PENSKE AUTOMOTIVE GROUP, INC. - Annual Report: 2020 (Form 10-K)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

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Commission file number 1-12297

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

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(248) 648-2500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:

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Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧ No ◻

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ◻  No ⌧

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

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

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

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

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

The aggregate market value of the voting common stock held by non-affiliates as of June 30, 2020, was $1,216,461,866. As of February 12, 2021, there were 80,390,860 shares of voting common stock outstanding.

Documents Incorporated by Reference

Certain portions, as expressly described in this report, of the registrant’s proxy statement for the 2021 Annual Meeting of the Stockholders to be held May 12, 2021 are incorporated by reference into Part III, Items 10-14.

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TABLE OF CONTENTS

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PART I

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Item 1.  Business

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We are a diversified international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe and distributes commercial vehicles, diesel engines, gas engines, power systems, and related parts and services principally in Australia and New Zealand. We employ over 23,000 people worldwide.

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Impact of the COVID-19 Pandemic on our Business

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The outbreak of the COVID-19 pandemic across the globe adversely impacted each of our markets and the global economy leading to disruptions to our business during 2020. Governmental authorities have taken countermeasures to slow the outbreak, including shelter-in-place orders, restrictions on travel, and government-funded assistance programs to individuals and businesses. The shelter-in-place orders and resulting business closures severely and negatively impacted our results, in particular in the second quarter of 2020. While the COVID-19 pandemic continues in all of our markets, as these orders lapsed and businesses reopened, we experienced improved business conditions and improved financial results in the third and fourth quarters of 2020, primarily driven by our cost cutting measures and increased gross profit on vehicles sold.

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In response to shelter-in-place orders resulting from the COVID-19 pandemic, many of our automotive and commercial vehicle showrooms experienced temporary closures during 2020. During the fourth quarter of 2020 and continuing into 2021, in response to increased incidence of the COVID-19 pandemic, certain parts of the U.K. reinstated shelter-in-place orders which have required our dealerships to close. We continue to conduct sales through our online “Click & Collect” program, which allows vehicle sales without showroom access. If shelter-in-place orders are extended or additional restrictions are enacted that require our dealerships to close, we may be adversely impacted. Nearly all of our service, parts, and collision center departments remained open during the crisis, and curbside or home delivery offerings supplemented our traditional service offerings, where available. We modified certain business practices to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. We continue to offer sales activity by appointment and through our e-commerce channels. In all of our locations, we implemented enhanced cleaning procedures, enforced social distancing guidelines, and took other precautions to maintain the health and safety of our employees and customers. We continue to experience interim business closures at some of our facilities in response to a customer or employee reporting a positive test result for COVID-19. When we become aware of such result, we notify appropriate personnel and deep clean our facility, which may include closure of that facility. We also are experiencing increased costs for providing the appropriate level of safety equipment for our facilities, employees, and customers, as well as increased costs for daily and enhanced deep cleaning when appropriate.

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Most of our manufacturer partners began suspending production beginning in late March 2020, and production disruptions resulted in lower inventory levels, in particular for new vehicles and limited inventory of certain models. Our manufacturer partners began providing us with additional incentive support in March 2020, and our manufacturer and lending partners have provided support to retail customers, such as increased incentives, payment deferrals, as well as 0% financing on certain vehicles and term lengths. While production has improved, the level of new vehicle inventory remains well below historical levels, which has contributed to increased gross profit on vehicles sold.

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We believe that business disruption relating to the COVID-19 pandemic will continue to negatively impact the global economy and may materially affect our businesses and results of operations. The situation caused by the COVID-19 pandemic is highly fluid and rapidly evolving, and while we continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment, we cannot anticipate with any certainty the length, scope, or severity of the business impact from the pandemic in each of the jurisdictions that we operate.

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Refer to the “COVID-19 Disclosure” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information.

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Business Overview

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In 2020, our business generated $20.4 billion in total revenue, which is comprised of approximately $17.9 billion from retail automotive dealerships, $2.1 billion from retail commercial truck dealerships, and $454.2 million from commercial vehicle distribution and other operations. We generated $3.2 billion in gross profit, which is comprised of $2.8 billion from retail automotive dealerships, $280.9 million from retail commercial truck dealerships, and $122.3 million from commercial vehicle distribution and other operations.

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Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $17.9 billion in total retail automotive dealership revenue we generated in 2020. As of December 31, 2020, we operated 304 retail automotive franchises, of which 142 franchises are located in the U.S. and 162 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In 2020, we retailed and wholesaled more than 505,000 vehicles. We are diversified geographically, with 57% of our total retail automotive dealership revenues in 2020 generated in the U.S. and Puerto Rico and 43% generated outside the U.S. We offer over 35 vehicle brands with 71% of our retail automotive dealership revenue in 2020 generated from premium brands, such as Audi, BMW, Land Rover, 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 third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry.

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We also operate seventeen Used Vehicle SuperCenters in the U.S. and the U.K. which retail and wholesale used vehicles under a one price, “no-haggle” methodology. Our operations in the U.S. consist of six retail locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas. Our operations in the U.K. consist of eleven retail locations and a vehicle preparation center. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom. We also have five additional sites under development.

During 2020, we disposed of seventeen retail automotive franchises: thirteen in the U.K, three in the U.S., and one in Germany. We also acquired the remaining 8.2% interest in one of our former retail automotive joint ventures in Aachen, Germany.

Retail automotive dealerships represented 87.7% of our total revenues and 87.3% of our total gross profit in 2020.

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We believe our diversified retail automotive income streams help to mitigate the historical cyclicality found in some elements of the automotive sector. Revenues from higher margin service and parts sales include warranty work, customer paid work, rapid repair, collision repair services, and wholesale parts sales. Service and parts sales are typically less cyclical than retail vehicle sales and generate the largest part of our retail automotive gross profit.

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The following graphics show the percentage of our total retail automotive dealership revenues by product area and their respective contribution to our retail automotive gross profit:

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

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This business represented 10.1% of our total revenues and 8.8% of our total gross profit in 2020.

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Our retail commercial truck business also benefits from diversified income streams similar to those of the retail automotive sector. The following graphics show the percentage of our total retail commercial truck dealership revenues by product area and their respective contribution to our retail commercial truck gross profit:

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Penske Australia. We are the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. In these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing MTU, Detroit Diesel, Allison Transmission, MTU Onsite Energy, Rolls Royce Power Systems, and Bergen Engines. This business, known as

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Penske Australia, offers products across the on- and off-highway markets, including in the construction, mining, marine, defense, and power generation sectors and supports full parts and aftersales service through a network of branches, field locations, and dealers across the region.

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These businesses represented 2.2% of our total revenues and 3.9% of our total gross profit in 2020.

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Penske Transportation Solutions. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments. Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental, and contract maintenance, along with logistic services, such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services, and dry van truckload carrier services. We recorded $164.5 million in equity earnings from this investment in 2020.

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2020 & 2021 Key Developments

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Retail Automotive Franchised Dealership Acquisitions and Dispositions. In 2020, we disposed of seventeen retail automotive franchises, which represented approximately $450.0 million in annualized revenue. Of the franchises disposed of, thirteen represented franchises in the U.K, three represented franchises in the U.S., and one represented a franchise in Germany. In 2020, we also acquired the remaining 8.2% interest in one of our former retail automotive joint ventures in Aachen, Germany.

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Digital and Online Sales. We continue to expand and enhance our digital and online sales platforms. In the U.S., we offer “Preferred Purchase”, a pressure-free and flexible way to personalize payments, value a trade-in vehicle, secure a vehicle, and select protection products from all of our dealerships. We also list all of our U.S. automotive inventory on PenskeCars.com. In the U.K., we offer “Buy Online” for all of our used inventory which allows customers the flexibility to purchase a vehicle from home. In addition, we offer “Click & Collect” which allows a customer to purchase a vehicle even if our showroom is closed. We currently have over 50,000 vehicles online for sale across our network. For service, we offer online scheduling, as well as online payments, to streamline the dealership service experience.

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Long-Term Debt. During 2020, we reduced our long-term debt by approximately $670 million, including $600 million of senior subordinated notes and $70 million of other long-term debt. We repaid in full, at scheduled maturity, our $300 million 3.75% senior subordinated notes and redeemed our $300 million 5.375% senior subordinated notes due in 2024. We also redeemed our $550 million 5.75% senior subordinated notes due 2022 with the proceeds of the newly issued $550 million in aggregate principal amount 3.50% senior subordinated notes due 2025.

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Expansion of Used Vehicle SuperCenters. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom. The Nottingham SuperCenter is expected to retail 6,000 units per year. For the year ended December 31, 2020, our Used Vehicle SuperCenters generated $1.0 billion in revenue and $150.7 million in gross profit.

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Stockholder Dividends and Stock Repurchases. In May 2020, our Board of Directors temporarily suspended our cash dividend. On October 14, 2020, we announced the reinstatement of our cash dividend in the amount of $0.42 per share. Our latest declared dividend is $0.43 per share payable March 1, 2021, to stockholders of record as of February 10, 2021, which represents a dividend yield of 2.7% using our January 25, 2021, closing stock price. We repurchased 1,027,736 shares of our common stock in 2020 for $34.4 million, which, together with quarterly dividends, represents a return to stockholders of approximately $102.5 million. As of December 31, 2020, our remaining share repurchase authorization was $170.6 million.

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Company and Dealership Awards. In 2019, the last year we participated, thirty-three of our dealerships were named to the Automotive News Top 100 Dealerships to Work For in the United States. In 2019 and 2018, a Penske dealership was ranked #1 in the United States in the Automotive News survey. We did not participate in the survey in 2020 due to COVID-19 related concerns Additionally, in January 2021, we were named one of the “World’s Most Admired Companies” by Fortune Magazine. We believe these awards reflect our ongoing commitment to our valuable

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dealership employees, which enhances customer satisfaction and may result in improved sales over time. In the U.K. in 2018, we were named “Dealer Group of the Year” by both Automotive Management and Motor Trader magazines, consolidating our position as the UK's largest dealer group. In 2019, our U.K. operations were named by Glassdoor as the 14th best place to work. We were not only the highest ranked business in the automotive sector, but Sytner Group Limited, a consolidated subsidiary, was also the top-rated retailer ahead of other large national businesses.

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Outlook

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Retail Automotive Dealership. In 2020, U.S. new light vehicle sales decreased 14.4%, as compared to 2019, to 14.7 million units, with a decrease of 9.7% in sales of trucks, crossovers, and sport utility vehicles and a decrease of 26.4% in sales of passenger cars. We believe the year over year declines are significantly attributable to lower inventory of new vehicles available for sale as vehicle production by the manufacturers was impacted due to plant shutdowns related to the COVID-19 pandemic and other effects of the COVID-19 pandemic. Despite these declines, we have experienced improved profitability and earnings in 2020 when compared to last year due to inventory being well below historical levels, which contributed to increased gross profit, in addition to our cost cutting measures. According to the National Automobile Dealers Association, sales for the U.S. light vehicle market are expected to increase by approximately 7.2% in 2021 to 15.5 million units in 2021.

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Recently, many of our principal vehicle manufacturers have announced production disruptions caused by a shortage of automotive microchips. The shortage is reported to be due to the overall demand for microchips in the global economy. IHS Markit has predicted that automotive supply globally will be reduced by 1.0 million units in the first quarter of 2021 due to the shortage. However, IHS Markit notes they believe production will recover later in the year. While we have ample levels of new vehicles in our inventory currently and expect to continue to have normal levels of used vehicles for sale, prolonged shortages could result in lower new vehicle sales volumes which could adversely affect us in the event lower sales are not offset by increased gross profit per unit as occurred in 2020. Moreover, due to remote working and lack of mobility associated with the pandemic in our markets, we believe our customers are driving less, which may affect our services revenues should this trend continue.

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In 2020, U.K. new vehicle registrations decreased 29.4%, as compared to 2019, to 1.6 million registrations. We believe the year over year declines are significantly attributable to the COVID-19 pandemic and lower inventory of new vehicles available for sale as vehicle production by the manufacturers was impacted due to plant shutdowns related to the COVID-19 pandemic. Despite these declines, we have experienced improved profitability and earnings in 2020 when compared to last year due to inventory being well below historical levels, which contributed to increased gross profit, in addition to our cost cutting measures.

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In response to the U.K.’s exit from the European Union (“Brexit”), the U.K. and the European Union reached a trade agreement in December 2020 providing an opportunity for tariff-free and quota-free trade. We believe that Brexit has negatively affected sales in the past several years, and while there remain certain administrative concerns regarding the movement of goods between the European Union and the U.K. we believe the trade agreement will alleviate the instability historically associated with Brexit.

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U.K. sales were also negatively affected by the uncertainty of residual values, potentially higher taxes on diesel-powered vehicles, and consumer confusion about low emission zones as the U.K. and Western European countries consider the ramifications of diesel engines on the environment, while also providing government incentives on certain electric vehicles. Representatives of the U.K. government suggested a ban on the sale of gasoline engines in cars and vans as early as 2030 and a ban on the sale of gasoline hybrid engines in cars and vans as early as 2035. Sales of diesel-powered vehicles decreased 55.0%, and non-diesel vehicles decreased 20.8% during 2020, as compared to 2019. Premium/luxury unit sales, which account for over 93% of our U.K. new unit sales, decreased 27.8% in 2020, as compared to a 29.4% decline for the overall market. According to the Society of Motor Manufacturers and Traders, U.K. new vehicle registrations are expected to increase by approximately 15.7% to 1.9 million units in 2021. However, in response to increased incidence of the COVID-19 pandemic, certain parts of the U.K. reinstated shelter-in-place orders in 2021 which have required our dealerships to close. We continue to conduct sales through our online “Click & Collect” program, which allows vehicle sales without showroom access. If shelter-in-place orders are extended or additional restrictions are enacted that require our dealerships to close, we may be adversely impacted.

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Retail Commercial Truck Dealership. In 2020, North American sales of Class 6-8 medium and heavy-duty trucks, the principal vehicles for our PTG business, decreased 29.6% from the same period last year to 358,050 units. The Class 6-7 medium-duty truck market decreased 28.6% to 124,818 units and Class 8 heavy-duty trucks, the largest North American market, decreased 30.1% to 233,232 units from the same period last year. Class 8 heavy-duty truck sales are expected to increase approximately 25% in 2021 to approximately 290,000 units according to data published by ACT Research. Any significant decline in North American retail sales may materially and adversely affect our retail commercial truck dealerships.

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Commercial Vehicle Distribution. Our Penske Australia distribution business operates principally in the Australian and New Zealand heavy and medium-duty truck markets. In 2020, the Australian heavy-duty truck market reported sales of 10,615 units, representing a decrease of 16.6% from the same period last year, while the New Zealand market reported sales of 2,665 units, representing a decrease of 24.5% from the same period last year. The brands we represent in Australia hold a 4.3% market share in the Australian heavy-duty truck market and a 2.6% market share in New Zealand. We expect the commercial vehicle and power systems market to remain resilient in 2021 and continuing benefits from sales of replacement or upgraded engines.

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Penske Transportation Solutions. PTS services have been largely deemed essential by governmental authorities during the COVID-19 pandemic, and a majority of the PTS business is generated by multi-year contracts for full-service leasing, contract maintenance, and logistics services. We expect continued resilient performance in 2021 for PTS if the rates during the COVID-19 pandemic remain moderate and shelter-in-place orders are not reinstated.

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Refer to the “COVID-19 Disclosure” in “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion on the impact of COVID-19.

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As discussed in “Item 1A. Risk Factors,” there are a number of factors that could cause actual results to differ materially from our expectations. For a detailed discussion of our financial and operating results, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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Long-Term Business Strategy

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We strive to create long-term value for our stockholders by employing the following set of strategies to improve the performance of our automotive and commercial truck dealerships and other businesses, drive growth through strategic acquisitions (and, where applicable, dispositions), and focus on improving profitability.

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Human Capital

We believe that our Human Capital is our greatest asset and is an integral component of the Company’s growth and value creation strategy. We understand that exceptional customer service can only be consistently delivered by attracting, motivating, training, and retaining the very best team members. We are committed to building a diverse and skilled workforce while providing a work environment that promotes equity and is free from any form of prohibited discrimination. With this in mind, we put our employees at the heart of everything that we do by developing their talent and enabling them to build long term careers.

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We operate in a decentralized manner that fosters an entrepreneurial spirit where each dealership or business unit has independent operational and financial management responsible for day-to-day operations. We believe experienced local managers are better qualified to make day-to-day decisions concerning the successful operation of a business unit and can be more responsive to our customers’ needs. We invest for future growth and offer outstanding brands and facilities which we believe attract outstanding talent. Attracting the best talent and allowing our associates to make business decisions at the local level helps to foster long-term growth through increased repeat and referral business.

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Diversification

Our business benefits from a diversified revenue and gross profit mix, including multiple revenue and gross profit streams in our traditional vehicle and commercial truck dealerships (new vehicles, used vehicles, finance and insurance, and service and parts operations), our commercial vehicle distribution and power systems operations, and returns relating to our joint venture investments, which we believe helps to mitigate the cyclicality that has historically impacted some elements of the automotive sector.

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Diversification Through Franchised Dealership Operations. Within our franchised dealership operations, we represent more than 35 brands and operate across 21 states and internationally. One of the unique attributes of our operations versus our peers is our diversification outside the U.S., with dealer operations across seven countries.

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The following table shows our consolidated revenues by country and by state in the U.S. as a percentage of our total revenue:

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Diversification Through Used Vehicle SuperCenters. Our Used Vehicle SuperCenters in the U.S. and U.K., complement and provide more diversification to our retail automotive operations and provide scalable opportunities across our market areas. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom.

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Diversification Through Retail Commercial Truck Dealership. Our PTG business provides more diversification to our overall business model and allows us to bring our automotive dealership expertise to the retail commercial truck market. Operations in Canada, in addition to our U.S. locations, further diversifies our revenue stream.

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Diversification Through Penske Transportation Solutions. We currently hold a 28.9% ownership interest in PTS, a leading provider of transportation and supply chain services, which further diversifies our total results of operations. We continue to realize significant cash tax savings as a result of our investment in PTS in addition to the diversification offered by earnings from PTS.

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Offer Outstanding Brands in Premium Facilities and Superior Customer Service

We offer outstanding brands through premium facilities as we believe offering our customers a superior customer service experience will generate repeat and referral business and will help to foster a loyal and dedicated customer base.

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We sell over 35 brands in our markets and our automotive dealership revenue mix consists of 71% related to premium brands, 22% related to volume non-U.S. brands, 1% related to brands of U.S. based manufacturers, and 6% related to our Used Vehicle SuperCenters. We believe our brand mix will offer us the opportunity to generate same-store growth, including higher margin service and parts sales. The following chart reflects our percentage of total retail automotive dealership revenue by brand:

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Where advantageous, we aggregate our automotive dealerships in a campus setting in order to build a destination location for our customers, which we believe helps to drive increased customer traffic to each of the brands at the location. This strategy also creates an opportunity to reduce personnel expenses, consolidate advertising and administrative expenses, and leverage operating expenses.

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Our PTG dealerships provide a similar suite of services as our automotive dealerships, and PTG is committed to providing outstanding brands and superior customer service. We believe our ability to repair trucks by providing around-the-clock service in certain locations, coupled with modern conveniences for the comfort of our customers while their trucks are being repaired, will generate repeat and referral business and will help to foster a loyal and dedicated customer base.

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Expand Revenues at Existing Locations and Increase Higher-Margin Businesses

Increase Same-Store Sales. We believe our emphasis on a premium brand mix, superior customer service, and premium facilities will contribute to increases in same-store sales over time.

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Grow Finance, Insurance, and Other Aftermarket Revenues. Each sale of a vehicle provides us the opportunity to assist in arranging financing for the sale of a vehicle, to sell the customer an extended service contract or other insurance product, and to sell aftermarket products, such as security systems and protective coatings. Where possible, we attempt to vertically integrate with the captive finance companies of the manufacturers we represent and to supplement these offerings with preferred lenders as necessary. In order to improve our finance and insurance business, we focus on enhancing training programs and implementing process improvements which we believe will improve our overall revenues. We implemented docuPAD® at our U.S. dealerships, an interactive tool designed to improve document processing and menu presentation of finance and insurance options, which we have expanded to use with remote sales. We expect docuPAD® to create a more consistent process for our dealerships, improve customer experience, yield higher finance and insurance revenue, improve compliance, and reduce the need for printed copies and paper storage.

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Expand Service and Parts and Collision Repair Revenues. Today’s vehicles are increasingly complex and require sophisticated equipment and specially trained technicians to perform certain services. Additionally, many manufacturers today are offering maintenance programs packaged with the vehicle sale. These programs require customers to have the service work performed at a factory-authorized dealership. Unlike independent service shops, our dealerships are authorized to perform this work under warranties provided by manufacturers. Additionally, we offer maintenance programs for sale through our dealerships. We believe that our brand mix and the complexity of today’s vehicles, combined with our investment in expanded service facilities, including the addition of a significant number of incremental service bays in recent years, and our focus on customer service, will contribute to increases in our service and parts revenue. We also offer rapid repair services, such as paint-less dent repair, headlight reconditioning, wheel repairs, tire sales, seat sales for our retail commercial truck operations, and windshield replacement at most of our facilities in order to offer our customers the convenience of one-stop shopping for all of their vehicle requirements.

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Grow Organically and Through Strategic Acquisitions

We believe that attractive retail automotive acquisition opportunities exist for well-capitalized dealership groups with experience in identifying, acquiring, and integrating dealerships. The highly fragmented automotive retail market in both the U.S. and the U.K. provides us with significant growth opportunities in our markets. We generally seek to acquire dealerships with high-growth automotive brands in highly concentrated or growing demographic areas that will benefit from our management expertise, manufacturer relations, and scale of operations as well as smaller, single location dealerships that can be effectively integrated into our existing operations. Over time, we have also been awarded new franchises from various manufacturers.

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We also seek to grow our business organically, including by opening additional Used Vehicle SuperCenters in the U.S. and the U.K. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom.

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We also believe there are attractive retail commercial truck acquisition opportunities in the highly fragmented North America Commercial Truck Market. We see continued growth in the brands we represent and believe there are opportunities for us to continue to make strategic acquisitions over time. While we did not have any acquisitions in 2020, our Premier Truck Group subsidiary acquired Warner Truck Centers, a retailer of Freightliner and Western Star medium and heavy-duty commercial trucks located in Utah and Idaho, in 2019. Warner Truck Centers consist of six dealership locations and generated approximately $669.2 million of revenue in 2020.

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Enhance Customer Satisfaction

Maintaining high levels of superior customer service is key to our business model. We strive to deliver a positive, valuable experience at every touchpoint to ensure the highest level of customer satisfaction. By offering outstanding

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brands in premium facilities, “one-stop” shopping convenience in our aggregated facilities, and a well-trained and knowledgeable staff, we aim to forge lasting relationships, from first contact to becoming a satisfied and loyal customer.

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Reputation management is one of our most powerful marketing tools. We proactively monitor online reputation management sites, including Google, Facebook, Yelp, among others, to enhance our online presence, build loyalty, gain a better understanding of our customers’ needs, attract top talent, and ultimately drive sales. Our reputation management strategy in actively monitoring and responding quickly to customer reviews is crucial for maintaining a positive online reputation.

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Digital Initiatives

We are focused on executing a comprehensive multi-channel digital strategy with emphasis on customization, personalization, and creating a connection with our customers. We strive to build and optimize our presence across all digital platforms to deliver a seamless, convenient, and transparent experience that gives customers the ability to purchase, sell, or schedule service for their vehicles on their terms.

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Each of our dealerships uses a content management system to maintain its own website. Vehicle data and inventory standards allow us to manage our dealership website inventory consistently across the stores. All our dealership websites have consistent functionality with digital solutions tailored to each brand, which helps to minimize costs, attract customers, and provide a consistent image. Self-service tools are integrated in our websites for sales and service as the importance of speed and ease continually increases.

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We primarily focus on search engine optimization, search engine marketing, and use of some third-party lead providers in key markets, to drive high quality traffic to our web properties. Most importantly, we have invested heavily in our own websites, so we can retain traffic and deliver an engaging, dynamic user experience. We design our websites for ease of customer use from any platform (mobile, desktop, iPad) and promote an inclusive digital experience with a focus towards “mobile first”.

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We promote our U.S. and U.K. automotive retail new and pre-owned vehicle inventory online through PenskeCars.com, Sytner.co.uk, agnewcars.com, CarSense.com, and CarShop.co.uk. The websites are designed to streamline the car-buying process and allow consumers to view and compare over 50,000 new, certified, and pre-owned vehicles. These sites, together with our dealership websites, provide consumers a simple way to view extensive vehicle information, including photos, prices, promotions, videos, and third-party vehicle history reports for pre-owned vehicles, schedule service appointments online 24/7, and use our digital tools to customize their vehicle purchase through our Preferred Purchase process in the U.S. and Click & Collect in the U.K. Customers may access vehicle inventory, locate or contact a dealership, explore payments, get instant trade offers, apply for financing and even schedule service, all at their convenience. We also use social media as a cost-effective way to engage with our customers, enhance brand visibility, and generate customer leads. By choosing a specific audience using a range of demographic tools, our dealerships are able to reach targeted potential customers effectively and efficiently. Connecting with our customers at a more personal level allows for trust, transparency, and loyalty.

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Preferred Purchase is our digital retailing solution for U.S. dealerships that provides transparency and a self-directed experience. This tool provides a digital buying process that brought much of the car buying experience online including trade-value, pricing, leasing, and financing options with customized payments. Customers can add insurance and protection products to their purchase, evaluate manufacturer and lender incentive programs, and pre-qualify for credit all online. Customers value the tool, but many still prefer to educate themselves at home and finish the transaction at the dealership to test drive the vehicle and take delivery in person.

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We have modified the tool to accommodate all buying behaviors. Preferred Purchase provides “Flexible Car Buying” and can serve a customer wherever they are at in their buying journey, whether they want to evaluate payment options or complete their purchase 100% online through a secure link where they can sign documents digitally and arrange for curbside or home delivery.

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Other initiatives include the “Sell Us Your Car” program which allows customers to sell their vehicles to us without a requirement to purchase a vehicle and our internally developed “Click & Collect” digital retailing program for our U.K. dealerships.

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Retail Automotive Dealership Operations

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Retail Automotive Franchises. We routinely acquire and dispose of retail automotive franchises. The following table exhibits our retail automotive franchises by location and manufacturer as of December 31, 2020:

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Retail Automotive Used Vehicle SuperCenters. The following table exhibits the Used Vehicle SuperCenters we currently operate by geographic location:

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New Vehicle Retail Sales. In 2020, we retailed 178,437 new vehicles which generated 45.1% of our retail automotive dealership revenue and 23.5% of our retail automotive dealership gross profit. New vehicles are typically acquired by dealerships directly from the manufacturer. We strive to maintain outstanding relationships with the automotive manufacturers based in part on our long-term presence in the retail automotive market, our commitment to providing premium facilities, our commitment to drive customer satisfaction, the reputation of our management team, and the consistent sales volume at our dealerships. Our dealerships finance the purchase of most new vehicles from the manufacturers through floor plan financing provided primarily by various manufacturers’ captive finance companies.

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Used Vehicle Retail Sales. In 2020, we retailed 233,469 used vehicles, including 53,207 from our Used Vehicle SuperCenters, which generated 35.8% of our retail automotive dealership revenue and 14.0% of our retail automotive dealership gross profit. We acquire used vehicles from various sources, including auctions open only to authorized new vehicle dealers, public auctions, trade-ins from consumers in connection with their purchase of a new vehicle from us,

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purchases of used vehicles directly from consumers, and lease expirations or terminations. To improve customer confidence in our used vehicle inventory, we provide vehicle history reports for all used vehicles, and virtually all of our franchised new vehicle dealerships participate in manufacturer certification processes for used vehicles. If certification is obtained, the used vehicle owner is typically provided benefits and warranties similar to those offered to new vehicle owners by the applicable manufacturer.

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We currently operate seventeen Used Vehicle SuperCenters in the U.S. and U.K. Each of these dealerships are committed to offering high quality “like-new” used vehicles at “no-haggle” prices. These businesses typically sell low mileage, high quality vehicles in a friendly and transparent buying experience. We include the results of our Used Vehicle SuperCenters within used vehicle retail sales. Our total revenue from Used Vehicle SuperCenters in 2020 was $1.0 billion compared to $1.2 billion in 2019. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom.

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Vehicle Finance and Insurance Sales. Finance and insurance sales represented 3.2% of our retail automotive dealership revenue and 20.7% of our retail automotive dealership gross profit in 2020. At our customers’ option, our dealerships can arrange third-party financing or leasing in connection with vehicle purchases. We typically receive a portion of the cost of the financing or leasing paid by the customer for each transaction as a fee. While these services are generally non-recourse to us, we are subject to chargebacks in certain circumstances, such as default under a financing arrangement or prepayment. These chargebacks vary by finance product but typically are limited to the fee we receive.

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We also offer our customers various vehicle warranty and extended protection products, including extended service contracts, maintenance programs, guaranteed auto protection (known as “GAP,” this protection covers the shortfall between a customer’s loan balance and insurance payoff in the event of a total loss), lease “wear and tear” insurance, and theft protection products. The extended service contracts and other products that our dealerships currently offer to customers are underwritten by independent third parties, including the vehicle manufacturers’ captive finance companies. Similar to finance transactions, we are subject to chargebacks relating to fees earned in connection with the sale of certain extended protection products. We also offer for sale other aftermarket products, including security systems and protective coatings.

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We offer finance and insurance products using a “menu” process, which is designed to ensure that we offer our customers a complete range of finance, insurance, protection, and other aftermarket products in a transparent manner. We implemented docuPAD® at our U.S. dealerships, an interactive tool designed to improve document processing and menu presentation of finance and insurance options. We expect docuPAD® to create a more consistent process for our dealerships, improve customer experience, yield higher finance and insurance revenue, improve compliance, and improve our responsibility to the environment by reducing the need for printed copies and paper storage.

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Service and Parts Sales. Service and parts sales represented 10.5% of our retail automotive dealership revenue and 40.5% of our retail automotive dealership gross profit in 2020. We generate service and parts sales in connection with warranty work performed at each of our franchised dealerships and non-warranty work. We believe our service and parts revenues benefit from the increasingly complex technology used in vehicles that makes it difficult for independent repair facilities or vehicle owners to maintain and repair today’s automobiles.

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A goal of each of our dealerships is to make each vehicle purchaser a customer of our service and parts department. Our dealerships keep detailed records of our customers’ maintenance and service histories, and many dealerships send reminders to customers when vehicles are due for periodic maintenance or service. Many of our dealerships have extended evening and weekend service hours for the convenience of our customers. We also offer rapid repair services, such as paint-less dent repair, headlight reconditioning, wheel repairs, tire sales, and windshield replacement at most of our facilities in order to offer our customers the convenience of one-stop shopping for all of their automotive requirements. We also operate 30 automotive collision repair centers, each of which is operated as an integral part of our dealership operations.

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Fleet and Wholesale Sales. Fleet and wholesale sales represented 5.4% of our retail automotive dealership revenue and 1.3% of our retail automotive dealership gross profit in 2020. Fleet activities represent the sale of new units to customers that are deemed to not be retail customers, such as cities, municipalities, or rental car companies and are generally sold at contracted amounts. Wholesale activities relate to the sale of used vehicles generally to other dealers

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and occur at auction. Vehicles sold through this channel generally include units acquired by trade-in that do not meet certain standards or aged units. In the U.K., we offer used vehicles to wholesalers and other dealers via online auction.

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Retail Commercial Truck Dealership Operations

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We operate a heavy and medium duty truck dealership group known as Premier Truck Group (“PTG”) offering primarily Freightliner and Western Star branded trucks, with locations in Texas, Oklahoma, Tennessee, Georgia, Utah, Idaho, and Canada. As of December 31, 2020, PTG operated twenty-five locations. PTG also offers a full range of used trucks available for sale as well as service and parts departments, providing a full range of maintenance and repair services. This business generated $2,060.9 million of revenue and $280.9 million of gross profit in 2020.

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PTG dealerships provide a similar suite of services as our automotive dealerships, offering new trucks and a large selection of used trucks for sale, a full range of parts, maintenance and repair services, and finance and insurance options by facilitating truck and trailer financing and leasing, extended maintenance plans, physical damage insurance, GAP insurance, roadside relief, and other programs.

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The necessity of repairing trucks for our customers is a key area of differentiation for our commercial truck dealerships. We provide around-the-clock service in certain locations to get our customers’ commercial trucks back on the road, so they can complete their routes. PTG also carries an extensive inventory of parts for the new and used trucks they sell and service, including Thomas Built Buses, and other makes of medium and heavy-duty trucks. The service and parts business of our PTG commercial truck dealerships represents approximately 74% of our retail commercial truck dealership gross profit.

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Commercial Vehicle Distribution Operations

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

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We distribute commercial vehicles and parts to a network which comprises on average of more than 70 dealership locations. Of these dealership locations, 7 are company-owned retail commercial vehicle dealerships in Australia and 3 are company-owned retail commercial vehicle dealerships in New Zealand. Our dealership in Brisbane, Australia is the largest retailer of Western Star Trucks in Australia by volume. We finance our purchases of these vehicles under floor plan agreements with a local Daimler affiliate and a local Volkswagen affiliate with terms similar to our other floor plan agreements.

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Our local headquarters is located in Brisbane, Australia, which is the country’s third largest city. Our headquarters includes administrative facilities as well as a parts distribution center and a production center.

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Western Star trucks are manufactured by Daimler Trucks North America in Portland, Oregon. These technologically advanced, custom-built vehicles are ordered by customers to meet their particular needs for line haul, long distance road train, mining, logging, and other heavy-duty applications. We are also the exclusive importer of MAN trucks and buses. MAN Truck and Bus, a VW Group company, is a leading producer of medium and heavy-duty trucks as well as city and coach buses. These cab-forward, fuel efficient vehicles are principally produced in several sites in Germany and are ordered by customers for line haul, local distribution, mining, and other off-road applications. Dennis Eagle refuse collection vehicles are manufactured by Ros Roca in Warwick, England. These brands represented 4.3% of heavy-duty truck units sold in Australia and 2.6% in New Zealand during 2020.

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We also distribute diesel gas engines and power systems to 141 dealer locations that are strategically located throughout Australia, New Zealand, and the Pacific. Most of the dealers (114) represent the Detroit Diesel brand, with

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the majority aligned to Western Star and/or Freightliner truck manufacturers. The remaining dealers represent the MTU (1) and Allison Transmission (12) brands. The “off-highway” business principally includes the sale of power systems directly to customers in the commercial, defense, mining, maritime sectors, and to several dealers. These dealer locations include the 16 branch facilities we operate across Australia and New Zealand. We also utilize mobile remote field service units to travel directly to customer premises.

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This business generated $454.2 million of revenue and $122.3 million of gross profit in 2020.

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Penske Transportation Solutions

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We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental, and contract maintenance, along with logistic services, such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services, and dry van truckload carrier services. PTS has a highly diversified customer base ranging from multi-national corporations across industries, such as food and beverage, transportation, manufacturing, automotive, retail, and healthcare, with whom they have long-term contracts to individual consumers who rent a single truck on a daily basis.

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PTS operates one of the leading full-service truck leasing, truck rental, and contract maintenance businesses in North America and an international logistics business in North America, South America, Europe, and Asia. PTS also operates its full-service truck leasing and truck rental business in Australia through a joint venture with us.

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Full-service truck leasing, truck rental, and contract maintenance. Full-service truck leasing, truck rental, and contract maintenance of commercial trucks, tractors, and trailers constitutes PTS’ largest business. PTS manages a fleet of approximately 327,500 trucks, tractors, and trailers, consisting of approximately 218,100 vehicles owned by PTS and leased to customers under full-service lease or rental agreements and approximately 108,400 customer-owned and -operated vehicles for which they provided contract maintenance services. Terms under its full-service leases generally range from four to seven years for tractors and trucks and six to ten years for trailers. Its commercial and consumer rental fleet as of December 31, 2020, consisted of approximately 77,100 vehicles for use by its full-service truck leasing, small business, and consumer customers for periods generally ranging from less than a day to 12 months. Most of its leased vehicles are configured according to customer specifications, including custom painting and lettering, while its rental trucks bear Penske branding.

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Commercial customers often outsource to PTS to reduce the complexity and cost of vehicle ownership. Under a full-service lease, PTS provides and fully maintains the vehicle, which is generally specifically configured for the customer. The services provided under full-service lease and contract maintenance agreements generally include preventive maintenance, advanced diagnostics, emergency road service, fleet services, safety programs, and fuel services through its network of 773 company-operated facilities. In addition, PTS’ commercial rental operations offer short-term availability of tractors, trucks, and trailers typically to accommodate seasonal, emergency, and other temporary needs. A significant portion of these rentals are to existing full-service leasing and contract maintenance customers who are seeking flexibility in their fleet management. PTS’ commercial rental business generated 18% of its operating revenue for 2020 and its full-service lease and contract maintenance business generated 50% of its operating revenue in 2020.

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For consumer customers, PTS provides short-term rental of light and medium duty vehicles on a one-way and local basis, typically to transport household goods. Customers typically include local small businesses and individuals seeking a do-it-yourself solution to their moving needs. PTS’ consumer fleet generally consists of late model vehicles ranging in size from small vans to 26-foot trucks, and its consumer rentals are conducted through approximately 2,000 independent rental agents and approximately 380 of its company-operated leasing and rental facilities. PTS’ consumer business generated 5% of its operating revenue for 2020.

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Logistics. PTS’ logistics business offers an extensive variety of services, including dedicated contract carriage, distribution center management, transportation management, lead logistics provider, and dry van truckload carrier services. PTS coordinates services for its customers across the supply chain, including inbound material flow, handling and packaging, inventory management, distribution and technologies, and sourcing of third-party carriers. These services

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are available individually or on a combined basis and often involve its associates performing services at the customer’s location. By offering a scalable series of services to its customers, PTS can manage the customer’s entire supply chain or any stand-alone service. PTS also utilizes specialized software that enables real-time fleet visibility and provides reporting metrics, giving customers detailed information on fuel economy and other critical supply chain costs. PTS’ international logistics business has approximately 420 locations in North America, South America, Europe, and Asia. PTS’ logistics business generated 27% of its operating revenue for 2020.

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Industry Information

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Retail Automotive Dealership. Approximately 57% of our retail automotive dealership revenues are generated in the U.S., which in 2020 was the world’s second largest automotive retail market as measured by units sold. In 2020, sales of new cars and light trucks were approximately 14.7 million units, a decrease of 14.4% from 2019 and were generated at approximately 16,600 franchised new-car dealerships. According to the latest available data from the National Automobile Dealers Association, dealership revenue is derived as follows: 53% from new vehicle sales, 35% from used vehicle sales, and 12% from service and parts sales. Dealerships also offer a wide range of higher-margin products and services, including extended service contracts, financing arrangements, and credit insurance. The National Automobile Dealers Association figures noted above include finance and insurance revenues within either new or used vehicle sales, as sales of these products are usually incremental to the sale of a vehicle.

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In the U.S., the franchised automotive dealer industry is the largest retail business by revenue, with virtually all new cars and light trucks bought in the U.S. through franchised dealers in a market of approximately $1.0 trillion. Publicly held automotive retail groups account for less than 10% of total industry revenue. Although significant consolidation has already taken place, the industry remains highly fragmented with more than 90% of the U.S. industry’s market share remaining in the hands of smaller regional and independent players. Our other markets are similarly fragmented. We believe that further consolidation in these markets is probable due to the significant capital requirements of maintaining manufacturer facility standards and the limited number of viable alternative exit strategies for dealership owners.

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Our Western European markets consist of Germany, the U.K., Italy, and Spain, which represented the first, third, fourth, and fifth largest automotive retail markets, respectively, in Western Europe in 2020 and accounted for approximately 63% of the total vehicle sales in Western Europe. Unit sales of automobiles in Western Europe were approximately 10.8 million in 2020, a 24.5% decrease compared to 2019. In Germany, the U.K., Italy, and Spain, new car sales were approximately 2.9 million, 1.6 million, 1.4 million, and 0.9 million units, respectively, in 2020.

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We also own a 49% interest in a Japanese joint venture. Unit sales in Japan were approximately 4.6 million in 2020.

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We also operate seventeen Used Vehicle SuperCenters in the U.S. and the U.K. Used vehicle sales are even more fragmented than new vehicle sales and are generated by new car dealerships, Used Vehicle SuperCenters, individual small lot sellers, as well as individual to individual sales. Used vehicle sales were approximately 38 million units in the U.S. and approximately 7 million units in the U.K. in 2020.

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Retail Commercial Truck Dealership. In 2020, North America sales of Class 6-8 medium and heavy-duty trucks, the principal vehicles for our PTG business, were approximately 358,050 units, a decrease of 29.6% from 2019 and were generated at approximately 2,200 new-truck dealerships. The Class 6-7 medium duty truck market decreased 28.6% to 124,818 units from 174,927 units in the same period in 2019. The largest market, Class 8 heavy-duty trucks, decreased 30.1% to approximately 233,232 units from approximately 333,779 units in 2019. In this market, our principal brands, Freightliner and Western Star, represent approximately 39.6% of that market.

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Commercial Vehicle Distribution. Our commercial vehicle distribution business operates principally in Australia and New Zealand. In 2020, heavy-duty truck sales in Australia and New Zealand combined were 13,280 units, representing a decrease of 18.3% from 2019. The brands we represent in Australia hold a 4.3% market share in the Australian heavy-duty truck market and a 2.6% market share in New Zealand.

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Penske Transportation Solutions. PTS participates broadly in the global supply chain, estimated at $9.3 trillion annually, and particularly, in the U.S. supply chain, estimated at $1.7 trillion annually. Only 12.4% of the total U.S. supply chain function is outsourced to third parties, such as PTS. We estimate, based on R. L. Polk registration data, that

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there are approximately 7.7 million commercial trucks operating in the United States, of which up to 3.7 million could be potential opportunities for PTS’ full-service leasing and contract maintenance offerings.

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Dealership. Generally, new vehicle unit sales are cyclical, and historically, fluctuations have been influenced by factors such as manufacturer incentives, interest rates, fuel prices, unemployment, inflation, weather, the level of personal discretionary spending, credit availability, consumer confidence, and other general economic factors. However, from a profitability perspective, automotive and truck retailers have historically been less vulnerable than manufacturers and parts suppliers to declines in new vehicle sales. We believe this is due to the retailers’ more flexible expense structure (a significant portion of the retail industry’s costs are variable) and their diversified revenue streams, such as used vehicle sales and service and parts sales. In addition, manufacturers may offer various dealer incentives when sales are slow, which further increases the volatility in profitability for manufacturers and may help to decrease volatility for franchised automotive retailers.

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Business Description

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Information Technology, Data Security, and Customer Privacy

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We consolidate financial, accounting, and operational data received from our operations utilizing common centralized management systems predominately licensed from, and in many cases operated by, third parties. Our systems follow our standardized accounting procedures and are compliant with any guidelines established by our vehicle manufacturers. Our technology allows us to extract and aggregate data from the systems in a consistent format to generate consolidated financial and operational analysis. These systems also allow us to access detailed information for each individual location as a group or on a consolidated basis. Information we can access includes, among other things, inventory, cash, unit sales, the mix of new and used vehicle sales, and sales of aftermarket products and services. Our ability to access this data allows us to continually analyze our local results of operations and financial position so as to identify areas for improvement.

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We are committed to respecting the privacy rights of our customers and all visitors to our website properties. We take privacy seriously and have instituted clear and comprehensive policies and procedures to ensure that our customers’ privacy rights are safeguarded. Each of our dealerships have a thorough privacy policy readily available on their individual website. We also comply with increasingly rigorous state and federal privacy laws. We utilize customer relationship management systems that assist us in identifying customer opportunities and responding to customer inquiries. We utilize compliance systems that support our ability to comply with our regulatory obligations. These systems assist us in maintaining the privacy of the information we receive from customers that we collect, process, and retain in the normal course of our business. We have adopted rigorous customer information safeguard programs and “red flag” policies to assist us in maintaining customer privacy.

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As part of our business model, we receive sensitive information regarding customers, associates, and vendors from various online and offline channels. Our internal and third-party systems are under a moderate level of risk from cyber criminals or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks continue to grow in number and sophistication thus presenting an ongoing threat to systems, whether internal or external, used to operate the business on a day to day basis. We also regularly train our associates to maintain vigilance against online attempts at data theft. We perform periodic control testing and audits on our systems as well as employ dedicated and third-party resources to monitor and protect critical assets from cyber-attacks. Despite these measures, our facilities, systems, associates, and those of our third-party service providers could be vulnerable to cyber-attacks, security breaches, social engineering, malicious software, or other events. Numerous national retailers have disclosed security breaches involving sophisticated cyber-attacks that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such retailers had in place. Any security breach or event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors as well as other operational and financial impacts derived from investigations, litigation, imposition of penalties, or other means. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.

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Marketing

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Retail Automotive Dealership. Our integrated marketing strategy focuses on each dealership to capitalize on local branding as well as corporate programs and web presence, which allows us to leverage scale and our parent brand recognition. We align ourselves with the marketing implemented by our OEM partners for their respective brands and integrate those initiatives and resources across the brands we represent.

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Our marketing strategy reflects a data-driven approach that combines key metrics and trends from industry and consumer studies, our customer relationship management systems, and performance data from our businesses. This approach emphasizes objectivity and transparency in our marketing efforts, allows us to create customer-focused solutions, and enables us to measure and gauge our success. Our tools quickly deliver personalized content across all channels and allow us to capture behavioral engagement, so we can better understand our customers and confidently develop more proactive strategies to meet and surpass their needs.

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We leverage scale by using consistent performance metrics to identify opportunities and negotiate enterprise arrangements for key marketing partners. A single, unified content management tool is used by our franchise dealerships in the U.S. to enhance customer communication, provide visibility into our sales pipeline, generate customer insights, enhance team collaboration, and measure return on investment across our organization.

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Our marketing strategy places a strong emphasis on digital marketing with a goal of attracting more prospects, converting more leads, and closing more sales. By focusing on social media, video, mobile, email marketing, online advertising, search engine optimization, automation, personalization, branding, and content, we optimize our digital presence across all avenues of engagement to ensure a seamless customer experience at every touchpoint.

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We monitor customer satisfaction data to gain insight into our business performance and enhance the areas of our business that drive customer loyalty. Social media is a highly valued element of our marketing strategy that allows us to engage with customers, increase dealership awareness, improve customer satisfaction, and enhance repeat and referral business. Additionally, we leverage corporate social media efforts and partners to benefit our dealerships and create a strong sense of community. Online reputation management sites, such as Google and Yelp, are proactively monitored to ensure we are offering a superior customer experience.

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Retail Commercial Truck Dealership and Commercial Vehicle Distribution. We market commercial trucks in the U.S., Canada, and Western Europe and commercial vehicles and other products in Australia and New Zealand, principally through a network of dealership and service locations supported by corporate level marketing efforts. Our digital marketing leverages manufacturer websites supplemented by brand specific websites to promote our brands and services. We also employ local sponsorships to generate brand awareness in our markets and market to customers at various trade shows and other industry events.

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Agreements with Vehicle and Equipment Manufacturers

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We operate our franchised new vehicle dealerships under separate agreements with the manufacturers or distributors of each brand of vehicle sold at that dealership. These agreements are typical throughout the industry and may contain provisions and standards governing almost every aspect of the dealership, including ownership, management, personnel, training, maintenance of a minimum of working capital, net worth requirements, maintenance of minimum lines of credit, advertising and marketing activities, facilities, signs, products and services, maintenance of minimum amounts of insurance, achievement of minimum customer service standards, and monthly financial reporting. In addition, the General Manager and/or the owner of a dealership typically cannot be changed without the manufacturer’s consent. In exchange for complying with these provisions and standards, we are granted the non-exclusive right to sell the manufacturer’s or distributor’s brand of vehicles and related parts and warranty services at our dealerships. The agreements also grant us a non-exclusive license to use each manufacturer’s trademarks, service marks, and designs in connection with our sales and service of its brand at our dealership.

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Some of our agreements, including those with BMW, Honda, Mercedes-Benz, and Toyota, expire after a specified period of time ranging from one to six years. Manufacturers have generally not terminated our franchise agreements, and our franchise agreements with fixed terms have typically been renewed without substantial cost. We currently expect the

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manufacturers to renew all of our franchise agreements as they expire. In addition, certain agreements with the manufacturers limit the total number of dealerships of that brand that we may own in a particular geographic area and in some cases, limit the total number of their vehicles that we may sell as a percentage of a particular manufacturer’s overall sales. Manufacturers may also limit the ownership of stores in contiguous markets. We have reached certain geographical limitations with certain manufacturers in the U.S. and U.K. Where these limits are reached, we cannot acquire additional franchises of those brands in the relevant market unless we can negotiate modifications to the agreements. We may not be able to negotiate any such modifications.

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Many of these agreements also grant the manufacturer or distributor a security interest in the vehicles and/or parts sold by them to the dealership as well as other dealership assets and permit them to terminate or not renew the agreement for a variety of causes, including failure to adequately operate the dealership, insolvency or bankruptcy, impairment of the dealer’s reputation or financial standing, changes in the dealership’s management, owners or location without consent, sales of the dealership’s assets without consent, failure to maintain adequate working capital or floor plan financing, changes in the dealership’s financial or other condition, failure to submit required information to them on a timely basis, failure to have any permit or license necessary to operate the dealership, and material breaches of other provisions of the agreement. In the U.S., these termination rights are subject to state franchise laws that limit a manufacturer’s right to terminate a franchise. In the U.K., we operate without such local franchise law protection (see “Regulation” below).

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Our agreements with manufacturers or distributors usually give them the right in some circumstances (including upon a merger, sale, change of control of the Company, or in some cases a material change in our business or capital structure) to acquire the dealerships from us at fair market value. For example, our agreement with General Motors provides that upon a proposed purchase of 20% or more of our voting stock by any new person, entity, or another manufacturer (subject to certain exceptions), an extraordinary corporate transaction (such as a merger, reorganization, or sale of a material amount of assets), or a change of control of our board of directors, General Motors has the right to acquire all assets, properties, and business of any General Motors dealership owned by us for fair value. Some of our agreements with other major manufacturers, including Honda and Toyota, contain provisions similar to the General Motors provisions.

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With respect to our commercial vehicle distribution operations in Australia and New Zealand, we are party to distributor agreements with each manufacturer of products we distribute pursuant to which we are the distributor of these products in those countries and nearby markets. The agreements govern all aspects of our distribution rights, including sales and service activities, service and warranty terms, use of intellectual property, promotion and advertising provisions, pricing and payment terms, and indemnification requirements. The agreement with Western Star expires in 2025, the agreement with MTU expires in 2029, and the agreement with Detroit Diesel expires in 2025. We also are party to shipping agreements with respect to importing those products. For each of our non-company owned dealers, we have signed a franchise agreement with terms that set forth the dealer’s obligations with respect to the sales and servicing of these vehicles and associated parts.

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Competition

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Dealership. We believe that the principal factors consumers consider when determining where to purchase a vehicle are the marketing campaigns conducted by manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, the location of dealerships, and the quality of the customer experience. Other factors include customer preference for particular brands of vehicles, pricing (including manufacturer rebates and other special offers), and warranties. We believe that our dealerships are competitive in all of these areas.

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The automotive and truck retail industry is currently served by franchised dealerships, independent Used Vehicle SuperCenters, and individual consumers who sell used vehicles in private transactions. For new vehicle sales, we compete primarily with other franchised dealers in each of our marketing areas, relying on our premium facilities, superior customer service, advertising and merchandising, management experience, sales expertise, reputation, and the location of our dealerships to attract and retain customers. Each of our markets may include a number of well-capitalized competitors, including in certain instances dealerships owned by manufacturers and national and regional retail chains. In our retail commercial truck dealership operations, we compete with other manufacturers and retailers of medium and heavy-duty trucks, such as Ford, International Kenworth, Mack, Peterbilt, and Volvo. We also compete with dealers that

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sell the same brands of new vehicles that we sell and with dealers that sell other brands of new vehicles that we do not represent in a particular market. Our new vehicle dealership competitors have franchise agreements which give them access to new vehicles on the same terms as us. Automotive dealers also face competition in the sale of new vehicles from purchasing services, warehouse clubs, and electric vehicle manufacturers that sell direct to consumer. With respect to arranging financing for our customers’ vehicle purchases, we compete with a broad range of financial institutions, such as banks and local credit unions.

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For used vehicle sales, we compete in a highly fragmented market which sells approximately 38.4 million units in the U.S. and approximately 7 million units in the U.K. annually through other franchised dealers, independent used vehicle dealers, automobile rental agencies, purchasing services, private parties, online retailers, and used vehicle “superstores” for the procurement and resale of used vehicles.

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We compete with other franchised dealers to perform warranty repairs and with other dealers, franchised and non-franchised service center chains, and independent garages for non-warranty repair and routine maintenance business. We compete with other dealers, franchised and independent aftermarket repair shops, and parts retailers in our parts operations. We believe that the principal factors consumers consider when determining where to purchase vehicle parts and service are price, the use of factory-approved replacement parts, facility location, the familiarity with a manufacturer’s brands, and the quality of customer service. A number of regional or national chains offer selected parts and services at prices that may be lower than our prices.

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We believe the majority of consumers are utilizing the Internet and other digital media in connection with the purchase of new and used vehicles. Accordingly, we face increased competition from online vehicle websites, including those developed by manufacturers and other dealership groups.

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Commercial Vehicle Distribution. With respect to our commercial vehicle distribution operations in Australia and New Zealand, we compete with manufacturers, distributors, and retailers of other vehicles and products in our markets. The brands we represent in Australia hold a 4.3% market share in the Australian heavy-duty truck market and a 2.6% market share in New Zealand.

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PTS. As an alternative to using PTS’ full-service truck leasing or contract maintenance services, we believe that most potential customers perform some or all of these services themselves. They may also purchase similar or alternative services from other third-party vendors. Its full-service truck leasing operations compete with companies providing similar services on a national, regional, and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, maintenance, service, and geographic coverage. PTS competes with finance lessors, truck and trailer manufacturers, and independent dealers, each of which provides full-service lease products, finance leases, extended warranty maintenance, rental, and other transportation services. Its contract maintenance offering competes primarily with truck and trailer manufacturers and independent dealers who provide maintenance services.

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PTS’ commercial and consumer rental operations compete with several other nationwide vehicle rental systems, a large number of vehicle leasing, and rental companies with multiple branches operating on a regional basis and many similar companies operating primarily on a local basis. Because a significant portion of its consumer rentals are used for moving and relocation, PTS competes with local and national moving and storage companies as well as alternatives such as portable container-based transportation and storage. In its commercial and consumer rental operations, it competes primarily on the basis of equipment availability, geographic location, and customer service.

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PTS’ logistics business competes with other dedicated logistics providers, transportation management businesses, freight brokers, warehouse providers, and truckload carriers on a national, regional, and local level as well as with the internal supply chain functions of prospective customers who rely on their own resources for logistics management. Competitive factors include price, efficient logistical design offerings, equipment, maintenance, service, technology, geographic coverage, and driver and operations expertise. PTS seeks to combine its logistics services with its existing full-service truck leasing and truck rental business to create an integrated transportation solution for its customers.

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Human Capital

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We believe that our Human Capital is our greatest asset. We understand that exceptional customer service can only be consistently delivered by attracting, motivating, training, and retaining the very best team members. We are committed to building a diverse and skilled workforce while providing a work environment that promotes equity and is free from any form of prohibited discrimination. With this in mind, we put our employees at the heart of everything that we do by developing their talent and enabling them to build long term careers.

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We operate in a decentralized manner that fosters an entrepreneurial spirit where each dealership or business unit has independent operational and financial management responsible for day-to-day operations. We believe experienced local managers are better qualified to make day-to-day decisions concerning the successful operation of a business unit and can be more responsive to our customers’ needs. We invest for future growth and offer outstanding brands and facilities which we believe attract outstanding talent. Attracting the best talent and allowing our associates to make business decisions at the local level helps to foster long-term growth through increased repeat and referral business.

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As of December 31, 2020, we employed over 23,000 people, a decrease of 12.4% from December 31, 2019. Due to the COVID-19 pandemic during the key shutdown months of April and May 2020, we furloughed approximately 15,000 employees, though we returned most of those employees to work during the course of the year. We maintained vigilance over all of our operations to ensure that our employees and customers were kept safe. Approximately 661 of our employees were covered by collective bargaining agreements with labor unions, and we believe our relations with our employees, including those represented by collective bargaining agreements, are good. Further, we are committed to building a diverse and skilled workforce. Our focus on inclusion and diversity at our U.S. automotive dealerships has resulted in over 65% of our workforce being diverse either by race, ethnicity, or gender, with our gender diversity higher than the National Automobile Dealer Association average. Additionally, our U.S. automotive dealerships have a management diversity rate of approximately 49%. This inclusive culture will enhance our ability to attract and retain the most talented leadership and workforce, thereby enabling us to better serve and broaden our customer base.

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We maintain a culture grounded in safety and endeavor to eliminate workplace incidents, risks, and hazards. We have partnered with environmental and safety consulting firms to assist in compliance with specific local and federal laws and regulations relating to environmental and safety issues and to promote best safety practices. Audits are regularly performed to assure and maintain compliance.

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In 2019, the last year we participated in the Automotive News survey, thirty-three of our U.S. dealerships were named to the Automotive News Top 100 Dealerships to Work For in the United States. In 2018 and 2019, a Penske dealership was ranked #1 in the United States in the Automotive News survey. We did not participate in the survey in 2020 due to COVID-19 related concerns. Additionally, in January 2021, we were named one of the “World’s Most Admired Companies” by Fortune Magazine. In the U.K. in 2018, we were named “Dealer Group of the Year” by both Automotive Management and Motor Trader magazines, consolidating our position as the UK's largest dealer group. In 2019, our U.K. operations were named by Glassdoor as the 14th best place to work. We were not only the highest ranked business in the automotive sector, but Sytner Group Limited, a consolidated subsidiary, was also the top-rated retailer ahead of other large national businesses. We believe these awards reflect our ongoing commitment to training our employees, which enhances customer satisfaction, and we believe results in improved sales over time.

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We believe our employee turnover of approximately 19% is low compared to our peers. We seek to motivate our key managers and salespersons through, among other things, variable compensation programs tied principally to local profitability and customer satisfaction. We also annually survey our employees to gauge their satisfaction and address any resulting concerns. Due to our reliance on vehicle manufacturers, we may be adversely affected by labor strikes or work stoppages at the manufacturers’ facilities.

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Regulation

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We operate in a highly regulated industry and a number of regulations affect the marketing, selling, financing, servicing, and distribution of vehicles. Under the laws of the jurisdictions in which we currently operate, we typically must obtain a license in order to establish, operate, relocate a dealership, or operate a repair facility. These laws also regulate our conduct of business, including our advertising, operating, financing, employment, distribution, and sales

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practices. Other laws and regulations include franchise laws and regulations, environmental laws and regulations (see “Environmental Matters” below), laws and regulations applicable to new and used motor vehicle dealers as well as customer and employee privacy, identity theft prevention, wage-hour, anti-discrimination, and other employment practices laws. With respect to online sales, many laws and regulations applicable to our business were adopted prior to the introduction of the Internet, certain digital technologies, and e-commerce, generally. As a result, we are tasked with maintaining compliance in an uncertain regulatory environment.

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Our financing activities with customers are subject to truth-in-lending, consumer leasing, equal credit opportunity, and similar regulations as well as motor vehicle finance laws, installment finance laws, insurance laws, usury laws, and other installment sales laws. Some jurisdictions regulate finance fees that may be paid as a result of vehicle sales. In recent years, private plaintiffs, state attorneys general, and federal agencies in the U.S. have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. In the U.K., the Financial Conduct Authority (the “FCA”) regulates consumer finance and insurance operations and has recently restricted certain types of compensation in connection with dealer assisted financing. See “Item 1A. Risk Factors, Regulatory Issues.”

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In the U.S., we benefit from the protection of numerous state franchise laws that generally provide that a manufacturer or distributor may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Some state franchise laws allow dealers to file protests or petitions or to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Our international locations generally do not have these laws, and as a result, our international operations operate without these types of protections.

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Environmental Matters

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We are subject to a wide range of environmental laws and regulations, including those governing discharges into the air and water, the operation and removal of aboveground and underground storage tanks, the use, handling, storage, and disposal of hazardous substances and other materials, and the investigation and remediation of environmental contamination. Our business involves the generation, use, handling, and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, filters, transmission fluid, antifreeze, refrigerant, batteries, solvents, lubricants, tires, and fuel. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.

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Our operations involving the management of hazardous and other environmentally sensitive materials are subject to numerous requirements. Our business also involves the operation of storage tanks containing such materials. Storage tanks are subject to periodic testing, containment, upgrading, and removal under applicable law. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks. In addition, water quality protection programs govern certain discharges from some of our operations. Similarly, certain air emissions from our operations, such as vehicle painting, may be subject to relevant laws. Various health and safety standards also apply to our operations.

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We may have liability in connection with materials that are sent to third-party recycling, treatment, and/or disposal facilities under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act and comparable statutes. These statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Responsible parties under these statutes may include the owner or operator of the site where the contamination occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites.

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Many jurisdictions in which we operate have placed additional restrictions and limitations on activities that may affect the environment. U.S. vehicle manufacturers are subject to federally mandated corporate average fuel economy standards, which are expected to increase substantially through 2026. Furthermore, in response to concerns that emissions of carbon dioxide and certain other gases, referred to as “greenhouse gases,” may be contributing to warming of the Earth’s atmosphere, climate change-related legislation and policy changes to restrict greenhouse gas emissions are being considered, or have been implemented, at state and federal levels. Officials of the States of California and Massachusetts have announced a ban on the sale of new vehicles with gasoline engines in cars in 2035. European

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regulation requires a 37.5% reduction in emissions carbon dioxide for cars by 2030 and several municipalities in Europe have announced future bans on diesel or combustible fuel vehicles. In November 2020, certain representatives of the U.K. government suggested a ban on the sale of gasoline engines in cars and vans as early as 2030 and a ban on the sale of gasoline hybrid engines in cars and vans as early as 2035. Significant increases in fuel economy requirements or new federal and state restrictions on emissions of carbon dioxide on vehicles and fuels could adversely affect prices of and demand for the vehicles that we sell, such as the reduced demand for diesel vehicles we have experienced in 2020 in the United Kingdom.

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We have a proactive strategy related to environmental, health, and safety compliance, which includes contracting with third parties to inspect our facilities periodically. We believe that we do not have any material environmental liabilities and that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material effect on us. However, soil and groundwater contamination are known to exist at certain of our current or former properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. Compliance with current, amended, new, or more stringent laws or regulations, stricter interpretations of existing laws, or the future discovery of environmental conditions could require additional expenditures by us, and such expenditures could be material.

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Insurance

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Our business is subject to substantial risk of loss due to significant concentrations of property value, including vehicles and parts at our locations. In addition, we are exposed to liabilities arising out of our operations, such as employee claims, customer claims, claims for personal injury or property damage, and potential fines and penalties in connection with alleged violations of regulatory requirements or data security requirements. We attempt to manage such risks through loss control and risk transfer utilizing insurance programs which are subject to specified deductibles and significant retentions, including information security risk insurance. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. As a result, we are exposed to uninsured and underinsured losses that could have a material adverse effect on us.

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Corporate Social Responsibility

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We recognize we are accountable to key stakeholders and the communities in which we do business. We focus our environmental, social, and governance efforts where we can have the most positive impact on our business and society, including issues related to community investment, environmental sustainability, human capital, and investor outreach. Central to our mission are the core values of ethics, integrity, professionalism, teamwork, and exceeding the expectations of our customers and employees. Our commitment to corporate social responsibility is driven by these core values as we aim to conduct our business in ways that enrich the communities where we work and live, focus on the environment and safety, provide a workplace that is safe, inclusive, and diverse while providing value to our stakeholders. We are committed to the implementation of responsible business practices and the continuous improvement of our operations and our relationships with our employees and the communities in which we live and work.

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Available Information

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For selected financial information concerning our various operating and geographic segments, see Note 18 to our consolidated financial statements included in Item 8 of this report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website, www.penskeautomotive.com, under the tab “Investor Relations” as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The SEC maintains an Internet site that contains reports, proxy, and information statements and other information that issuers file with the SEC. The address of the SEC’s website is www.sec.gov. We also make available on our website copies of materials regarding our corporate governance policies and practices, including our Corporate Governance Guidelines, our Code of Business Ethics, and the charters relating to the committees of our Board of Directors. The content of any website referred to in this Form 10-K is not deemed incorporated by reference into this Form 10-K unless expressly noted. You may obtain a printed copy of any of the foregoing materials by sending a written request to Investor Relations, Penske Automotive Group, Inc., 2555 Telegraph Road, Bloomfield Hills, MI 48302 or by calling toll-free 248-648-2500. The information on or linked to our website is not part of this document. We plan to disclose changes to our Code of Business Ethics or waivers, if any, for our executive officers or directors on our website. We incorporated in the state of Delaware in 1990 and began dealership operations in October 1992.

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Seasonality

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Dealership. 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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Commercial Vehicle Distribution. Our commercial vehicle distribution business generally experiences higher sales volumes during the second quarter of the year, which is primarily attributable to commercial vehicle customers completing annual capital expenditures before their fiscal year-end, which is typically June 30 in Australia.

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Item 1A. Risk Factors

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Our business, financial condition, results of operations, cash flows, prospects, and the prevailing market price and performance of our common stock may be affected by a number of factors, including the matters discussed below. Certain statements and information set forth herein as well, as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “goal,” “plan,” “seek,” “project,” “continue,” “will,” “would,” and variations of such words and similar expressions are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this Annual Report on Form 10-K or when made, and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events, or otherwise.

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Although we believe that the expectations, plans, intentions, and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.

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The material risks, uncertainties, and other factors that our stockholders and prospective investors should consider include the following:

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Operational Risks

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The COVID-19 pandemic has disrupted, and may continue to disrupt, our business, which could adversely affect our financial performance. The outbreak of the COVID-19 pandemic across the globe has adversely impacted each of our markets and the global economy, leading to disruptions to our business. The COVID-19 pandemic continues in virtually all of our markets. Governmental authorities have taken countermeasures to slow the outbreak, including shelter-in-place orders, restrictions on travel, and government-funded assistance programs to individuals and businesses. Business closures and shelter-in-place orders negatively impacted our business during 2020, and in response to increased incidence of the COVID-19 pandemic, certain parts of the U.K. have reinstated shelter-in-place orders which require our dealership showrooms to close, although we continue to conduct sales through our online “Click & Collect” program where available, though we are unsure of the continued availability of our “Click & Collect” program in response to continuing high levels of infection in certain areas of the U.K. If shelter-in-place orders are extended or additional restrictions are enacted that require our dealerships to close, we may be adversely impacted. The COVID-19 pandemic is a highly fluid and rapidly evolving situation due to numerous uncertainties, including the duration of the outbreak, travel restrictions, business closures, the effectiveness of actions taken to contain the disease, the distribution rate and acceptance rate of a vaccine, the effect of government assistance programs, production levels from our manufacturing partners, and other unintended consequences, and while we continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment, we cannot anticipate with any certainty the length, scope, or severity of the business impact from the COVID-19 pandemic in each of the jurisdictions that we operate.

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This business impact could include changes in customer demand; our relationship with, and the financial and operational capacities of, vehicle manufacturers, captive finance companies and other suppliers; workforce availability; risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms); the adequacy of our cash flow and earnings and other conditions which may affect our liquidity; our ability to pay our quarterly dividend at prior levels; and disruptions to our technology network and other critical systems, including our dealer management systems and software or other facilities or equipment. Moreover, due to remote working and lack of mobility associated with the pandemic in our markets, we believe our customers are driving less, which may affect our services revenues should this trend continue.

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

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Macro-economic conditions. Our performance is impacted by general economic conditions overall and in particular by economic conditions in the markets in which we operate. These economic conditions include levels of new and used vehicle sales, availability of consumer credit, changes in consumer demand, consumer confidence levels, fuel prices, personal discretionary spending levels, interest rates, and unemployment rates. When the worldwide economy faltered early in 2020, we were adversely affected, and we expect a similar relationship between general economic and industry conditions and our performance in the future.

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Adverse conditions affecting a significant automotive manufacturer or supplier will affect us. 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 2020, revenue generated at our Audi/Volkswagen/Porsche/Bentley, BMW/MINI, Toyota/Lexus, and Mercedes-Benz/Sprinter/smart dealerships represented 22%, 23%, 14%, and 10%, respectively, of our total automotive dealership revenues. In addition, our retail commercial truck operations rely principally on Freightliner and Western Star trucks (both Daimler brands).

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Significant adverse weather related events, supply chain issues, or other 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 impact any of the manufacturers whose franchises generate a significant percentage of our revenue. For example, in 2017, hurricanes in Puerto Rico, Florida, Georgia, and Texas generated storm-related losses. Should these or similar events reoccur, we would expect similar adverse effects. Moreover, new rules in place after the recent Brexit accord between the European Union and the U.K. could slow parts originating in the U.K or Europe for distribution to our dealerships. COVID-19 has impacted and may continue to impact the supply of vehicles or parts to the U.S. or European markets, and our business could be materially adversely affected. The supply chain required to manufacture and supply the parts for the vehicles we sell is highly complex and integrated. Any failure of that supply chain could materially and adversely affect us. For example, recently, many of our principal vehicle manufacturers have announced production disruptions caused by a shortage of automotive microchips. The shortage is reported to be due to the overall demand for microchips in the global economy. IHS Markit has predicted that automotive supply globally will be reduced by 1.0 million units in the first quarter of 2021 due to the shortage. However, IHS Markit notes they believe production will recover later in the year. While we have ample levels of new vehicles in our inventory currently and expect to continue to have normal levels of used vehicles for sale, prolonged shortages could result in lower new vehicle sales volumes which could adversely affect us. Moreover, due to remote working and lack of mobility associated with the pandemic in our markets, we believe our customers are driving less, which may affect our services revenues should this trend continue.

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Manufacturer incentive programs. Vehicle manufacturers offer incentive programs intended to promote and support vehicle sales. These incentive programs include but are not limited to customer rebates, dealer incentives on new vehicles, manufacturer floor plan interest and advertising assistance, and warranties on new and used vehicles. A discontinuation of or change to the manufacturers’ incentive programs may adversely impact vehicle demand, the value of new and used vehicles, and may materially affect our results of operations.

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The success of our commercial vehicle distribution businesses is directly impacted by availability and demand for the vehicles and other products we distribute. We are the exclusive distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. We are also the distributor of diesel and gas engines and power systems in these same markets. The profitability of these businesses depends upon the number of vehicles, engines, power systems, and parts we distribute, which in turn is impacted by demand for these products. We believe demand is subject to general economic conditions, exchange rate fluctuations, regulatory changes, competitiveness of the products, and other factors over which we have limited control. In the event sales of these products are less than we expect, our related results of operations and cash flows for this aspect of our business may be materially adversely affected. The products we distribute are principally manufactured at a limited number of locations. In the event of a supply disruption, sufficient quantities of the vehicles, engines, power systems, and parts are not made available to us, or if we accept these

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products and are unable to economically distribute them, our cash flows or results of operations may be materially adversely affected.

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Australian economic conditions. Our commercial vehicle distribution operations in Australia and New Zealand may be impacted by local economic conditions and in particular, the price of commodities such as copper and iron ore, which may impact the desire of our customers to operate their mining operations and replace their vehicle fleets. Adverse pricing concerns of those, and other commodities, may have a material adverse effect on our ability to distribute, and/or retail, commercial vehicles and other products profitably. These same conditions may also negatively impact the value of the Australian Dollar versus the U.S. Dollar, which negatively impacts our U.S. Dollar reported financial results and the pricing of products sold by Penske Australia, which are manufactured in the U.S., U.K., and Germany.

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Additional risks relating to PTS. PTS’ business has additional risks to those in the retail business.

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Customers. PTS has a more concentrated customer base than we do and is subject to changes in the financial health of its customers, changes in their asset utilization rates, and increased competition for those customers.

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Workforce. PTS requires a significant number of qualified drivers and technicians, which may be difficult to hire, and is subject to increased compliance costs or work stoppages relating to those employees, particularly in regard to changes in labor laws and time of work rules regarding those employees. PTS contributes to 10 U.S. multi-employer pension plans that provide defined benefits to approximately 3,350 associates covered by collective bargaining agreements. If they withdraw or are deemed to withdraw from participation in any of these plans, then applicable law could require them to make withdrawal liability payments to the plan. If any of those plans were deemed to be underfunded, PTS could be subject to additional assessments, which could be substantial.

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Fleet risk. As one of the largest purchasers of commercial trucks in North America, PTS requires continued availability from truck manufacturers and suppliers of vehicles and parts for its fleet, which may be uncertain, in particular if a significant recall were to occur. In addition, because PTS sells a large number of trucks each year and is subject to residual risk for the vehicles it leases to customers, changes in values of used trucks affects PTS’ profitability.

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Capital markets risk. PTS relies on banks and the capital markets to fund its operations and capital commitments. PTS had a significant amount of total indebtedness at December 31, 2020, which it uses in part to purchase its vehicle fleet and therefore, is subject to changes in, and continued access to, the capital markets.

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Strategic Risks

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Brand reputation. Our businesses and our commercial vehicle operations, in particular, as those are more concentrated with a particular manufacturer, are impacted by consumer demand and brand preference, including consumers’ perception of the quality of those brands. A decline in the quality and brand reputation of the vehicles or other products we sell or distribute, as a result of events such as manufacturer recalls or legal proceedings, may adversely affect our business. If such events were to occur, the profitability of our business related to those manufacturers could be adversely affected.

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Our business is very competitive. We generally compete with other franchised dealerships in our markets, used vehicle superstores, private market buyers and sellers of used vehicles, an increasing number of internet-based vehicle sellers, recently, electric vehicle manufacturers that sell direct to consumers, national and local service and repair shops and parts retailers with respect to commercial vehicles, distributors of similar products, and manufacturers in certain markets. Purchase decisions by consumers when shopping for a vehicle are extremely price sensitive. The level of competition in the market can lead to lower selling prices and related profits. If there is a prolonged drop in retail prices or if new vehicle sales are allowed to be made over the internet without the involvement of franchised dealers, our business could be materially adversely affected.

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Evolving automotive and trucking industries. The automotive and trucking industries are predicted to experience rapid change. Shared vehicle services such as Uber and Lyft provide consumers with increased choice in their personal mobility options. The effect of these and similar mobility options on the retail automotive industry is uncertain and may

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include lower levels of new vehicles sales but with increasing miles driven, which could require additional demand for vehicle maintenance. In part due to regulatory requirements to limit vehicle emissions, many automotive manufacturers have announced plans to further electrify their vehicle offerings. We expect to continue to sell electric and hybrid gas/electric vehicles through our franchised dealerships; however, if pure electric vehicles were widely accepted by customers, our service revenues may decline as these vehicles may require less physical maintenance than gas and hybrid vehicles. In addition, technological advances are facilitating the development of driverless vehicles. The eventual timing of availability of driverless vehicles is uncertain due to regulatory requirements, additional technological requirements, and uncertain consumer acceptance of these vehicles. The effect of driverless vehicles on the automotive retail and trucking industries is uncertain and could include changes in the level of new and used vehicles sales, the price of new vehicles, and the role of franchised dealers, any of which could materially and adversely affect our business.

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Key personnel. We believe that our success depends to a significant extent upon the efforts and abilities of our senior management and in particular, upon Roger Penske who is our Chair and Chief Executive Officer. To the extent Mr. Penske, or other key personnel, were to depart from our Company unexpectedly, our business could be significantly disrupted.

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Financial Risks

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Leverage. Our significant debt and other commitments expose us to a number of risks, including:

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Cash requirements for debt and lease obligations. A significant portion of the cash flow we generate must be used to service the interest and principal payments relating to our various financial commitments, including $3.1 billion of floor plan notes payable, $1.7 billion of non-vehicle long-term debt, and $5.4 billion of future lease commitments (including extension periods that are reasonably assured of being exercised and assuming constant consumer price indices). A sustained or significant decrease in our operating cash flows could lead to an inability to meet our debt service or lease requirements or to a failure to meet specified financial and operating covenants included in certain of our agreements. If this were to occur, it may lead to a default under one or more of our commitments and potentially the acceleration of amounts due, which could have a significant and adverse effect on us.

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Availability. Because we finance the majority of our operating and strategic initiatives using a variety of commitments, including floor plan notes payable and revolving credit facilities, we are dependent on continued availability of these sources of funds. If these agreements are terminated or we are unable to access them because of a breach of financial or operating covenants or otherwise, we will likely be materially affected.

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Interest rate variability. The interest rates we are charged on a substantial portion of our debt, including the floor plan notes payable we issue to purchase the majority of our inventory, are variable, increasing or decreasing based on changes in certain published interest rates. Increases to such interest rates has resulted and may continue to result in higher interest expense for us, which negatively affects our operating results. Because many of our customers finance their vehicle purchases, increased interest rates may also decrease vehicle sales, which would negatively affect our operating results.

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We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined. Regulatory authorities in both the U.S. and U.K. have announced their intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021 in the U.K and after June 30, 2023 in the U.S. In the U.S., we expect the Secured Overnight Financing Rate (“SOFR”) will be adopted in lieu of LIBOR. In the U.K., we expect the Sterling Overnight Indexed Average (SONIA) to be adopted. Our senior secured revolving credit facilities in the U.S. and U.K. and many of our floorplan arrangements utilize LIBOR as a benchmark for calculating the applicable interest rate. Changes in the method of calculating LIBOR, the elimination of LIBOR, or the replacement of LIBOR with an alternative rate or benchmark may require us to renegotiate or amend these facilities, loans, and programs, which may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to or elimination of LIBOR, the establishment and use of alternative rates or benchmarks, and the corresponding effects on our cost of capital may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.

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Impairment of our goodwill or other indefinite-lived intangible assets has in the past had, and in the future could have, a material adverse impact on our earnings. We evaluate goodwill and other indefinite-lived intangible assets for impairment annually and upon the occurrence of an indicator of impairment. Our process for impairment testing of these assets is described further under “Impairment Testing” in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates. If we determine that the amount of our goodwill or other indefinite-lived intangible assets are impaired at any point in time, we would be required to reduce the value of these assets on our balance sheet, which would also result in a material non-cash impairment charge that could also have a material adverse effect on our results of operations for the period in which the impairment occurs.

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Performance of sublessees. In connection with the sale, relocation, and closure of certain of our franchises, we have entered into a number of third-party sublease agreements. The rent paid by our sub-tenants on such properties in 2020 totaled approximately $25.8 million. In the aggregate, we remain ultimately liable for approximately $202.3 million of such lease payments including payments relating to all available renewal periods. We rely on our sub-tenants to pay the rent and maintain the properties covered by these leases. In the event a subtenant does not perform under the terms of their lease with us, we could be required to fulfill such obligations, which could have a significant and adverse effect on us.

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International and foreign currency risk. We have significant operations outside the U.S. that expose us to changes in foreign exchange rates and to the impact of economic and political conditions in the markets where we operate. As exchange rates fluctuate, our results of operations as reported in U.S. Dollars fluctuate. For example, if the U.S. Dollar were to continue to strengthen against the British Pound, our U.K. results of operations would translate into less U.S. Dollar reported results. Sustained levels or an increase in the value of the U.S. Dollar, particularly as compared to the British Pound, could result in a significant and adverse effect on our reported results.

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Joint ventures. We have significant investments in a variety of joint ventures, including retail automotive operations in Germany, Japan, Italy, and Spain. We have a 28.9% interest in PTS. We expect to receive annual operating distributions from PTS and the other ventures and in the case of PTS, realize significant cash tax savings. These benefits may not be realized if the joint ventures do not perform as expected, or if changes in tax, financial, or regulatory requirements negatively impact the results of the joint venture operations. Our ability to dispose of these investments may be limited. In addition, the relevant joint venture agreement and other contractual restrictions may limit our access to the cash flows of these joint ventures. For example, PTS’ principal debt agreements allow partner distributions only as long as PTS is not in default under that agreement and the amount PTS distributes does not exceed 50% of its consolidated net income.

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Legal and Compliance Risks

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Vehicle manufacturers exercise significant control over us. Each of our new vehicle dealerships and distributor operations operate under franchise and other agreements with automotive manufacturers, commercial vehicle manufacturers, or related distributors. These agreements govern almost every aspect of the operation of our dealerships and give manufacturers the discretion to terminate or not renew our franchise agreements for a variety of reasons, including certain events outside our control such as accumulation of our stock by third parties. Without franchise or distributor agreements, we would be unable to sell or distribute new vehicles or perform manufacturer authorized warranty service. If a significant number of our franchise agreements are terminated, not renewed, or, with respect to our distributor operations, a competing distributor were introduced, we would be materially affected.

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Regulatory issues. We are subject to a wide variety of regulatory activities, including:

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Governmental regulations, claims, and legal proceedings. Governmental regulations affect almost every aspect of our business, including the fair treatment of our employees, wage and hour issues, and our financing activities with customers. In California, previous judicial decisions have called into question whether long-standing methods for compensating dealership employees comply with the local wage and hour rules and may do so again. We could be susceptible to claims or related actions if we fail to operate our business in accordance with applicable laws or it is determined that long-standing compensation methods did not comply with local laws. Many laws and regulations

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applicable to our business were adopted prior to the introduction of online vehicle sales, the Internet and certain digital technology, generally. As a result, we are tasked with maintaining compliance in an uncertain regulatory environment. Claims arising out of actual or alleged violations of law which may be asserted against us or any of our dealers by individuals, through class actions, or by governmental entities in civil or criminal investigations and proceedings, may expose us to substantial monetary damages which may adversely affect us.

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In the U.K., the FCA regulates consumer finance and insurance operations. Effective January 28, 2021, the FCA has prohibited certain types of compensation in connection with dealer assisted financing. Our U.K. franchises are no longer allowed to increase or decrease the interest rate of a consumer’s financing if such changes increase or decrease the dealer’s related compensation. We expect to generate lower revenues from dealer assisted financing; however, industry practice is still evolving in response to these changes. If these changes significantly restrict our ability to generate revenue from arranging financing or selling insurance products, we could be materially and adversely affected.

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Privacy Regulation. We are subject to numerous laws and regulations in the U.S. and internationally designed to protect the information of clients, customers, employees and other third parties that we collect and maintain, including the European Union General Data Protection Regulation (the “GDPR”). The GDPR, among other things, mandates new requirements regarding the handling of personal data of employees and customers, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. The state of California has a similar law called the California Consumer Privacy Act (the “CCPA”). The CCPA was amended in 2020 to create the “California Privacy Protection Agency” which will have the authority to audit and enforce privacy rules, among other responsibilities. If we fail to comply with these laws or other similar regulations applicable to our business, we could be subject to significant litigation, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions. For example, a failure to comply with the GDPR could result in fines up to the greater of €20 million or 4% of annual global revenues.

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Recalls. Legislative and regulatory bodies from time to time have considered laws or regulations that would prohibit companies from renting or selling any vehicle that is subject to a recall until the recall service is performed. Whether any such prohibition may be enacted, and its ultimate scope, cannot be determined at this time. If a law or regulation is enacted that prevents the sale of vehicles until recall service has been performed, we could be required to reserve a significant portion of our vehicles from being available for sale for even a minor recall unrelated to vehicle safety. In addition, various manufacturers have issued stop sale notices in relation to certain recalls that require that we retain vehicles until the recall can be performed, whether or not parts are then available. While servicing recall vehicles yields parts and service revenue to us, the inability to sell a significant portion of our vehicles could increase our costs and have an adverse effect on our results of operations if a large number of our vehicles are the subject of simultaneous recalls or if needed replacement parts are not in adequate supply.

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Vehicle requirements. Federal and state governments in our markets have increasingly placed restrictions and limitations on the vehicles sold in the market in an effort to combat perceived negative environmental effects. For example, in the U.S., automotive manufacturers are subject to federally mandated corporate average fuel economy standards, which will increase substantially through 2026. Certain representatives of the U.K. government suggested a ban on the sale of gasoline engines in cars and vans as early as 2030 and a ban on the sale of gasoline hybrid engines in cars and vans as early as 2035. Similar bans have been announced in California and Massachusetts which would ban the sale of new vehicle with gasoline engines in cars in 2035. Furthermore, numerous states and other jurisdictions, including California, have adopted or are considering regulations requiring the sale of specified numbers of zero-emission vehicles. Significant increases in fuel economy requirements and new restrictions on emissions on vehicles and fuels could adversely affect prices of and demand for the new vehicles that we sell, which could materially adversely affect us.

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Tariff and trade risk. Increased tariffs, import product restrictions, and foreign trade risks may impair our ability to sell foreign vehicles profitably. The United States Mexico Canada Agreement allows tariff-free importing of automobiles among the countries only if (i) the vehicles have 75% of their components manufactured in the US, Mexico, or Canada, (ii) workers with an hourly wage of at least $16, manufacture at least 30% of the vehicle, which graduates up to 40% of the vehicle in 2023, or in the case of trucks, 45% and (iii) 70% of the steel and aluminum used in the production of the vehicle is sourced within North America. Should tariffs increase, we expect the price

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of many new vehicles we sell to increase which may adversely affect our new vehicle sales and related finance and insurance sales. Moreover, new rules in place after the recent Brexit accord between the European Union and the U.K. require varying levels of content in vehicles to originate in either the U.K. or the European Union to remain tariff free. If automotive manufacturers cannot meet these content rules, there may be import tariffs on any affected vehicles, which could adversely affect our U.K. results.

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Franchise laws in the U.S. In the U.S., state law generally provides protections to franchised vehicle dealers from discriminatory practices by manufacturers and from unreasonable termination or non-renewal of their franchise agreements. In many states, the laws require that new vehicle sales be conducted exclusively by automotive retailers (not manufacturers). In recent years, new electric vehicle manufacturers have been able to conduct new vehicle sales outside of the franchised automotive system as new entrants. While the sales levels of these new entrants is small and we expect continued good relations with our manufacturer partners, should U.S. franchise laws be repealed or amended to allow our existing manufacturer partners to effectively operate outside the franchised system, our results of operations may be materially and adversely impacted. Our franchised automotive dealers in the U.K. and European Union operate effectively without such protections.

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Changes in law. New laws and regulations at the state and federal level may be enacted which could materially adversely impact our business. For example, in 2013, a ballot initiative in California titled the California Car Buyers Protection Act was proposed that would have eliminated our ability to be compensated for assisting in financing customer vehicle purchases, among other matters. If these initiatives or other adverse changes in law were to be enacted, it could have a significant and adverse effect on us.

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Climate change and environmental regulations. Scientific evidence suggests that the globe is warming potentially resulting in an environment more prone to natural disasters, such as flooding. To date, we have seen increases in our cost to insure against such risks, which costs could continue to increase should this trend continue. We are subject to a wide range of environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of storage tanks; and the use, storage, and disposal of hazardous substances. In the normal course of our operations we use, generate, and dispose of materials covered by these laws and regulations. In the face of climate change, these laws could become more stringent. We face potentially significant costs relating to claims, penalties, and remediation efforts in the event of non-compliance with existing and future laws and regulations. Furthermore, should climate change continue, we expect further regulation of gas engines and vehicle emissions which may affect the types of vehicles we sell and service. We cannot predict the future costs to our businesses for these developments.

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Accounting rules and regulations. Significant changes to GAAP in the U.S. could significantly affect our reported financial position, earnings, and cash flows upon adoption and effectiveness. In addition, any changes to lease accounting could affect PTS customers’ decisions to purchase or lease trucks, which could adversely affect their business if leasing becomes a less favorable option. See the disclosure provided under “Recent Accounting Pronouncements” in Part II, Item 8, Note 1 of the Notes to our Consolidated Financial Statements for additional detail on accounting standard updates that could have an impact on us.

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Related parties. Our two largest stockholders, Penske Corporation and its affiliates (“Penske Corporation”) and Mitsui & Co., Ltd. and its affiliates (“Mitsui”), together beneficially own approximately 60% of our outstanding common stock. The presence of such significant stockholders results in several risks, including:

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Our principal stockholders have substantial influence. Penske Corporation and Mitsui have entered into a stockholders agreement pursuant to which they have agreed to vote together as to the election of our directors. As a result, Penske Corporation has the ability to control the composition of our Board of Directors, which may allow it to control our affairs and business. This concentration of ownership coupled with certain provisions contained in our agreements with manufacturers, our certificate of incorporation, and our bylaws could discourage, delay, or prevent a change in control of us.

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Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests. Roger Penske, our Chair and Chief Executive Officer and a director, holds the same offices at Penske Corporation. Robert Kurnick, Jr., our President and a director, is also the Vice Chair and a director

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of Penske Corporation. Bud Denker, our Executive Vice President, Human Resources, is also the President of Penske Corporation. Each of these officers is paid much of their compensation by Penske Corporation. The compensation they receive from us is based on their efforts on our behalf; however, they are not required to spend any specific amount of time on our matters. One of our directors, Greg Penske, is the son of our Chair and also serves as a director of Penske Corporation. Michael Eisenson, one of our directors, is also a director of Penske Corporation. Masashi Yamanaka, one of our directors, is also an employee of Mitsui & Co. Roger Penske also serves as Chairman of Penske Transportation Solutions, for which he is compensated by PTS.

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Penske Corporation ownership levels. Certain of our agreements have clauses that are triggered in the event of a material change in the level of ownership of our common stock by Penske Corporation, such as our trademark agreement between us and Penske Corporation that governs our use of the “Penske” name which can be terminated 24 months after the date that Penske Corporation no longer owns at least 20% of our voting stock. We may not be able to renegotiate such agreements on terms that are acceptable to us, if at all, in the event of a significant change in Penske Corporation’s ownership.

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We have a significant number of shares of common stock eligible for future sale. Penske Corporation and Mitsui own approximately 60% of our common stock, and each has two demand registration rights that could result in a substantial number of shares being introduced for sale in the market. We also have a significant amount of authorized but unissued shares. Penske Corporation has pledged all of its shares of our common stock as collateral to secure a loan facility. A default by Penske Corporation could result in the foreclosure on those shares by the lenders, after which the lenders could attempt to sell those shares on the open market or to a third party. The introduction of any of these shares into the market could have a material adverse effect on our stock price.

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General Risks

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Property loss, business interruption, or other liabilities. Our business is subject to substantial risk of loss due to the significant concentration of property values, including vehicle and parts inventories at our operating locations; claims by employees, customers, and third parties for personal injury or property damage; and fines and penalties in connection with alleged violations of regulatory requirements. While we have insurance for many of these risks, we retain risk relating to certain of these perils and certain perils are not covered by our insurance. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. If we experience significant losses that are not covered by our insurance, whether due to adverse weather conditions or otherwise, or we are required to retain a significant portion of a loss, it could have a significant and adverse effect on us.

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Information technology. Our information systems are fully integrated into our operations, and we rely on them to operate effectively, including with respect to electronic communications and data transfer protocols with manufacturers and other vendors, customer relationship management, sales and service scheduling, data storage, and financial and operational reporting. The majority of our systems are licensed from third parties; the most significant of which are provided by a limited number of suppliers in the U.S., U.K., and Australia. The failure of our information systems to perform as designed, the failure to protect the integrity of these systems, or the interruption of these systems due to natural disasters, power loss, unexpected termination of our agreements, or other reasons could significantly and adversely disrupt our business operations, impact sales and results of operations, expose us to customer or third-party claims, or result in adverse publicity.

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Cyber-security. As part of our business model, we receive sensitive information regarding customers, associates, and vendors from various online and offline channels. We collect, process, and retain this information in the normal course of our business. Our internal and third-party systems are under a moderate level of risk from cyber criminals or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks continue to grow in number and sophistication thus presenting an ongoing threat to systems, whether internal or external, used to operate the business on a day to day basis. Despite the security measures we have in place, our facilities, systems, associates, and those of our third-party service providers, could be vulnerable to cyber-attacks, security breaches, social engineering, malicious software, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Numerous national retailers have disclosed security breaches involving sophisticated cyber-attacks that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such retailers had in place. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential

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information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors as well as other operational and financial impacts derived from investigations, litigation, imposition of penalties, or other means. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.

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Item 1B.  Unresolved Staff Comments

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Not applicable.

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Item 2.  Properties

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We lease or sublease substantially all of our dealership properties and other facilities. These leases are generally for a period of between 5 and 20 years and are typically structured to include renewal options at our election. We lease office space in Bloomfield Hills, Michigan; Leicester, England; and Brisbane, Australia for our principal administrative headquarters and other corporate related activities. We believe that our facilities are sufficient for our needs and are in good repair.

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Item 3.  Legal Proceedings

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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 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 4.  Mine Safety Disclosures

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Not applicable.

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PART II

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Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

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Our common stock is traded on the New York Stock Exchange under the symbol “PAG.” As of February 12, 2021, there were 215 holders of record of our common stock.

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Dividends

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In May 2020, our Board of Directors temporarily suspended our cash dividend. On October 14, 2020, we announced the reinstatement of our cash dividend in the amount of $0.42 per share. We have also announced a cash dividend of $0.43 per share to be paid on March 1, 2021, to stockholders of record as of February 10, 2021. While future cash dividends will depend upon our earnings, capital requirements, financial condition, restrictions imposed by any then-existing indebtedness, and other factors considered relevant by our Board of Directors, we currently expect to continue to pay comparable dividends in the future.

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Securities Repurchases

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In September 2019, our Board of Directors increased the authority delegated to management to repurchase our outstanding securities to $200.0 million. As of December 31, 2020, we had $170.6 million in repurchase authorization remaining under the securities repurchase program. For further information with respect to repurchases of our shares by us, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Securities Repurchases” and Part II, Item 8, Note 15 of the Notes to our Consolidated Financial Statements.

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SHARE INVESTMENT PERFORMANCE

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The following graph compares the cumulative total stockholder returns on our common stock based on an investment of $100 on December 31, 2015, and the close of the market on December 31 of each year thereafter against (i) the Standard & Poor’s 500 Index and (ii) an industry/peer group consisting of Asbury Automotive Group, Inc., AutoNation, Inc., Group 1 Automotive, Inc., Lithia Motors, Inc., and Sonic Automotive, Inc. The graph assumes the reinvestment of all dividends.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Penske Automotive Group, Inc., the S&P 500 Index, and a Peer Group

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Item 6. Selected Financial Data

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Not Applicable.

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Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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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 “Item 1A. Risk Factors” and “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. Our period to period results of operations may vary depending on the dates of acquisitions or disposals.

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Overview

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We are a diversified international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe and distributes commercial vehicles, power systems, and related parts and services principally in Australia and New Zealand. We employ over 23,000 people worldwide.

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COVID-19 Disclosure

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Overview - The outbreak of the COVID-19 pandemic across the globe adversely impacted each of our markets and the global economy beginning in the first quarter of 2020, leading to disruptions to our business. Governmental authorities have taken countermeasures to slow the outbreak, including shelter-in-place orders, restrictions on travel, and government-funded assistance programs to individuals and businesses. The shelter-in-place orders and resulting business closures severely and negatively impacted our results, in particular in the second quarter of 2020. While the pandemic continues in all of our markets, as these orders lapsed and businesses reopened, we experienced improved business conditions and improved financial results in the third and fourth quarters, primarily driven by our cost cutting measures and increased gross profit on vehicles sold. During 2020, our new and used gross profit per unit increased 17.1% and 29.3%, principally resulting from limited vehicle availability due to plant shutdowns related to the COVID-19 pandemic, as new and used retail automotive gross profit per unit increased when compared to 2019. In addition, selling, general, and administrative expenses as a percentage of gross profit decreased by 3.6 percentage points in 2020 in part due to employee reductions, temporary compensation reductions, government assistance, and other expense reductions noted below.

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The situation caused by the COVID-19 pandemic is highly fluid and rapidly evolving, and while we continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment, we cannot anticipate with any certainty the length, scope, or severity of the business impact from the COVID-19 pandemic in each of the jurisdictions that we operate. See “Part I, Item 1A. Risk Factors.”

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In response to shelter-in-place orders resulting from the COVID-19 pandemic, many of our automotive and commercial vehicle showrooms experienced temporary closures during 2020. Nearly all of our service, parts, and collision center departments remained open during the crisis, and curbside or home delivery offerings supplemented our traditional service offerings. We modified certain business practices to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. We continue to offer sales activity by appointment and through our e-commerce channels. In all of our locations, we implemented enhanced cleaning procedures, enforced social distancing guidelines, and took other precautions to maintain the health and safety of our employees and customers. We continue to experience interim business closures at some of our facilities in response to a customer or employee reporting a positive test result for COVID-19. When we become aware of such result, we notify appropriate personnel and deep clean our facility, which may include closure of that facility. We also are experiencing increased costs for providing the appropriate level of safety equipment for our facilities, employees, and customers, as well as increased costs for daily and enhanced deep cleaning when appropriate.

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Beginning in the first quarter of 2020, we implemented a hiring freeze and expense reductions across the company, including the postponement and elimination of an estimated $150 million in capital expenditures. We furloughed

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approximately 15,000 employees in April and May in various countries, though we returned most of those employees to work during the course of the year. We also reduced our workforce by approximately 3,300 employees or 12.4% compared to December 31, 2019. During 2020, many of our employees who were not furloughed worked reduced hours and experienced pay cuts, including a six-month 100% reduction in salary for our CEO and President and 25% temporary reductions in salary for our other named executive officers. In addition, our Board of Directors waived six months of board service fees in 2020. The compensation levels for our executive officers and Board of Directors have since returned to their pre-COVID-19 levels.

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Most of our manufacturer partners began suspending production beginning in late March 2020, and production disruptions continued into the second quarter of 2020. These disruptions resulted in lower inventory levels, in particular for new vehicles and limited inventory of certain models. Our manufacturer partners began providing us with additional incentive support in March 2020, and our manufacturer and lending partners have provided support to retail customers, such as increased incentives, payment deferrals, as well as 0% financing on certain vehicles and term lengths. While production has improved, the level of new vehicle inventory remains well below historical levels, which has contributed to increased gross profit on vehicles sold.

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United States – Beginning in March 2020, shelter-in-place rules in many states either required we close dealerships or limit our automotive dealership operations to essential services. Virtual/online sales of new and used vehicles remained available in all locations, while the service departments remained open to support critical transportation needs. In May 2020, many shelter-in-place rules began to expire, and restrictions were slowly lifted in many states allowing us to reopen dealerships all of which remain open, subject in certain locations to personnel capacity limits. For the year ended December 31, 2020, new and used retail automotive gross profit per unit increased 19.5% and 16.8%, primarily due to inventory shortages and additional manufacturer incentives, while our automotive dealerships experienced a 14.4% decrease in unit volume and a 12.5% decrease in service and parts revenues compared to the prior year on a same-store basis. Our U.S. Used Vehicle SuperCenters experienced a same-store used unit sales decline of 26.9% in 2020, largely attributable to lower inventory and the COVID-19 pandemic.

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Commercial truck dealership sales and service operations were classified as essential businesses and remained open throughout 2020 in most locations around the U.S. and Canada providing services to our customers. For the year ended December 31, 2020, the North American Class 6-8 retail sales market declined 29.6%, and our new same-store unit sales and revenue declined 10.0% and 5.2%, respectively, during the same period.

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Penske Transportation Solutions – We have a 28.9% ownership interest in Penske Transportation Solutions ("PTS"). As an integral part of the North American supply chain, PTS has been generally classified as essential by governmental authorities which allowed PTS to remain operating in much of its business, providing crucial supply chain and transportation services to its customers. While its full-service leasing and contract maintenance businesses remained consistent, commercial rental utilization slowed during the second quarter of 2020 but increased with the expirations of the shelter-in-place orders. In the third quarter of 2020, PTS began to experience increased levels of utilization and profitability as business conditions improved. In its logistics services business, throughout 2020, PTS experienced heavy volumes in the grocery sector which were offset by plant closings in automotive and manufacturing. In the third quarter of 2020, most of PTS’ logistics customers returned to normal operations, generating strong results. PTS has also experienced improved remarketing results as truck prices improved in response to limited inventory. In response to the COVID-19 pandemic, PTS initially furloughed over 5,000 employees, most of which returned to work. PTS also reduced executive salaries by up to 30%, which reductions have been eliminated.

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United Kingdom – All dealerships closed on March 24, 2020, in accordance with government orders, though we provided service and parts operations on an emergency basis. Over 90% of the employees in the U.K. were placed on furlough beginning March 24, 2020. However, we opened substantially all service and parts operations in mid-May 2020 and showrooms in early June 2020. During the fourth quarter of 2020 and continuing into 2021, in response to increased incidence of the COVID-19 pandemic, certain parts of the U.K. reinstated shelter-in-place orders which required our dealerships to close. We continue to conduct sales through our online “Click & Collect” program, which allows vehicle sales without showroom access. Despite showroom closures in the U.K. during the fourth quarter of 2020, our UK dealers experienced a 5.6% increase in gross profit when compared to the fourth quarter of 2019 driven by an increase in gross profit per unit and sales through our e-commerce channels. For the year ended December 31, 2020, new and used retail automotive gross profit per unit increased 10.1% and 45.6%, primarily due to inventory shortages and additional

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manufacturer incentives, while our automotive dealerships experienced a 20.5% decrease in unit volume and a 14.1% decrease in service and parts revenues compared to the prior year on a same-store basis. Our U.K. Used Vehicle SuperCenters also experienced a same-store gross profit per unit increase of 35.2%, primarily due to improved inventory management, and a same-store used unit sales decrease of 31.3% in 2020.

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Australia – In most jurisdictions, non-essential business operations were closed by government order in March 2020 though many governmental restrictions have since been lifted. Penske Australia has been deemed essential throughout the COVID-19 pandemic, and therefore, sales, parts, service, and defense functions continue to remain operational. Throughout 2020, Penske Australia results of operations have remained consistent in spite of the COVID-19 pandemic.

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Government Assistance – We received government assistance in most of our jurisdictions through COVID-19 related government programs which provided tax credits or direct wage or health care assistance payments to us. These programs generally require us to claim tax credits or apply to the government for reimbursement of wages or employee health benefits based on the applicable laws and programs within each jurisdiction. During 2020, we received $57.5 million of wage assistance for furloughed employees in the U.K., as well as an additional $8.5 million of assistance and tax credits in our U.S. and other jurisdictions. As a result, we recorded a reduction to selling, general, and administrative expenses of approximately $66.0 million for the amounts of government assistance received during 2020.

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Liquidity – As of December 31, 2020, we had $49.5 million of cash and access to an additional $952 million of availability through our revolving credit facilities. This amount includes $100 million of additional borrowing capacity under our U.S. credit agreement which we amended effective August 1, 2020.

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During the third quarter of 2020, we repaid in full at scheduled maturity our $300 million 3.75% senior subordinated notes due August 15, 2020. We also issued $550 million in aggregate principal amount of 3.50% senior subordinated notes due 2025 in August 2020, the proceeds of which were used to redeem our $550 million in aggregate principal amount of 5.75% senior subordinated notes due 2022 on October 1, 2020. During the fourth quarter of 2020, we also redeemed our $300 million 5.375% senior subordinated notes due 2024 at a redemption price equal to 101.792% of the principal amount together with accrued and unpaid interest, using availability under our U.S. revolving credit facility and cash flow from operations. Refer to Part II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements for further discussion of our long-term debt.

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Risks and Uncertainties – The full impact that the COVID-19 pandemic will have on our business cannot be predicted at this time due to numerous uncertainties, including the duration of the outbreak, travel restrictions, business closures, the effectiveness of actions taken to contain the disease, the distribution rate and acceptance rate of a vaccine, the effect of government assistance programs, production levels from our manufacturing partners, and other unintended consequences. This impact could include changes in customer demand, our relationship with, and the financial and operational capacities of, vehicle manufacturers, captive finance companies and other suppliers, workforce availability, risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms), the adequacy of our cash flow and earnings and other conditions which may affect our liquidity, our ability to pay our quarterly dividend at prior levels, and disruptions to our technology network and other critical systems, including our dealer management systems and software or other facilities or equipment.

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

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Business Overview

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In 2020, our business generated $20.4 billion in total revenue, which is comprised of approximately $17.9 billion from retail automotive dealerships, $2.1 billion from retail commercial truck dealerships, and $454.2 million from commercial vehicle distribution and other operations. We generated $3.2 billion in gross profit, which is comprised of $2.8 billion from retail automotive dealerships, $280.9 million from retail commercial truck dealerships, and $122.3 million from commercial vehicle distribution and other operations.

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Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $17.9 billion in total retail automotive dealership revenue we generated in 2020. As of December 31, 2020, we operated 304 retail automotive franchises, of which 142 franchises are located in the U.S. and 162 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In 2020, we retailed and wholesaled more than 505,000 vehicles. We are diversified geographically with 57% of our total retail automotive dealership revenues in 2020 generated in the U.S. and Puerto Rico and 43% generated outside the U.S. We offer over 35 vehicle brands with 71% of our retail automotive dealership revenue in 2020 generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz, and Porsche. Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services, the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products. In 2020, we also acquired the remaining 8.2% interest in one of our former retail automotive joint ventures in Aachen, Germany.

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We also operate seventeen Used Vehicle SuperCenters in the U.S. and the U.K., which retail and wholesale used vehicles under a one price, “no-haggle” methodology. Our operations in the U.S. consist of six retail locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas. Our operations in the U.K. consist of eleven retail locations and a vehicle preparation center. During 2020, we opened one Used Vehicle SuperCenter in Nottingham, United Kingdom. For the year ended December 31, 2020, these Used Vehicle SuperCenters retailed 53,207 units and generated $1.0 billion in revenue.

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Retail automotive dealerships represented 87.7% of our total revenues and 87.3% of our total gross profit in 2020.

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

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This business represented 10.1% of our total revenues and 8.8% of our total gross profit in 2020.

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

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These businesses represented 2.2% of our total revenues and 3.9% of our total gross profit in 2020.

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Penske Transportation Solutions. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments. Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental, and contract maintenance along with logistic services, such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services, and dry van truckload carrier services. We recorded $164.5 million in equity earnings from this investment in 2020.

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Outlook

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Please see the discussion provided under “Outlook” in Part I, Item 1 for a discussion of our outlook in our markets.

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Operating Overview

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Automotive and commercial truck dealerships represent the majority of our results of operations. New and used vehicle revenues typically include sales to retail customers, fleet customers, and leasing companies providing consumer leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties, and the sales of certain other products. Service and parts revenues include fees paid by customers for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories as well as warranty repairs that are reimbursed directly by various OEMs.

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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.

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The results of our commercial vehicle distribution business in Australia and New Zealand are principally driven by the number and types of products and vehicles ordered by our customers.

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Aggregate revenue and gross profit decreased $2,735.5 million, or 11.8%, and $271.0 million, or 7.8%, respectively, during 2020 compared to 2019. See “COVID-19 Disclosure” above.

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As exchange rates fluctuate, our revenue and results of operations as reported in U.S. Dollars fluctuate. For example, if the British Pound were to weaken against the U.S. Dollar, our U.K. results of operations would translate into less U.S. Dollar reported results. Foreign currency average rate fluctuations increased revenue and gross profit by $118.6 million and $16.9 million, respectively, in 2020. Foreign currency average rate fluctuations increased earnings per share from continuing operations by approximately $0.03 per share in 2020. Excluding the impact of foreign currency average rate fluctuations, revenue and gross profit decreased 12.3% and 8.3%, respectively, in 2020.

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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.

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Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that are 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, and includes interest relating to our retail commercial truck dealership and commercial vehicle distribution operations. 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, the Euro Interbank Offered Rate, the Canadian Prime Rate, the Australian Bank Bill Swap Rate, or the New Zealand Bank Bill Benchmark Rate.

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Regulatory authorities in both the U.S. and U.K. have announced their intention to stop compelling banks to submit rates for the calculation of LIBOR after 2021. In the U.S., we expect the Secured Overnight Financing Rate (“SOFR”) will be adopted in lieu of LIBOR. In the U.K., we expect the Sterling Overnight Indexed Average (SONIA) to be adopted. Our senior secured revolving credit facilities in the U.S. and U.K., and many of our floorplan arrangements, utilize LIBOR as a benchmark for calculating the applicable interest rate. We cannot predict the effect of the potential changes to or elimination of LIBOR or the establishment and use of alternative rates or benchmarks and the corresponding effects on our cost of capital.

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Equity in earnings of affiliates principally represents our share of the earnings from PTS, along with our investments in joint ventures and other non-consolidated investments.

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The future success of our business is dependent upon, among other things, general economic and industry conditions; including the recovery time frame for the global economy in light of the COVID-19 pandemic; our ability to react effectively to changing business conditions in light of the COVID-19 pandemic; our ability to consummate and integrate acquisitions; the level of vehicle sales in the markets where we operate; our ability to obtain vehicles from our manufacturers, especially in light of the COVID-19 pandemic; our ability to increase sales of higher margin products, especially service and parts sales; our ability to realize returns on our significant capital investment in new and upgraded dealership facilities; our ability to navigate a rapidly changing automotive and truck landscape; the success of our distribution of commercial vehicles, engines, and power systems; 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” below.

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Critical Accounting Policies and Estimates

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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.

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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.

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Revenue Recognition

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Dealership Vehicle, Parts, and Service Sales. We record revenue for vehicle sales at a point in time when vehicles are delivered, which is when the transfer of title, risks, and rewards of ownership and control are considered passed to the customer. We record revenue for vehicle service and collision work over time as 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. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). During 2020, 2019, and 2018, we earned $588.7 million, $698.4 million, and $699.4 million, respectively, of rebates, incentives, and reimbursements from manufacturers, of which $575.4 million, $679.2 million, and $680.0 million, respectively, was recorded as a reduction of cost of sales. The remaining $13.3 million, $19.2 million, and $19.4 million was recorded as a reduction of selling, general, and administrative expenses during 2020, 2019, and 2018, respectively.

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

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cancellation rates on extended service contracts and other insurance products. Aggregate reserves relating to chargeback activity were $28.7 million and $26.6 million as of December 31, 2020, and December 31, 2019, respectively.

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Commercial Vehicle Distribution. We record revenue from the distribution of vehicles, engines, and other products at a point in time when delivered, which is when the transfer of title, risks, and rewards of ownership and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed and when parts are delivered to our customers. For our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones.

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Refer to the disclosures provided in Part II, Item 8, Note 2 of the Notes to our Consolidated Financial Statements for additional detail on revenue recognition.

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Impairment Testing

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Other indefinite-lived intangible assets are assessed for impairment annually on October 1 and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. These indefinite-lived intangible assets relate to franchise agreements with vehicle manufacturers and distributors, which represent the estimated value of franchises acquired in business combinations, and distribution agreements with commercial vehicle manufacturers, which represent the estimated value for distribution rights acquired in business combinations. An indicator of impairment exists if the carrying value exceeds its estimated fair value, and an impairment loss may be recognized up to that excess. The fair value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, profit margins, and the cost of capital. We also evaluate, in connection with the annual impairment testing, whether events and circumstances continue to support our assessment that the other indefinite-lived intangible assets continue to have an indefinite life.

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Goodwill impairment is assessed at the reporting unit level annually on October 1 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 that we have four reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail Automotive, consisting of our retail automotive dealership operations; (ii) Retail Commercial Truck, consisting of our retail commercial truck dealership operations in the U.S. and Canada; (iii) Other, consisting of our commercial vehicle and power systems distribution operations and other non-automotive consolidated operations; and (iv) Non-Automotive Investments, consisting of our equity method investments in non-automotive operations which includes our investment in PTS. We have determined that the dealerships in each of our operating segments within the Retail Automotive reportable segment are components that are aggregated into six 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/or 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). The reporting units are Eastern, Central, and Western United States, Stand-Alone Used United States, International, and Stand-Alone Used International. Our Retail Commercial Truck reportable segment has been determined to represent one operating segment and reporting unit. The goodwill included in our Other reportable segment relates to our commercial vehicle distribution operating segment. There is no goodwill recorded in our Non-Automotive Investments reportable segment.

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For our Retail Automotive, Retail Commercial Truck, and Other reporting units, we prepared a quantitative assessment of the carrying value of goodwill. We 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 the weighted average cost of capital as the discount rate. We also validate the fair value for each reporting unit using the income approach by calculating a cash earnings multiple and determining whether the multiple was reasonable compared to recent market transactions completed by the Company or in the industry. As part of that assessment, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization. We believe this reconciliation process is consistent with a market participant perspective. 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 the cost of capital. During 2020, we concluded

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that for the retail automotive, retail commercial truck, and other reporting units that their fair values exceeded its carrying value.

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Investments

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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 $1,500.3 million and $1,399.0 million as of December 31, 2020, and 2019, respectively, including $1,419.2 million and $1,323.2 million relating to PTS as of December 31, 2020, and 2019, respectively. We currently hold a 28.9% ownership interest in PTS.

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Investments for which there is not a liquid, actively traded market are reviewed periodically by management for indicators of impairment. If an indicator of impairment is identified, management estimates the fair value of the investment using a discounted cash flow approach, which includes assumptions relating to revenue and profitability growth, profit margins, residual values, and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments’ carrying value to fair value.

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Self-Insurance

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We retain risk relating to certain of our general liability insurance, workers’ compensation insurance, vehicle physical damage insurance, property insurance, employment practices liability insurance, information security risk 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 the pre-determined loss limits are paid by third-party insurance carriers. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. 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 $29.7 million and $28.6 million as of December 31, 2020, and 2019, respectively.

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Income Taxes

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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.

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On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, includes various income and payroll tax provisions, modifications to federal net operating loss rules, business interest deduction limitations, and bonus depreciation eligibility for qualified improvement property. As a result of the net operating loss carryback provision of the CARES Act and various other U.S. and foreign tax legislation changes, we recorded an income tax benefit of $11.4 million for the year ended December 31, 2020. Additionally, we received payroll tax deferrals and benefits from the employee retention tax credit.

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Refer to the disclosures provided in Part II, Item 8, Note 17 of the Notes to our Consolidated Financial Statements for additional detail on our accounting for income taxes, including additional discussion on the enactment of the Act and the resulting impact on our financial statements.

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Leases

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We determine if an arrangement is a lease at inception. Our operating leases primarily consist of land and facilities, including certain dealerships and office space. We also have equipment leases that primarily relate to office and computer equipment, service and shop equipment, company vehicles, and other miscellaneous items. We do not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.

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Operating leases are included in “operating lease right-of-use assets,” “accrued expenses and other current liabilities,” and “long-term operating lease liabilities” on our Consolidated Balance Sheet. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Our property leases are generally for an initial period between 5 and 20 years and are typically structured to include renewal options at our election. We include renewal options that we are reasonably certain to exercise in the measurement our lease liabilities and right-of-use assets. As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. Lease expense is recognized on a straight-line basis over the lease term.

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Refer to the disclosures provided in Part II, Item 8, Note 3 and Note 12 of the Notes to our Consolidated Financial Statements for a description of our operating leases.

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Recent Accounting Pronouncements

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Please see the disclosures provided under “Recent Accounting Pronouncements” in Part II, Item 8, Note 1 of the Notes to our Consolidated Financial Statements set forth below which are incorporated by reference herein.

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Results of Operations

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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 were acquired on January 15, 2018, the results of the acquired entity would be included in annual same-store comparisons beginning with the year ended December 31, 2020, and in quarterly same-store comparisons beginning with the quarter ended June 30, 2019.

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The results for 2020 have been impacted by the COVID-19 pandemic, and each of the items mentioned below should be reviewed in light of our discussion under “COVID-19 Disclosure” and “Item 1A. Risk Factors” which are incorporated herein. The results for 2020 include a net income tax benefit of $11.4 million, or $0.14 per share, related to the CARES Act and various other U.S. and foreign tax legislation changes. The results for 2020 also include a net benefit of $3.3 million, or $0.04 per share, related to a gain on the sale of retail automotive dealerships, partially offset by a loss on debt extinguishment of $6.4 million, or $0.08 per share.

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For the discussion and analysis comparing the results of operations for 2018 to 2019, we refer you to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results in the 2019 Form 10-K filed on February 21, 2020.

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Retail Automotive Dealership New Vehicle Data

(In millions, except unit and per unit amounts)

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Units

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Retail unit sales of new vehicles decreased from 2019 to 2020 due to a 36,695 unit, or 17.2%, decrease in same-store new retail unit sales, coupled with a 7,572 unit decrease from net dealership dispositions. Same-store units decreased 14.0% in the U.S. and decreased 22.6% internationally. Overall, new units decreased 14.8% in the U.S. and decreased 27.8% internationally. The decrease in units is primarily due to the decline in our retail automotive business resulting from the COVID-19 pandemic, as well as the limited availability of inventory from our manufacturers as discussed above.

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Revenues

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New vehicle retail sales revenue decreased from 2019 to 2020 due to a $1,006.2 million, or 11.2%, decrease in same-store revenues, coupled with a $242.8 million decrease from net dealership dispositions. Excluding $40.0 million of favorable foreign currency fluctuations, same-store new retail revenue decreased 11.6%. The same-store revenue decrease is due to the decrease in same-store new retail unit sales, which decreased revenue by $1,553.9 million, partially offset by the $3,109 per unit increase in comparative average selling prices (including a $227 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $547.7 million.

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Gross Profit

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Retail gross profit from new vehicle sales decreased from 2019 to 2020 due to a $27.5 million, or 4.1%, decrease in same-store gross profit, coupled with a $15.3 million decrease from net dealership dispositions. Excluding $3.9 million of favorable foreign currency fluctuations, same-store gross profit decreased 4.6%. The decrease in same-store gross profit is due to the decrease in same-store new retail unit sales, which decreased gross profit by $116.6 million, partially offset by a $506 per unit increase in the average gross profit per new vehicle retailed (including a $22 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by $89.1 million. The increase in average gross profit per new vehicle retailed is partially attributed to limited availability of inventory from our manufacturers as discussed above.

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Retail Automotive Dealership Used Vehicle Data

(In millions, except unit and per unit amounts)

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Units

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Retail unit sales of used vehicles decreased from 2019 to 2020 due to a 46,812 unit, or 17.1%, decrease in same-store used retail unit sales, coupled with a 3,909 unit decrease from net dealership dispositions. Same-store units decreased 14.8% in the U.S. and decreased 19.1% internationally. Same-store retail units for our U.S. and U.K. Used Vehicle SuperCenters decreased 26.9% and 31.3%, respectively. Overall, used units decreased 14.5% in the U.S. and decreased 20.7% internationally. The decrease in units is primarily due to the decline in our retail automotive business resulting from the COVID-19 pandemic.

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Revenues

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Used vehicle retail sales revenue decreased from 2019 to 2020 due to a $725.8 million decrease in same-store revenues, coupled with a $100.7 million decrease from net dealership dispositions. Excluding $58.9 million of favorable foreign currency fluctuations, same-store used retail revenue decreased 11.2%. The same-store revenue decrease is primarily due to the decrease in same-store used retail unit sales, which decreased revenue by $1,199.6 million, partially offset by a $2,088 per unit increase in comparative average selling prices (including a $259 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $473.8 million. The average sales price per unit for our Used Vehicle SuperCenters increased 7.8% to $15,901.

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Gross Profit

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Retail gross profit from used vehicle sales increased $22.8 million, or 6.2%, from 2019 to 2020, including a $22.6 million, or 6.3%, increase in same-store gross profit. Excluding $4.1 million of favorable foreign currency fluctuations, same-store gross profit increased 5.1%. The increase in same-store gross profit is due to a $371 per unit increase in average gross profit per used vehicle retailed (including an $18 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by $84.1 million, partially offset by the decrease in same-store used retail unit sales, which decreased gross profit by $61.5 million. The average gross profit per unit for our Used Vehicle SuperCenters increased 16.2% to $924. The increase in average gross profit per used vehicle retailed is primarily due to

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lower inventory availability of new vehicles and greater affordability of used vehicles as compared to new, which increased demand for used vehicles, and improved vehicle sourcing particularly in our Used Vehicle SuperCenters.

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Retail Automotive Dealership Finance and Insurance Data

(In millions, except unit and per unit amounts)

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Finance and insurance revenue decreased from 2019 to 2020 due to a $67.9 million, or 10.7%, decrease in same-store revenues, coupled with a $7.9 million decrease from net dealership dispositions. Excluding $3.6 million of favorable foreign currency fluctuations, same-store finance and insurance revenue decreased 11.3%. The same-store revenue decrease is due to the decrease in same-store retail unit sales, which decreased revenue by $108.7 million, partially offset by a $101 per unit increase in comparative average finance and insurance revenue per unit (including an $8 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $40.8 million. Finance and insurance revenue per unit increased 9.1% in the U.S. and 6.5% in the U.K. We believe the increase in same-store finance and insurance revenue per unit is primarily due to our efforts to increase finance and insurance penetration, which include implementing interactive digital customer sales platforms, additional training, and targeting underperforming locations.

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Retail Automotive Dealership Service and Parts Data

(In millions)

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