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Interim Financial Statements | 3 Months Ended
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Mar. 31, 2021
Interim Financial Statements. |
Interim Financial Statements | 1. Interim Financial Statements ​ Unless the context otherwise requires, the use of the terms “PAG,” “we,” “us,” and “our” in these Notes to the Consolidated Condensed Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries. ​ Impact of the COVID-19 Pandemic on our Business ​ Overview – In March 2020, COVID-19 was declared a global pandemic by the World Health Organization. The outbreak of the COVID-19 pandemic across the globe adversely impacted each of our markets and the global economy, leading to disruptions in our business. While the COVID-19 pandemic continues in all of our markets, we have experienced improved business conditions and improved financial results primarily driven by our cost cutting measures and increased gross profit on vehicles sold due in part to increased demand, coupled with lower inventory due to production shortages experienced by our vehicle manufacturers. ​ In response to the COVID-19 pandemic, the U.K. reinstated shelter-in-place orders which required our dealership showrooms to remain closed during the three months ended March 31, 2021. These shelter-in-place orders largely expired April 12, 2021, though certain restrictions remain. We continued to conduct sales through our online tools, which allowed vehicle sales without showroom access. If shelter-in-place orders are re-enacted or other restrictions are placed on our business, we may be adversely impacted. ​ We believe that business disruption relating to the COVID-19 pandemic may continue to negatively impact the global economy and may affect our businesses as outlined above, or in other manners including supply chain disruptions, all of which would adversely impact our business and results of operations. ​ Refer to the “COVID-19 Disclosure” in Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. ​ Business Overview and Concentrations ​ 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. ​ 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 March 31, 2021, we operated 304 retail automotive franchises, of which 143 franchises are located in the U.S. and 161 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the three months ended March 31, 2021, we retailed and wholesaled more than 135,000 vehicles. We are diversified geographically, with 58% of our total retail automotive dealership revenues in the three months ended March 31, 2021, generated in the U.S. and Puerto Rico and 42% generated outside the U.S. We offer over 35 vehicle brands, with 73% of our retail automotive dealership revenue in the three months ended March 31, 2021, generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz and Porsche. Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry. ​ We also operate 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. During the first quarter, we renamed our U.S.-based Used Vehicle SuperCenters from CarSense to CarShop to align with the existing eleven U.K.-based CarShop Used Vehicle SuperCenters, forming one global CarShop brand. 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 the three months ended March 31, 2021, we were awarded one retail automotive franchise in the U.S. and disposed of one retail automotive franchise in the U.K. ​ 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 March 31, 2021, 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. ​ In April 2021, we acquired Kansas City Freightliner (“KCFL”), a retailer of medium and heavy-duty commercial trucks in Kansas and Missouri. KCFL adds four full-service dealerships, four parts and service centers, and two collision centers to PTG’s existing operations. ​ 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. ​ 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. ​ Basis of Presentation ​ The accompanying unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of March 31, 2021, and December 31, 2020, and for the three-month periods ended March 31, 2021, and 2020 is unaudited but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2020, which are included as part of our Annual Report on Form 10-K. ​ Estimates ​ The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets, and certain reserves. ​ Fair Value of Financial Instruments ​ Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value: ​
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Level 1 | ​ | Quoted prices in active markets for identical assets or liabilities
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Level 2 | ​ | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
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Level 3 | ​ | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities
​ Our financial instruments consist of cash and cash equivalents, debt, floor plan notes payable, forward exchange contracts, and interest rate swaps used to hedge future cash flows. Other than our fixed rate debt, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting. ​ Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on our current market interest rates for similar types of financial instruments (Level 2). A summary of our fixed rate debt is as follows: ​
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​ | ​ | March 31, 2021 | ​ | December 31, 2020 |
​ |  | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value |
3.50% senior subordinated notes due 2025 | ​ | $ | 543.6 | ​ | $ | 558.1 | ​ | $ | 543.2 | ​ | $ | 554.6 | ​
5.50% senior subordinated notes due 2026 | ​ | ​ | 496.6 | ​ | ​ | 512.3 | ​ | ​ | 496.4 | ​ | ​ | 515.0 | ​
Mortgage facilities | ​ |  | 453.7 | ​ |  | 456.7 | ​ |  | 458.1 | ​ |  | 474.7 | ​
​ ​ ​ ​ ​ Discontinued Operations ​ We had no entities newly classified as held for sale during the three months ended March 31, 2021, or 2020 that met the criteria to be classified as discontinued operations. As such, results from discontinued operations represent only those businesses that were classified as discontinued operations prior to the adoption of ASU No. 2014-08 on January 1, 2015. ​ Disposals ​ During the three months ended March 31, 2021, we disposed of one retail automotive franchise. The results of operations for this business are included within continuing operations for the three months ended March 31, 2021, and 2020 as this franchise did not meet the criteria to be classified as held for sale and treated as discontinued operations. ​ Income Taxes ​ Tax regulations may require items to be included in our tax return at different times than when those items are reflected in our financial statements. Some of the differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax return in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax return that have not yet been recognized as an expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not more likely than not to allow for the use of the deduction or credit. ​ ​ Recent Accounting Pronouncements ​ Reference Rate Reform ​ In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” This ASU refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities. These new standards were effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. 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 are currently evaluating the impact of the transition from LIBOR to alternative reference interest rates. 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 but do not expect a significant impact on our consolidated financial position, results of operations, and cash flows. ​ Disclosures for Business Acquisitions, Dispositions, and Significant Subsidiaries ​ On May 20, 2020, the SEC issued a final rule that amends the financial statement requirements for acquisitions and dispositions of businesses, including the determinations of whether a subsidiary or an acquired or disposed business is significant. The significance test rule changes to SEC Regulation S-X, Rule 3-09 impact our disclosure requirements for equity method investments, including our investment in Penske Transportation Solutions (“PTS”) as it relates to providing audited financial statements and summarized financial statement information in our footnotes disclosures. The rule is effective January 1, 2021, but earlier compliance is permitted. The Company early adopted this rule in the fourth quarter of 2020.

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