprehensive income / (loss) by component and the reclassifications out of accumulated other comprehensive income / (loss) during the three and six months ended June 30, 2013 attributable to Penske Automotive Group common stockholders.

 

Three Months Ended June 30, 2013

 

		Interest Rate Swaps			Foreign Currency Translation			Other			Total
Balance at March 31, 2013		$	(7,627	)	$	(38,381	)	$	1,522		$	(44,486	)
Other comprehensive income before reclassifications		566			1,556			303			2,425
Amounts reclassified from accumulated other comprehensive income - net of tax		556			—			—			556
Net current-period other comprehensive income		1,122			1,556			303			2,981
Balance at June 30, 2013		$	(6,505	)	$	(36,825	)	$	1,825		$	(41,505	)

 

Six Months Ended June 30, 2013

 

		Interest Rate Swaps			Foreign Currency Translation			Other			Total
Balance at December 31, 2012		$	(8,678	)	$	(1,194	)	$	3,039		$	(6,833	)
Other comprehensive income before reclassifications		512			(34,747		)	(1,214		)	(35,449		)
Amounts reclassified from accumulated other comprehensive income - net of tax		1,661			(884		)	—			777
Net current-period other comprehensive income		2,173			(35,631		)	(1,214		)	(34,672		)
Balance at June 30, 2013		$	(6,505	)	$	(36,825	)	$	1,825		$	(41,505	)

 

Within the amounts reclassified from accumulated other comprehensive income, the $556 and $1,661 associated with interest rate swaps is included in floor plan interest expense, and the $(884) associated with foreign currency translation is included in selling, general, and administrative expenses.

 

12. Segment Information

 

Our operations are organized by management into operating segments by line of business and geography. We have determined that we have two reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail, consisting of our automotive retail operations, and (ii) Other, consisting of our Hertz rental car business operating segment and our investments in non-automotive retail operations operating segment. 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: Eastern, Central, and Western United States and International. The geographic operating segments 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).

 

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