Filed by Bowne Pure Compliance
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number 1-12297
Penske Automotive Group, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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22-3086739 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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2555 Telegraph Road,
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48302-0954 |
Bloomfield Hills, Michigan
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(Zip Code) |
(Address of principal executive offices) |
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Registrants telephone number, including area code:
(248) 648-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check
one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes o No þ
As of July 22, 2008, there were 95,428,865 shares of voting common stock outstanding.
TABLE OF CONTENTS
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Page |
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PART I FINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
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4 |
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5 |
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6 |
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7 |
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25 |
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46 |
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46 |
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47 |
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47 |
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Item 5. Other Information |
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48 |
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Exhibit 12 |
Exhibit 31 |
Exhibit 32 |
2
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
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June 30, |
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December 31, |
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2008 |
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2007 |
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(Unaudited) |
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(In thousands, except |
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per share amounts) |
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ASSETS |
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Cash and cash equivalents |
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$ |
17,734 |
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$ |
11,690 |
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Accounts receivable, net of allowance for doubtful accounts of $2,640 and $2,935 |
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432,811 |
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448,985 |
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Inventories, net |
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1,790,464 |
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1,682,736 |
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Other current assets |
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91,321 |
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65,948 |
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Assets held for sale |
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7,911 |
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88,165 |
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Total current assets |
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2,340,241 |
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2,297,524 |
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Property and equipment, net |
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692,817 |
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617,874 |
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Goodwill |
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1,466,005 |
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1,430,528 |
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Franchise value |
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247,498 |
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237,733 |
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Other assets |
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309,531 |
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84,894 |
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Total assets |
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$ |
5,056,092 |
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$ |
4,668,553 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Floor plan notes payable |
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$ |
1,098,103 |
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$ |
1,070,882 |
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Floor plan notes payable non-trade |
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549,150 |
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476,854 |
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Accounts payable |
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256,062 |
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266,726 |
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Accrued expenses |
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260,444 |
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212,310 |
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Current portion of long-term debt |
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14,255 |
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14,522 |
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Liabilities held for sale |
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10,762 |
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54,745 |
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Total current liabilities |
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2,188,776 |
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2,096,039 |
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Long-term debt |
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1,054,555 |
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830,106 |
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Other long-term liabilities |
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324,562 |
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320,949 |
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Total liabilities |
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3,567,893 |
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3,247,094 |
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Commitments and contingent liabilities |
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Stockholders Equity |
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Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding |
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Common Stock, $0.0001 par value, 240,000 shares authorized; 95,425 shares issued at
June 30, 2008; 95,020 shares issued at December 31, 2007 |
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10 |
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10 |
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Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and
outstanding |
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Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and
outstanding |
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Additional paid-in-capital |
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739,131 |
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733,895 |
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Retained earnings |
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644,225 |
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587,566 |
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Accumulated other comprehensive income |
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104,833 |
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99,988 |
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Total stockholders equity |
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1,488,199 |
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1,421,459 |
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Total liabilities and stockholders equity |
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$ |
5,056,092 |
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$ |
4,668,553 |
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See Notes to Consolidated Condensed Financial Statements
3
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2008 |
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2007 |
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2008 |
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2007 |
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(Unaudited) |
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(In thousands, except per share amounts) |
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Revenue: |
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New vehicle |
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$ |
1,734,440 |
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$ |
1,814,171 |
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$ |
3,370,042 |
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$ |
3,438,949 |
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Used vehicle |
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819,184 |
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825,171 |
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1,622,640 |
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1,605,516 |
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Finance and insurance, net |
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75,995 |
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75,144 |
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150,596 |
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142,976 |
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Service and parts |
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364,139 |
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353,548 |
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727,021 |
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701,502 |
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Distribution |
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98,421 |
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162,191 |
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Fleet and wholesale vehicle |
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270,485 |
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297,151 |
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533,674 |
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556,257 |
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Total revenues |
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3,362,664 |
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3,365,185 |
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6,566,164 |
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6,445,200 |
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Cost of sales: |
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New vehicle |
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1,588,673 |
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1,662,440 |
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3,086,317 |
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3,150,642 |
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Used vehicle |
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755,458 |
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759,553 |
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1,491,307 |
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1,478,793 |
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Service and parts |
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159,834 |
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154,670 |
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319,344 |
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309,468 |
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Distribution |
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82,605 |
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136,223 |
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Fleet and wholesale vehicle |
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274,557 |
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296,032 |
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538,025 |
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552,040 |
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Total cost of sales |
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2,861,127 |
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2,872,695 |
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5,571,216 |
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5,490,943 |
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Gross profit |
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501,537 |
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492,490 |
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994,948 |
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954,257 |
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Selling, general and administrative expenses |
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398,516 |
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385,200 |
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797,012 |
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754,911 |
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Depreciation and amortization |
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13,594 |
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12,864 |
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27,068 |
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25,204 |
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Operating income |
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89,427 |
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94,426 |
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170,868 |
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174,142 |
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Floor plan interest expense |
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(16,589 |
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(19,247 |
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(33,901 |
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(35,063 |
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Other interest expense |
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(12,616 |
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(12,890 |
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(24,659 |
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(31,713 |
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Equity in earnings of affiliates |
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3,011 |
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2,529 |
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4,403 |
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1,708 |
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Loss on debt redemption |
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(18,634 |
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Income from continuing operations before
income taxes and minority interests |
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63,233 |
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64,818 |
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116,711 |
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90,440 |
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Income taxes |
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(22,258 |
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(24,059 |
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(41,427 |
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(32,855 |
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Minority interests |
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(428 |
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(702 |
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(863 |
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(996 |
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Income from continuing operations |
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40,547 |
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40,057 |
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74,421 |
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56,589 |
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(Loss) income from discontinued operations, net of tax |
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(683 |
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298 |
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(628 |
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(1,652 |
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Net income |
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$ |
39,864 |
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$ |
40,355 |
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$ |
73,793 |
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$ |
54,937 |
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Basic earnings per share: |
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Continuing operations |
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$ |
0.43 |
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$ |
0.43 |
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$ |
0.79 |
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$ |
0.60 |
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Discontinued operations |
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(0.01 |
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0.00 |
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(0.01 |
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(0.02 |
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Net income |
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0.42 |
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0.43 |
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0.78 |
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0.58 |
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Shares used in determining basic earnings per share |
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94,506 |
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94,033 |
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94,422 |
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93,940 |
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Diluted earnings per share: |
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Continuing operations |
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$ |
0.43 |
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$ |
0.42 |
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$ |
0.79 |
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$ |
0.60 |
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Discontinued operations |
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(0.01 |
) |
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0.00 |
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(0.01 |
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(0.02 |
) |
Net income |
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0.42 |
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0.43 |
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0.78 |
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0.58 |
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Shares used in determining diluted earnings per
share |
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94,895 |
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94,532 |
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94,784 |
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|
94,483 |
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Cash dividends per share |
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$ |
0.09 |
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$ |
0.07 |
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$ |
0.18 |
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$ |
0.14 |
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See Notes to Consolidated Condensed Financial Statements
4
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
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Six Months Ended |
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June 30, |
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2008 |
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2007 |
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(Unaudited) |
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(In thousands) |
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Operating Activities: |
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Net income |
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$ |
73,793 |
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$ |
54,937 |
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Adjustments to reconcile net income to net cash from continuing operating activities: |
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Depreciation and amortization |
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27,068 |
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25,204 |
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Undistributed earnings of equity method investments |
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(4,403 |
) |
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(1,708 |
) |
Loss from discontinued operations, net of tax |
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628 |
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1,652 |
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Deferred income taxes |
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|
7,059 |
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9,314 |
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Loss on debt redemption |
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|
18,634 |
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Minority interests |
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|
863 |
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|
996 |
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Changes in operating assets and liabilities: |
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Accounts receivable |
|
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19,212 |
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|
13,511 |
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Inventories |
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(71,253 |
) |
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(71,440 |
) |
Floor plan notes payable |
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|
121,549 |
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|
245,452 |
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Accounts payable and accrued expenses |
|
|
16,197 |
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22,580 |
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Other |
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(14,482 |
) |
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(31,967 |
) |
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Net cash from continuing operating activities |
|
|
176,231 |
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|
287,165 |
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Investing Activities: |
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Purchase of equipment and improvements |
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(117,073 |
) |
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|
(73,600 |
) |
Proceeds from sale-leaseback transactions |
|
|
19,740 |
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|
76,509 |
|
Dealership acquisitions net, including repayment of sellers floorplan notes payable
of $4,928 and $48,518, respectively |
|
|
(69,105 |
) |
|
|
(157,892 |
) |
Purchase of Penske Truck Leasing Co., L.P. partnership interest |
|
|
(219,000 |
) |
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|
|
Other |
|
|
(1,500 |
) |
|
|
13,264 |
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities |
|
|
(386,938 |
) |
|
|
(141,719 |
) |
|
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Financing Activities: |
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|
Proceeds from borrowings under U.S. revolving credit line |
|
|
301,500 |
|
|
|
241,500 |
|
Repayments under U.S. revolving credit line |
|
|
(301,500 |
) |
|
|
(241,500 |
) |
Redemption 9 5/8% Senior Subordinated debt |
|
|
|
|
|
|
(314,439 |
) |
Proceeds from U.S. credit agreement term loan |
|
|
219,000 |
|
|
|
|
|
Net borrowings (repayments) of other long-term debt |
|
|
454 |
|
|
|
(38,828 |
) |
Net (repayments) borrowings of floor plan notes payable non-trade |
|
|
(22,032 |
) |
|
|
137,713 |
|
Proceeds from exercises of options, including excess tax benefit |
|
|
820 |
|
|
|
1,527 |
|
Dividends |
|
|
(17,134 |
) |
|
|
(13,252 |
) |
|
|
|
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|
|
|
|
|
Net cash from continuing financing activities |
|
|
181,108 |
|
|
|
(227,279 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
Net cash from discontinued operating activities |
|
|
2,105 |
|
|
|
20,825 |
|
Net cash from discontinued investing activities |
|
|
61,212 |
|
|
|
34,562 |
|
Net cash from discontinued financing activities |
|
|
(27,674 |
) |
|
|
31,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
35,643 |
|
|
|
86,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
6,044 |
|
|
|
4,849 |
|
Cash and cash equivalents, beginning of period |
|
|
11,690 |
|
|
|
14,768 |
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
17,734 |
|
|
$ |
19,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
66,296 |
|
|
$ |
76,418 |
|
Income taxes |
|
|
2,288 |
|
|
|
12,598 |
|
Seller financed debt |
|
|
4,728 |
|
|
|
4,953 |
|
See Notes to Consolidated Condensed Financial Statements
5
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Total |
|
|
|
Issued |
|
|
|
|
|
|
Paid-In |
|
|
Retained |
|
|
Comprehensive |
|
|
Stockholders |
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income |
|
|
Equity |
|
|
|
(Unaudited) |
|
|
|
(Dollars in thousands) |
|
|
Balances, January 1, 2008 |
|
|
95,019,763 |
|
|
$ |
10 |
|
|
$ |
733,895 |
|
|
$ |
587,566 |
|
|
$ |
99,988 |
|
|
$ |
1,421,459 |
|
Equity compensation |
|
|
344,428 |
|
|
|
|
|
|
|
4,416 |
|
|
|
|
|
|
|
|
|
|
|
4,416 |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,134 |
) |
|
|
|
|
|
|
(17,134 |
) |
Exercise of stock options,
including tax benefit of
$253 |
|
|
60,336 |
|
|
|
|
|
|
|
820 |
|
|
|
|
|
|
|
|
|
|
|
820 |
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,766 |
|
|
|
5,766 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(921 |
) |
|
|
(921 |
) |
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,793 |
|
|
|
|
|
|
|
73,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, June 30, 2008 |
|
|
95,424,527 |
|
|
$ |
10 |
|
|
$ |
739,131 |
|
|
$ |
644,225 |
|
|
$ |
104,833 |
|
|
$ |
1,488,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Condensed Financial Statements
6
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Interim Financial Statements
Basis of Presentation
The following unaudited consolidated condensed financial statements of Penske
Automotive Group, Inc. (the Company) have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). Certain information and
disclosures normally included in the Companys annual financial statements prepared in
accordance with generally accepted accounting principles have been condensed or omitted
pursuant to the SEC rules and regulations. The information presented as of June 30, 2008 and
December 31, 2007 and for the three and six month periods ended June 30, 2008 and 2007 is
unaudited, but includes all adjustments which the management of the Company believes to be
necessary for the fair presentation of results for the periods presented. The consolidated
condensed financial statements for prior periods have been revised for entities which have
been treated as discontinued operations through June 30, 2008. The results for the interim
periods are not necessarily indicative of results to be expected for the year. These
consolidated condensed financial statements should be read in conjunction with the Companys
audited financial statements for the year ended December 31, 2007, which are included as
part of the Companys Annual Report on Form 10-K.
On June 26, 2008, we acquired a 9% limited partnership interest in Penske Truck Leasing
Co., L.P., a leading global transportation services provider, in exchange for $219 million. PTL
operates and maintains more than 200,000 vehicles and serves customers in North America, South
America, Europe and Asia. Product lines include full-service leasing, contract maintenance,
commercial and consumer truck rental and logistics services, including transportation and
distribution center management and supply chain management.
Discontinued Operations
The Company accounts for dispositions as discontinued operations when it is evident
that the operations and cash flows of a franchise being disposed of will be eliminated from
the Companys on-going operations and that the Company will not have any significant
continuing involvement in its operations. In reaching the determination as to whether the
cash flows of a dealership will be eliminated from ongoing operations, the Company considers
whether it is likely that customers will migrate to similar franchises that it owns in the
same geographic market. The Companys consideration includes an evaluation of the brands
sold at other dealerships it operates in the market and their proximity to the disposed
dealership. When the Company disposes of franchises, it typically does not have continuing
brand representation in that market. If the franchise being disposed of is located in a
complex of Company dealerships, the Company does not treat the disposition as a discontinued
operation if the Company believes that the cash flows generated by the disposed franchise
will be replaced by expanded operations of the remaining franchises. Combined financial
information regarding dealerships accounted for as discontinued operations follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
67,770 |
|
|
$ |
145,766 |
|
|
$ |
156,254 |
|
|
$ |
311,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax (loss) income |
|
|
(3,622 |
) |
|
|
243 |
|
|
|
(3,601 |
) |
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) Gain on disposal |
|
|
(234 |
) |
|
|
146 |
|
|
|
(234 |
) |
|
|
(2,814 |
) |
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Inventories |
|
$ |
6,736 |
|
|
$ |
53,052 |
|
Other assets |
|
|
1,175 |
|
|
|
35,113 |
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
7,911 |
|
|
$ |
88,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable (trade and non-trade) |
|
$ |
6,607 |
|
|
$ |
42,717 |
|
Other liabilities |
|
|
4,155 |
|
|
|
12,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
$ |
10,762 |
|
|
$ |
54,745 |
|
|
|
|
|
|
|
|
7
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates. The accounts requiring the use of significant estimates include
accounts receivable, inventories, income taxes, intangible assets and certain reserves.
Intangible Assets
The Companys principal intangible assets relate to its franchise agreements with
vehicle manufacturers, which represent the estimated value of franchises acquired in
business combinations, and goodwill, which represents the excess of cost over the fair value
of tangible and identified intangible assets acquired in connection with business
combinations. Intangible assets are amortized over their estimated useful lives. The Company
believes the franchise value of its dealerships have an indefinite useful life based on the
following facts:
|
|
|
Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers; |
|
|
|
|
There are no known changes or events that would alter the automotive retailing franchise environment; |
|
|
|
|
Certain franchise agreement terms are indefinite; |
|
|
|
|
Franchise agreements that have limited terms have historically been renewed without substantial cost; and |
|
|
|
|
The Companys history shows that manufacturers have not terminated our franchise agreements. |
The following is a summary of the changes in the carrying amount of goodwill and
franchise value for the six months ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Franchise |
|
|
|
Goodwill |
|
|
Value |
|
Balances January 1, 2008 |
|
$ |
1,430,528 |
|
|
$ |
237,733 |
|
Additions during period |
|
|
31,458 |
|
|
|
10,742 |
|
Deletions during period |
|
|
|
|
|
|
(1,754 |
) |
Foreign currency translation |
|
|
4,019 |
|
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances June 30, 2008 |
|
$ |
1,466,005 |
|
|
$ |
247,498 |
|
|
|
|
|
|
|
|
As of June 30, 2008, approximately $665,877 of the Companys goodwill is deductible for
tax purposes. The Company has established deferred tax liabilities related to the temporary
differences arising from such tax deductible goodwill.
8
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
New Accounting Pronouncements
SFAS No. 157, Fair Value Measurements defines fair value, establishes a
framework for measuring fair value in generally accepted accounting principles, and
expands disclosure requirements relating to fair value measurements. The FASB provided
a one year deferral of the provisions of this pronouncement for non-financial assets
and liabilities, however, the relevant provisions of SFAS 157 required by SFAS 159
were adopted as of January 1, 2008. SFAS 157 thus becomes effective for the Companys
non-financial assets and liabilities on January 1, 2009. The Company continues to
evaluate the impact of those elements of this pronouncement.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an Amendment of FASB Statement No. 115 permits entities to
choose to measure many financial instruments and certain other items at fair value
and consequently report unrealized gains and losses on such items in earnings. The
Company did not elect the fair value option with respect to any of its current
financial assets or financial liabilities when the provisions of this statement
became effective on January 1, 2008. As a result, there was no impact upon adoption.
SFAS No. 141(R) Business Combinations requires almost all assets acquired and
liabilities assumed in business combinations to be recorded at fair value as of the
acquisition date, liabilities related to contingent consideration to be remeasured at
fair value in each subsequent reporting period, and all acquisition related costs to
be expensed as incurred. The pronouncement also clarifies the accounting under
various scenarios such as step purchases or situations in which the fair value of
assets and liabilities acquired exceeds the consideration. SFAS 141(R) will be
effective for the Company on January 1, 2009.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an
Amendment of ARB No. 51 clarifies that a noncontrolling interest in a subsidiary
must be measured at fair value and classified as a separate component of equity.
This pronouncement also outlines the accounting for changes in a parents ownership
in a subsidiary. SFAS 160 will be effective for the Company on January 1, 2009 and
will require the Company to reclassify its minority interest liabilities to
shareholders equity for the Companys non-wholly owned consolidated subsidiaries.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities
amends and expands the disclosure requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities to explain why and how an entity uses
derivative instruments, how the hedged items are accounted for under the relevant
literature and how the derivative instruments affect an entitys financial position,
financial performance and cash flows. SFAS 161 will be effective for the Company on
January 1, 2009. This pronouncement will have no impact on the Companys accounting,
and the Company is currently evaluating the pronouncements additional disclosure
requirements.
FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt
Instruments That May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement) requires the issuer of a convertible debt instrument that may be settled
in cash upon conversion, including partial cash settlement, to separately account for
the debt and equity components of the instrument. The value to be ascribed to the
debt portion of the instrument is determined using a fair value methodology, with the
residual representing the equity component. The equity component will be recorded as
an increase in stockholders equity, with the debt discount being amortized as
additional interest expense over the expected life of the instrument. FSP APB 14-1
will be effective for our fiscal year beginning January 1, 2009 and requires
retrospective application to all periods presented. The Company will apply this
guidance to the accounting for its 3.5% Senior Subordinated Convertible Notes due 2026
(the Notes), which the Company issued in January 2006. It is expected that the
Company will assign approximately $70 million to the equity component as of the Notes
issuance date. In addition, interest expense will be restated for all periods
presented, with an increase of approximately $15 million expected for the year ended
December 31, 2009. Due to the prepayment features included within the Notes, the
recording of incremental interest expense will be completed in April 2011.
9
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
2. Inventories
Inventories consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
New vehicles |
|
$ |
1,337,815 |
|
|
$ |
1,220,558 |
|
Used vehicles |
|
|
365,575 |
|
|
|
378,488 |
|
Parts, accessories and other |
|
|
87,074 |
|
|
|
83,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total inventories |
|
$ |
1,790,464 |
|
|
$ |
1,682,736 |
|
|
|
|
|
|
|
|
The Company receives non-refundable credits from certain vehicle manufacturers which
are treated as a reduction of cost of sales when the vehicles are sold. Such credits
amounted to $14,267 and $15,019 during the six months ended June 30, 2008 and 2007,
respectively.
3. Business Combinations
The Company acquired five and eight franchises during the six months ended June 30,
2008 and 2007, respectively. The Companys financial statements include the results of
operations of the acquired dealerships from the date of acquisition. Purchase price
allocations may be subject to final adjustment. A summary of the aggregate purchase price
allocations for the six months ended June 30, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
Accounts receivable |
|
$ |
2,560 |
|
|
$ |
11,908 |
|
Inventory |
|
|
36,476 |
|
|
|
48,425 |
|
Other current assets |
|
|
815 |
|
|
|
3,465 |
|
Property and equipment |
|
|
1,836 |
|
|
|
5,077 |
|
Goodwill |
|
|
31,458 |
|
|
|
54,768 |
|
Franchise value |
|
|
10,742 |
|
|
|
41,668 |
|
Other non-current assets |
|
|
|
|
|
|
5,099 |
|
Current liabilities |
|
|
(14,782 |
) |
|
|
(12,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used in dealership acquisitions |
|
$ |
69,105 |
|
|
$ |
157,892 |
|
|
|
|
|
|
|
|
The following unaudited consolidated pro forma results of operations of the Company for
the three and six months ended June 30, 2008 and 2007 give effect to acquisitions
consummated during 2008 and 2007 as if they had occurred on January 1, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
3,384,838 |
|
|
$ |
3,518,437 |
|
|
$ |
6,658,152 |
|
|
$ |
6,798,347 |
|
Income from continuing operations |
|
|
40,773 |
|
|
|
41,007 |
|
|
|
76,316 |
|
|
|
59,181 |
|
Net income |
|
|
40,090 |
|
|
|
41,305 |
|
|
|
75,688 |
|
|
|
57,529 |
|
Income from continuing operations
per diluted common share |
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
$ |
0.81 |
|
|
$ |
0.63 |
|
Earnings per diluted common share |
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
$ |
0.80 |
|
|
$ |
0.61 |
|
10
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
4. Floor Plan Notes Payable Trade and Non-trade
The Company finances the majority of its new and a portion of its used vehicle
inventories under revolving floor plan arrangements with various lenders. In the U.S., the
floor plan arrangements are due on demand; however, the Company is generally not required to
repay floor plan advances prior to the sale of the vehicles that have been financed. The
Company typically makes monthly interest payments on the amount financed. Outside the U.S.,
substantially all of the floor plan arrangements are payable on demand or have an original
maturity of 90 days or less and the Company is generally required to repay floor plan
advances at the earlier of the sale of the vehicles that have been financed or the stated
maturity. All of the floor plan agreements grant a security interest in substantially all of
the assets of the Companys dealership subsidiaries and in the U.S. are guaranteed by the
Company. Interest rates under the floor plan arrangements are variable and increase or
decrease based on changes in various benchmarks. The Company classifies floor plan notes
payable to a party other than the manufacturer of a particular new vehicle, and all floor
plan notes payable relating to used vehicles, as floor plan notes payable non-trade on its
consolidated condensed balance sheets and classifies related cash flows as a financing
activity on its consolidated condensed statements of cash flows.
5. Earnings Per Share
Basic earnings per share is computed using net income and weighted average shares of
voting common stock outstanding. Diluted earnings per share is computed using net income and
the weighted average shares of voting common stock outstanding, adjusted for the dilutive
effect of stock options and restricted stock. A reconciliation of the number of shares used
in the calculation of basic and diluted earnings per share for the three and six months
ended June 30, 2008 and 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Weighted average shares outstanding |
|
|
94,506 |
|
|
|
94,033 |
|
|
|
94,422 |
|
|
|
93,940 |
|
Effect of stock options |
|
|
114 |
|
|
|
228 |
|
|
|
116 |
|
|
|
236 |
|
Effect of restricted stock |
|
|
275 |
|
|
|
271 |
|
|
|
246 |
|
|
|
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding,
including effect of dilutive
securities |
|
|
94,895 |
|
|
|
94,532 |
|
|
|
94,784 |
|
|
|
94,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, the Company has senior subordinated convertible notes outstanding which,
under certain circumstances discussed in Note 6, may be converted to voting common stock. As
of June 30, 2008 and 2007, no shares related to the senior subordinated convertible notes
were included in the calculation of diluted earnings per share because the effect of such
securities was not dilutive.
6. Long-Term Debt
Long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
U.S. revolving credit line |
|
$ |
|
|
|
$ |
|
|
U.S. credit agreement term loan |
|
|
219,000 |
|
|
|
|
|
U.K. credit agreement |
|
|
96,779 |
|
|
|
91,265 |
|
7.75% Senior Subordinated Notes due 2016 |
|
|
375,000 |
|
|
|
375,000 |
|
3.5% Senior Subordinated Convertible Notes due 2026 |
|
|
375,000 |
|
|
|
375,000 |
|
Other |
|
|
3,031 |
|
|
|
3,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
1,068,810 |
|
|
|
844,628 |
|
Less: Current portion |
|
|
(14,255 |
) |
|
|
(14,522 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net long-term debt |
|
$ |
1,054,555 |
|
|
$ |
830,106 |
|
|
|
|
|
|
|
|
11
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
U.S. Credit Agreement
The Company is party to a $479,000 credit agreement with DCFS USA LLC and Toyota Motor
Credit Corporation, as amended (the U.S. Credit Agreement), which provides for up to
$250,000 of borrowing capacity for working capital, acquisitions, capital expenditures,
investments and for other general corporate purposes, a $219,000 non-amortizing term loan
and an additional $10,000 of availability for letters of credit, through September 30, 2010.
The revolving loans bear interest at defined LIBOR plus 1.75%, subject to an incremental
0.50% for uncollateralized borrowings in excess of a defined borrowing base. The term loan,
which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may
not be reborrowed.
The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the Companys domestic subsidiaries and contains a number of significant
covenants that, among other things, restrict the Companys ability to dispose of assets,
incur additional indebtedness, repay other indebtedness, pay dividends, create liens on
assets, make investments or acquisitions and engage in mergers or consolidations. The
Company is also required to comply with specified financial and other tests and ratios, each
as defined in the U.S. Credit Agreement, including: a ratio of current assets to current
liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders equity, a ratio
of debt to earnings before interest, taxes, depreciation and amortization (EBITDA), a
ratio of domestic debt to domestic EBITDA, and a measurement of stockholders equity. A
breach of these requirements would give rise to certain remedies under the agreement, the
most severe of which is the termination of the agreement and acceleration of the amounts
owed. As of June 30, 2008, the Company was in compliance with all covenants under the U.S.
Credit Agreement.
The U.S. Credit Agreement also contains typical events of default, including change of
control, non-payment of obligations and cross-defaults to the Companys other material
indebtedness. Substantially all of the Companys domestic assets are subject to security
interests granted to lenders under the U.S. Credit Agreement. As of June 30, 2008, $219,000
of term loans and $500 of letters of credit were outstanding under this facility. No
revolving loans were outstanding as of June 30, 2008.
U.K. Credit Agreement
The Companys subsidiaries in the U.K. (the U.K. Subsidiaries) are party to an
agreement with the Royal Bank of Scotland plc, as agent for National Westminster Bank plc,
which provides for a multi-option credit agreement, a fixed rate credit agreement and a
seasonally adjusted overdraft line of credit (collectively, the U.K. Credit Agreement) to
be used to finance acquisitions, working capital, and general corporate purposes. The U.K.
Credit Agreement provides for (1) up to £70,000 in revolving loans through August 31, 2011,
which have an original maturity of 90 days or less and bear interest between defined LIBOR
plus 0.65% and defined LIBOR plus 1.25%, (2) a £30,000 funded term loan which bears interest
between 5.94% and 6.54% and is payable ratably in quarterly intervals through June 30, 2011,
and (3) a seasonally adjusted overdraft line of credit for up to £30,000 that bears interest
at the Bank of England Base Rate plus 1.00%, and matures on August 31, 2011.
The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and
several basis by the U.K. Subsidiaries, and contains a number of significant covenants that,
among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose
of assets, incur additional indebtedness, repay other indebtedness, create liens on assets,
make investments or acquisitions and engage in mergers or consolidations. In addition, the
U.K. Subsidiaries are required to comply with specified ratios and tests, each as defined in
the U.K. Credit Agreement, including: a ratio of earnings before interest and taxes plus
rental payments to interest plus rental payments (as defined), a measurement of maximum
capital expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most severe of
which is the termination of the agreement and acceleration of the amounts owed. As of June
30, 2008, the U.K. subsidiaries were in compliance with all covenants under the U.K. Credit
Agreement.
The U.K. Credit Agreement also contains typical events of default, including change of
control and non-payment of obligations and cross-defaults to other material indebtedness of
the U.K. Subsidiaries. Substantially all of the U.K. Subsidiaries assets are subject to
security interests granted to lenders under the U.K. Credit Agreement. As of June 30, 2008,
outstanding loans under the U.K. Credit Agreement amounted to £48,586 ($96,779).
12
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
7.75% Senior Subordinated Notes
On December 7, 2006, the Company issued $375,000 aggregate principal amount of 7.75%
Senior Subordinated Notes due 2016 (the 7.75% Notes). The 7.75% Notes are unsecured senior
subordinated notes and are subordinate to all existing and future senior debt, including
debt under the Companys credit agreements and floor plan indebtedness. The 7.75% Notes are
guaranteed by substantially all wholly-owned domestic subsidiaries on an unsecured senior
subordinated basis. Those guarantees are full and unconditional and joint and several. The
Company can redeem all or some of the 7.75% Notes at its option beginning in December 2011
at specified redemption prices, or prior to December 2011 at 100% of the principal amount of
the notes plus an applicable make-whole premium, as defined. In addition, the Company may
redeem up to 40% of the 7.75% Notes at specified redemption prices using the proceeds of
certain equity offerings before December 15, 2009. Upon certain sales of assets or specific
kinds of changes of control, the Company is required to make an offer to purchase the 7.75%
Notes. The 7.75% Notes also contain customary negative covenants and events of default. As
of June 30, 2008, the Company was in compliance with all negative covenants and there were
no events of default.
Senior Subordinated Convertible Notes
On January 31, 2006, the Company issued $375,000 aggregate principal amount of 3.50%
senior subordinated convertible notes due 2026 (the Convertible Notes). The Convertible
Notes mature on April 1, 2026, unless earlier converted, redeemed or purchased by the
Company. The Convertible Notes are unsecured senior subordinated obligations and are
subordinate to all future and existing debt under the Companys credit agreements and floor
plan indebtedness. The convertible notes are guaranteed on an unsecured senior subordinated
basis by substantially all of the Companys wholly owned domestic subsidiaries. Those
guarantees are full and unconditional and joint and several. The Convertible Notes also
contain customary negative covenants and events of default. As of June 30, 2008, the Company
was in compliance with all negative covenants and there were no events of default.
Holders of the convertible notes may convert them based on a conversion rate of 42.2052
shares of common stock per $1,000 principal amount of the Convertible Notes (which is equal
to a conversion price of approximately $23.69 per share), subject to adjustment, only under
the following circumstances: (1) in any quarterly period, if the closing price of the common
stock for twenty of the last thirty trading days in the prior quarter exceeds $28.43
(subject to adjustment), (2) for specified periods, if the trading price of the Convertible
Notes falls below specific thresholds, (3) if the Convertible Notes are called for
redemption, (4) if specified distributions to holders of common stock are made or specified
corporate transactions occur, (5) if a fundamental change (as defined) occurs, or (6) during
the ten trading days prior to, but excluding, the maturity date.
Upon conversion of the Convertible Notes, for each $1,000 principal amount of the
Convertible Notes, a holder will receive an amount in cash, in lieu of shares of the
Companys common stock, equal to the lesser of (i) $1,000 or (ii) the conversion value,
determined in the manner set forth in the related indenture covering the Convertible Notes,
of the number of shares of common stock equal to the conversion rate. If the conversion
value exceeds $1,000, the Company will also deliver, at its election, cash, common stock or
a combination of cash and common stock with respect to the remaining value deliverable upon
conversion.
In the event of a change of control on or before April 6, 2011, the Company will pay,
to the extent described in the indenture, a make-whole premium by increasing the conversion
rate applicable to such Convertible Notes. In addition, the Company will pay contingent
interest in cash, commencing with any six-month period from April 1 to September 30 and from
October 1 to March 31, beginning on April 1, 2011, if the average trading price of a
Convertible Note for the five trading days ending on the third trading day immediately
preceding the first day of that six-month period equals 120% or more of the principal amount
of the Convertible Notes.
13
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
On or after April 6, 2011, the Company may redeem the Convertible Notes, in whole at
any time or in part from time to time, for cash at a redemption price of 100% of the
principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid
interest to the applicable redemption date. Holders of the Convertible Notes may require the
Company to purchase all or a portion of their Convertible Notes for cash on each of April 1,
2011, April 1, 2016 or April 1, 2021 at a purchase price equal to 100% of the principal
amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any,
to the applicable purchase date.
9.625% Senior Subordinated Notes
In March 2007, the Company redeemed its $300,000 aggregate principal amount of 9.625%
Senior Subordinated Notes due 2012 (the 9.625% Notes) at a price of 104.813%. The 9.625%
Notes were unsecured senior subordinated notes and were subordinate to all existing senior
debt, including debt under the Companys credit agreements and floor plan indebtedness. The
Company incurred an $18,634 pre-tax charge in connection with the redemption, consisting of
a $14,439 redemption premium and the write-off of $4,195 of unamortized deferred financing
costs.
7. Stockholders Equity
Comprehensive income
Other comprehensive income includes changes in the fair value of interest rate swap
agreements, foreign currency translation gains and losses, and available for sale securities
valuation adjustments that have been excluded from net income and reflected in equity. Total
comprehensive income is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
39,864 |
|
|
$ |
40,355 |
|
|
$ |
73,793 |
|
|
$ |
54,937 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
1,706 |
|
|
|
8,110 |
|
|
|
5,766 |
|
|
|
10,209 |
|
Other |
|
|
4,351 |
|
|
|
289 |
|
|
|
(921 |
) |
|
|
467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
45,921 |
|
|
$ |
48,754 |
|
|
$ |
78,638 |
|
|
$ |
65,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. Interest Rate Swaps
The Company is party to interest rate swap agreements through January 7, 2011 pursuant
to which the LIBOR portion of $300,000 of the Companys floating rate floor plan debt was
fixed at 3.67%. We may terminate these arrangements at any time subject to the settlement
of the then current fair value of the swap arrangements. The swaps are designated as cash
flow hedges of future interest payments of LIBOR based U.S. floor plan borrowings. During
the six months ended June 30, 2008, the swaps increased the weighted average interest rate
on floor plan borrowings by approximately 0.1%. As of June 30, 2008, the Company used Level
2 inputs as described under SFAS 157 to estimate the fair value of these contracts to be a $1,224 liability, and
expects approximately $2,526 associated with the swaps to be recognized as an increase of
interest expense over the next twelve months.
The Company was party to an interest rate swap agreement which expired in January
2008, pursuant to which a notional $200,000 of its U.S. floating rate debt was exchanged for
fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of
the LIBOR based U.S. floor plan borrowings.
14
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
9. Commitments and Contingent Liabilities
The Company is involved in litigation which may relate to issues with customers,
employment related matters, class action claims, purported class action claims, and claims
brought by governmental authorities. As of June 30, 2008, the Company is not party to any
legal proceedings, including class action lawsuits, that, individually or in the aggregate,
are reasonably expected to have a material adverse effect on the Companys results of
operations, financial condition or cash flows. However, the results of these matters cannot
be predicted with certainty, and an unfavorable resolution of one or more of these matters
could have a material adverse effect on the Companys results of operations, financial
condition or cash flows. See MD&A forward looking statements.
The Company was party to a joint venture agreement with respect to one of the Companys
franchises pursuant to which the Company was required to repurchase its partners interest.
The Company completed this repurchase on July 23, 2008 with a payment of $5.1 million.
The Company leases the majority of its dealership facilities and corporate offices
under non-cancelable operating lease agreements with expirations through 2062, including all
option periods available to the Company. The Companys lease arrangements typically allow
for a base term with options for extension in the Companys favor and include escalation
clauses tied to the Consumer Price Index.
15
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
10. Segment Information
The Company has two reportable operating segments as defined in SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information: (i) Retail,
consisting of our automotive retail operations, and (ii) Distribution, consisting of our
distribution of the smart for two vehicle, parts and accessories in the U.S. and Puerto Rico.
The Companys operations are organized by management by line of business and geography. The
Retail segment includes all automotive dealerships, regardless of geography, and includes
all departments relevant to the operation of the dealerships. We believe the dealership
operations included in the Retail segment are one reportable segment as their operations (A)
have similar economic characteristics (all are automotive dealerships having similar
margins), (B) offer similar products and services (all sell new and used vehicles, service,
parts and third-party finance and insurance products), (C) have similar target markets and
customers (generally individuals) and (D) have similar distribution and marketing practices
(all distribute products and services through dealership facilities that market to customers
in similar fashions.) The accounting policies of both segments are the same and are
described in Note 1.
The following table summarizes revenues and income from continuing operations before
certain non-recurring items, income taxes and minority interest, which is the measure by
which management allocates resources to its segments and which we refer to as adjusted
segment income, for each of our reportable segments. Adjusted segment income excludes the
item discussed below in order to enhance the comparability of segment income from period to
period.
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
Retail |
|
|
Distribution |
|
|
Elimination |
|
|
Total |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
3,264,243 |
|
|
$ |
116,881 |
|
|
$ |
(18,460 |
) |
|
$ |
3,362,664 |
|
2007 |
|
|
3,365,185 |
|
|
|
|
|
|
|
|
|
|
|
3,365,185 |
|
Adjusted segment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
52,917 |
|
|
$ |
10,307 |
|
|
$ |
9 |
|
|
$ |
63,233 |
|
2007 |
|
|
64,818 |
|
|
|
|
|
|
|
|
|
|
|
64,818 |
|
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intersegment |
|
|
|
|
|
|
Retail |
|
|
Distribution |
|
|
Elimination |
|
|
Total |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
6,403,973 |
|
|
$ |
192,361 |
|
|
$ |
(30,170 |
) |
|
$ |
6,566,164 |
|
2007 |
|
|
6,445,200 |
|
|
|
|
|
|
|
|
|
|
|
6,445,200 |
|
Adjusted segment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
103,035 |
|
|
$ |
14,254 |
|
|
$ |
(578 |
) |
|
$ |
116,711 |
|
2007 |
|
|
109,074 |
|
|
|
|
|
|
|
|
|
|
|
109,074 |
|
The following table reconciles total adjusted segment income to consolidated income from
continuing operations before income taxes and minority interests for the six month period ended
June 30, 2008. There are no reconciling items in the three month period ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
June 30, 2007 |
|
Total adjusted segment income |
|
$ |
116,711 |
|
|
$ |
109,074 |
|
Loss on debt redemption |
|
|
|
|
|
|
(18,634 |
) |
|
|
|
|
|
|
|
Income from continuing operations
before income taxes and minority
interests |
|
$ |
116,711 |
|
|
$ |
90,440 |
|
|
|
|
|
|
|
|
16
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
11. Consolidating Condensed Financial Information
The following tables include consolidating condensed financial information as of June
30, 2008 and December 31, 2007 and for the three and six month periods ended June 30, 2008
and 2007 for Penske Automotive Group, Inc. (as the issuer of the Convertible Notes and the
7.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing
foreign entities). The condensed consolidating financial information includes certain
allocations of balance sheet, income statement and cash flow items which are not necessarily
indicative of the financial position, results of operations or cash flows of these entities
on a stand-alone basis. The 2007 consolidating condensed financial statements have been
restated for an immaterial error relating to the presentation of long-term debt.
CONSOLIDATING CONDENSED BALANCE SHEET
June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
17,734 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,083 |
|
|
$ |
6,651 |
|
Accounts receivable, net |
|
|
432,811 |
|
|
|
(194,119 |
) |
|
|
194,119 |
|
|
|
254,762 |
|
|
|
178,049 |
|
Inventories, net |
|
|
1,790,464 |
|
|
|
|
|
|
|
|
|
|
|
1,026,060 |
|
|
|
764,404 |
|
Other current assets |
|
|
91,321 |
|
|
|
|
|
|
|
5,023 |
|
|
|
43,327 |
|
|
|
42,971 |
|
Assets held for sale |
|
|
7,911 |
|
|
|
|
|
|
|
|
|
|
|
1,601 |
|
|
|
6,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,340,241 |
|
|
|
(194,119 |
) |
|
|
199,142 |
|
|
|
1,336,833 |
|
|
|
998,385 |
|
Property and equipment, net |
|
|
692,817 |
|
|
|
|
|
|
|
11,872 |
|
|
|
389,177 |
|
|
|
291,768 |
|
Intangible assets |
|
|
1,713,503 |
|
|
|
|
|
|
|
|
|
|
|
1,151,613 |
|
|
|
561,890 |
|
Other assets |
|
|
309,531 |
|
|
|
(2,023,900 |
) |
|
|
2,251,828 |
|
|
|
9,519 |
|
|
|
72,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,056,092 |
|
|
$ |
(2,218,019 |
) |
|
$ |
2,462,842 |
|
|
$ |
2,887,142 |
|
|
$ |
1,924,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable |
|
$ |
1,098,103 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
617,169 |
|
|
$ |
480,934 |
|
Floor plan notes payable
non-trade |
|
|
549,150 |
|
|
|
|
|
|
|
|
|
|
|
295,397 |
|
|
|
253,753 |
|
Accounts payable |
|
|
256,062 |
|
|
|
|
|
|
|
3,864 |
|
|
|
106,623 |
|
|
|
145,575 |
|
Accrued expenses |
|
|
260,444 |
|
|
|
(194,119 |
) |
|
|
1,779 |
|
|
|
113,711 |
|
|
|
339,073 |
|
Current portion of
long-term debt |
|
|
14,255 |
|
|
|
|
|
|
|
|
|
|
|
168 |
|
|
|
14,087 |
|
Liabilities held for sale |
|
|
10,762 |
|
|
|
|
|
|
|
|
|
|
|
1,009 |
|
|
|
9,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,188,776 |
|
|
|
(194,119 |
) |
|
|
5,643 |
|
|
|
1,134,077 |
|
|
|
1,243,175 |
|
Long-term debt |
|
|
1,054,555 |
|
|
|
(166,646 |
) |
|
|
969,000 |
|
|
|
2,946 |
|
|
|
249,255 |
|
Other long-term liabilities |
|
|
324,562 |
|
|
|
|
|
|
|
|
|
|
|
303,014 |
|
|
|
21,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,567,893 |
|
|
|
(360,765 |
) |
|
|
974,643 |
|
|
|
1,440,037 |
|
|
|
1,513,978 |
|
Total stockholders equity |
|
|
1,488,199 |
|
|
|
(1,857,254 |
) |
|
|
1,488,199 |
|
|
|
1,447,105 |
|
|
|
410,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
5,056,092 |
|
|
$ |
(2,218,019 |
) |
|
$ |
2,462,842 |
|
|
$ |
2,887,142 |
|
|
$ |
1,924,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
11,690 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,690 |
|
Accounts receivable, net |
|
|
448,985 |
|
|
|
(210,645 |
) |
|
|
210,945 |
|
|
|
289,939 |
|
|
|
158,746 |
|
Inventories, net |
|
|
1,682,736 |
|
|
|
|
|
|
|
|
|
|
|
924,632 |
|
|
|
758,104 |
|
Other current assets |
|
|
65,948 |
|
|
|
|
|
|
|
3,849 |
|
|
|
27,958 |
|
|
|
34,141 |
|
Assets held for sale |
|
|
88,165 |
|
|
|
|
|
|
|
|
|
|
|
64,277 |
|
|
|
23,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,297,524 |
|
|
|
(210,645 |
) |
|
|
214,794 |
|
|
|
1,306,806 |
|
|
|
986,569 |
|
Property and equipment, net |
|
|
617,874 |
|
|
|
|
|
|
|
4,617 |
|
|
|
345,088 |
|
|
|
268,169 |
|
Intangible assets |
|
|
1,668,261 |
|
|
|
|
|
|
|
|
|
|
|
1,073,598 |
|
|
|
594,663 |
|
Other assets |
|
|
84,894 |
|
|
|
(1,951,050 |
) |
|
|
1,956,788 |
|
|
|
12,395 |
|
|
|
66,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,668,553 |
|
|
$ |
(2,161,695 |
) |
|
$ |
2,176,199 |
|
|
$ |
2,737,887 |
|
|
$ |
1,916,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Floor plan notes payable |
|
$ |
1,070,882 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
569,259 |
|
|
$ |
501,623 |
|
Floor plan notes payable
non-trade |
|
|
476,854 |
|
|
|
|
|
|
|
|
|
|
|
293,269 |
|
|
|
183,585 |
|
Accounts payable |
|
|
266,726 |
|
|
|
|
|
|
|
4,550 |
|
|
|
96,562 |
|
|
|
165,614 |
|
Accrued expenses |
|
|
212,310 |
|
|
|
(210,645 |
) |
|
|
190 |
|
|
|
64,037 |
|
|
|
358,728 |
|
Current portion of
long-term debt |
|
|
14,522 |
|
|
|
|
|
|
|
|
|
|
|
496 |
|
|
|
14,026 |
|
Liabilities held for sale |
|
|
54,745 |
|
|
|
|
|
|
|
|
|
|
|
34,113 |
|
|
|
20,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
2,096,039 |
|
|
|
(210,645 |
) |
|
|
4,740 |
|
|
|
1,057,736 |
|
|
|
1,244,208 |
|
Long-term debt |
|
|
830,106 |
|
|
|
(237,616 |
) |
|
|
750,000 |
|
|
|
2,548 |
|
|
|
315,174 |
|
Other long-term liabilities |
|
|
320,949 |
|
|
|
|
|
|
|
|
|
|
|
288,647 |
|
|
|
32,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
3,247,094 |
|
|
|
(448,261 |
) |
|
|
754,740 |
|
|
|
1,348,931 |
|
|
|
1,591,684 |
|
Total stockholders equity |
|
|
1,421,459 |
|
|
|
(1,713,434 |
) |
|
|
1,421,459 |
|
|
|
1,388,956 |
|
|
|
324,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity |
|
$ |
4,668,553 |
|
|
$ |
(2,161,695 |
) |
|
$ |
2,176,199 |
|
|
$ |
2,737,887 |
|
|
$ |
1,916,162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,362,664 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,979,933 |
|
|
$ |
1,382,731 |
|
Cost of sales |
|
|
2,861,127 |
|
|
|
|
|
|
|
|
|
|
|
1,668,805 |
|
|
|
1,192,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
501,537 |
|
|
|
|
|
|
|
|
|
|
|
311,128 |
|
|
|
190,409 |
|
Selling, general, and
administrative expenses |
|
|
398,516 |
|
|
|
|
|
|
|
2,922 |
|
|
|
247,049 |
|
|
|
148,545 |
|
Depreciation and
amortization |
|
|
13,594 |
|
|
|
|
|
|
|
290 |
|
|
|
7,650 |
|
|
|
5,654 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
89,427 |
|
|
|
|
|
|
|
(3,212 |
) |
|
|
56,429 |
|
|
|
36,210 |
|
Floor plan interest expense |
|
|
(16,589 |
) |
|
|
|
|
|
|
|
|
|
|
(9,594 |
) |
|
|
(6,995 |
) |
Other interest expense |
|
|
(12,616 |
) |
|
|
|
|
|
|
(8,533 |
) |
|
|
|
|
|
|
(4,083 |
) |
Equity in income of
affiliates |
|
|
3,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,011 |
|
Loss on debt redemption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(74,550 |
) |
|
|
74,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
before income taxes and
minority interests |
|
|
63,233 |
|
|
|
(74,550 |
) |
|
|
62,805 |
|
|
|
46,835 |
|
|
|
28,143 |
|
Income taxes |
|
|
(22,258 |
) |
|
|
26,420 |
|
|
|
(22,258 |
) |
|
|
(18,009 |
) |
|
|
(8,411 |
) |
Minority interests |
|
|
(428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(428 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations |
|
|
40,547 |
|
|
|
(48,130 |
) |
|
|
40,547 |
|
|
|
28,826 |
|
|
|
19,304 |
|
Income (loss) from
discontinued operations,
net of tax |
|
|
(683 |
) |
|
|
683 |
|
|
|
(683 |
) |
|
|
(912 |
) |
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
39,864 |
|
|
$ |
(47,447 |
) |
|
$ |
39,864 |
|
|
$ |
27,914 |
|
|
$ |
19,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Three Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
3,365,185 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,912,150 |
|
|
$ |
1,453,035 |
|
Cost of sales |
|
|
2,872,695 |
|
|
|
|
|
|
|
|
|
|
|
1,620,869 |
|
|
|
1,251,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
492,490 |
|
|
|
|
|
|
|
|
|
|
|
291,281 |
|
|
|
201,209 |
|
Selling, general, and
administrative expenses |
|
|
385,200 |
|
|
|
|
|
|
|
3,960 |
|
|
|
227,880 |
|
|
|
153,360 |
|
Depreciation and
amortization |
|
|
12,864 |
|
|
|
|
|
|
|
389 |
|
|
|
6,839 |
|
|
|
5,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
94,426 |
|
|
|
|
|
|
|
(4,349 |
) |
|
|
56,562 |
|
|
|
42,213 |
|
Floor plan interest expense |
|
|
(19,247 |
) |
|
|
|
|
|
|
|
|
|
|
(11,689 |
) |
|
|
(7,558 |
) |
Other interest expense |
|
|
(12,890 |
) |
|
|
|
|
|
|
(6,580 |
) |
|
|
(5 |
) |
|
|
(6,305 |
) |
Equity in income of
affiliates |
|
|
2,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,529 |
|
Loss on debt redemption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(75,045 |
) |
|
|
75,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
before income taxes and
minority interests |
|
|
64,818 |
|
|
|
(75,045 |
) |
|
|
64,116 |
|
|
|
44,868 |
|
|
|
30,879 |
|
Income taxes |
|
|
(24,059 |
) |
|
|
25,515 |
|
|
|
(24,059 |
) |
|
|
(15,562 |
) |
|
|
(9,953 |
) |
Minority interests |
|
|
(702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(702 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations |
|
|
40,057 |
|
|
|
(49,530 |
) |
|
|
40,057 |
|
|
|
29,306 |
|
|
|
20,224 |
|
Income (loss) from
discontinued operations,
net of tax |
|
|
298 |
|
|
|
(298 |
) |
|
|
298 |
|
|
|
(130 |
) |
|
|
428 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
40,355 |
|
|
$ |
(49,828 |
) |
|
$ |
40,355 |
|
|
$ |
29,176 |
|
|
$ |
20,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
6,566,164 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,717,352 |
|
|
$ |
2,848,812 |
|
Cost of sales |
|
|
5,571,216 |
|
|
|
|
|
|
|
|
|
|
|
3,131,238 |
|
|
|
2,439,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
994,948 |
|
|
|
|
|
|
|
|
|
|
|
586,114 |
|
|
|
408,834 |
|
Selling, general, and
administrative expenses |
|
|
797,012 |
|
|
|
|
|
|
|
6,773 |
|
|
|
478,984 |
|
|
|
311,255 |
|
Depreciation and
amortization |
|
|
27,068 |
|
|
|
|
|
|
|
653 |
|
|
|
14,874 |
|
|
|
11,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
170,868 |
|
|
|
|
|
|
|
(7,426 |
) |
|
|
92,256 |
|
|
|
86,038 |
|
Floor plan interest expense |
|
|
(33,901 |
) |
|
|
|
|
|
|
|
|
|
|
(19,150 |
) |
|
|
(14,751 |
) |
Other interest expense |
|
|
(24,659 |
) |
|
|
|
|
|
|
(15,689 |
) |
|
|
|
|
|
|
(8,970 |
) |
Equity in income of
affiliates |
|
|
4,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,403 |
|
Loss on debt redemption |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(138,963 |
) |
|
|
138,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
before income taxes and
minority interests |
|
|
116,711 |
|
|
|
(138,963 |
) |
|
|
115,848 |
|
|
|
73,106 |
|
|
|
66,720 |
|
Income taxes |
|
|
(41,427 |
) |
|
|
49,693 |
|
|
|
(41,427 |
) |
|
|
(29,780 |
) |
|
|
(19,913 |
) |
Minority interests |
|
|
(863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(863 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations |
|
|
74,421 |
|
|
|
(89,270 |
) |
|
|
74,421 |
|
|
|
43,326 |
|
|
|
45,944 |
|
Income (loss) from
discontinued operations,
net of tax |
|
|
(628 |
) |
|
|
628 |
|
|
|
(628 |
) |
|
|
(1,133 |
) |
|
|
505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
73,793 |
|
|
$ |
(88,642 |
) |
|
$ |
73,793 |
|
|
$ |
42,193 |
|
|
$ |
46,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF INCOME
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Eliminations |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
6,445,200 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,565,385 |
|
|
$ |
2,879,815 |
|
Cost of sales |
|
|
5,490,943 |
|
|
|
|
|
|
|
|
|
|
|
3,012,094 |
|
|
|
2,478,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
954,257 |
|
|
|
|
|
|
|
|
|
|
|
553,291 |
|
|
|
400,966 |
|
Selling, general, and
administrative expenses |
|
|
754,911 |
|
|
|
|
|
|
|
8,072 |
|
|
|
440,440 |
|
|
|
306,399 |
|
Depreciation and
amortization |
|
|
25,204 |
|
|
|
|
|
|
|
734 |
|
|
|
13,439 |
|
|
|
11,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
174,142 |
|
|
|
|
|
|
|
(8,806 |
) |
|
|
99,412 |
|
|
|
83,536 |
|
Floor plan interest expense |
|
|
(35,063 |
) |
|
|
|
|
|
|
|
|
|
|
(20,326 |
) |
|
|
(14,737 |
) |
Other interest expense |
|
|
(31,713 |
) |
|
|
|
|
|
|
(18,793 |
) |
|
|
(29 |
) |
|
|
(12,891 |
) |
Equity in income of
affiliates |
|
|
1,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,708 |
|
Loss on debt redemption |
|
|
(18,634 |
) |
|
|
|
|
|
|
(18,634 |
) |
|
|
|
|
|
|
|
|
Equity in earnings of
subsidiaries |
|
|
|
|
|
|
(135,677 |
) |
|
|
135,677 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations
before income taxes and
minority interests |
|
|
90,440 |
|
|
|
(135,677 |
) |
|
|
89,444 |
|
|
|
79,057 |
|
|
|
57,616 |
|
Income taxes |
|
|
(32,855 |
) |
|
|
46,130 |
|
|
|
(32,855 |
) |
|
|
(28,015 |
) |
|
|
(18,115 |
) |
Minority interests |
|
|
(996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(996 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
continuing operations |
|
|
56,589 |
|
|
|
(89,547 |
) |
|
|
56,589 |
|
|
|
51,042 |
|
|
|
38,505 |
|
Income (loss) from
discontinued operations,
net of tax |
|
|
(1,652 |
) |
|
|
1,652 |
|
|
|
(1,652 |
) |
|
|
(2,549 |
) |
|
|
897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
54,937 |
|
|
$ |
(87,895 |
) |
|
$ |
54,937 |
|
|
$ |
48,493 |
|
|
$ |
39,402 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities |
|
$ |
176,231 |
|
|
$ |
7,908 |
|
|
$ |
109,704 |
|
|
$ |
58,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(117,073 |
) |
|
|
(7,908 |
) |
|
|
(56,576 |
) |
|
|
(52,589 |
) |
Proceeds from sale leaseback transactions |
|
|
19,740 |
|
|
|
|
|
|
|
5,964 |
|
|
|
13,776 |
|
Dealership acquisitions, net |
|
|
(69,105 |
) |
|
|
|
|
|
|
(32,788 |
) |
|
|
(36,317 |
) |
Purchase of Penske Truck Leasing Co., L.P.
partnership interest |
|
|
(219,000 |
) |
|
|
(219,000 |
) |
|
|
|
|
|
|
|
|
Other |
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities |
|
|
(386,938 |
) |
|
|
(226,908 |
) |
|
|
(83,400 |
) |
|
|
(76,630 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from U.S. credit agreement term loan |
|
|
219,000 |
|
|
|
219,000 |
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) of long-term debt |
|
|
454 |
|
|
|
16,314 |
|
|
|
(3,962 |
) |
|
|
(11,898 |
) |
Floor plan notes payable non-trade |
|
|
(22,032 |
) |
|
|
|
|
|
|
(41,234 |
) |
|
|
19,202 |
|
Proceeds from exercises of options including
excess tax benefit |
|
|
820 |
|
|
|
820 |
|
|
|
|
|
|
|
|
|
Distributions from (to) parent |
|
|
|
|
|
|
|
|
|
|
1,031 |
|
|
|
(1,031 |
) |
Dividends |
|
|
(17,134 |
) |
|
|
(17,134 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities |
|
|
181,108 |
|
|
|
219,000 |
|
|
|
(44,165 |
) |
|
|
6,273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
35,643 |
|
|
|
|
|
|
|
28,944 |
|
|
|
6,699 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
6,044 |
|
|
|
|
|
|
|
11,083 |
|
|
|
(5,039 |
) |
Cash and cash equivalents, beginning of period |
|
|
11,690 |
|
|
|
|
|
|
|
|
|
|
|
11,690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
17,734 |
|
|
$ |
|
|
|
$ |
11,083 |
|
|
$ |
6,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
PENSKE AUTOMOTIVE GROUP, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penske |
|
|
|
|
|
|
|
|
|
Total |
|
|
Automotive |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
Company |
|
|
Group, Inc. |
|
|
Subsidiaries |
|
|
Subsidiaries |
|
|
|
(In Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing operating activities |
|
$ |
287,165 |
|
|
$ |
7,610 |
|
|
$ |
176,006 |
|
|
$ |
103,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(73,600 |
) |
|
|
(1,935 |
) |
|
|
(50,420 |
) |
|
|
(21,245 |
) |
Proceeds from sale leaseback transactions |
|
|
76,509 |
|
|
|
|
|
|
|
45,085 |
|
|
|
31,424 |
|
Dealership acquisitions, net |
|
|
(157,892 |
) |
|
|
|
|
|
|
(121,425 |
) |
|
|
(36,467 |
) |
Other |
|
|
13,264 |
|
|
|
8,764 |
|
|
|
|
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing investing activities |
|
|
(141,719 |
) |
|
|
6,829 |
|
|
|
(126,760 |
) |
|
|
(21,788 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings (repayments) of long-term debt |
|
|
(38,828 |
) |
|
|
311,725 |
|
|
|
(316,864 |
) |
|
|
(33,689 |
) |
|
Floor plan notes payable non-trade |
|
|
137,713 |
|
|
|
|
|
|
|
169,403 |
|
|
|
(31,690 |
) |
Proceeds from exercises of options including
excess tax benefit |
|
|
1,527 |
|
|
|
1,527 |
|
|
|
|
|
|
|
|
|
Redemption 9 5/8% Senior Subordinated Debt |
|
|
(314,439 |
) |
|
|
(314,439 |
) |
|
|
|
|
|
|
|
|
Distributions from (to) parent |
|
|
|
|
|
|
|
|
|
|
7,367 |
|
|
|
(7,367 |
) |
Dividends |
|
|
(13,252 |
) |
|
|
(13,252 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from continuing financing activities |
|
|
(227,279 |
) |
|
|
(14,439 |
) |
|
|
(140,094 |
) |
|
|
(72,746 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from discontinued operations |
|
|
86,682 |
|
|
|
|
|
|
|
86,526 |
|
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
|
4,849 |
|
|
|
|
|
|
|
(4,322 |
) |
|
|
9,171 |
|
Cash and cash equivalents, beginning of period |
|
|
14,768 |
|
|
|
|
|
|
|
4,040 |
|
|
|
10,728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
19,617 |
|
|
$ |
|
|
|
$ |
(282 |
) |
|
$ |
19,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
This Managements Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those discussed in the forward-looking statements
as a result of various factors, including those discussed in Forward Looking Statements.
We have acquired a number of dealerships since inception. Our financial statements include
the results of operations of acquired dealerships from the date of acquisition. In addition,
this Managements Discussion and Analysis of Financial Condition and Results of Operations
has been updated for the effects of revising our financial statements for entities which
have been treated as discontinued operations through June 30, 2008 in accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets.
Overview
We are the second largest automotive retailer headquartered in the United States as
measured by total revenues. As of June 30, 2008, we owned and operated 161 franchises in the
United States and 147 franchises outside of the United States, primarily in the United
Kingdom. We offer a full range of vehicle brands with 95% of our total revenue in 2008
generated from non-U.S. brands and with sales relating to premium brands, such as Audi, BMW,
Cadillac and Porsche, representing 64% of our total revenue. Each of our dealerships offers
a wide selection of new and used vehicles for sale. In addition to selling new and used
vehicles, we generate higher-margin revenue at each of our dealerships through maintenance
and repair services and the sale and placement of higher-margin products, such as third
party finance and insurance products, third-party extended service contracts and replacement
and aftermarket automotive products.
New and used vehicle revenues include sales to retail customers and to leasing
companies providing consumer automobile leasing. We generate finance and insurance revenues
from sales of third-party extended service contracts, sales of third-party insurance
policies, fees for facilitating the sale of third-party finance and lease contracts and the
sale of certain other products. Service and parts revenues include fees paid for repair,
maintenance and collision services, the sale of replacement parts and the sale of
aftermarket accessories.
We are, through smart USA Distributor, LLC (smart USA), a wholly owned subsidiary,
the exclusive distributor of the smart for two vehicle in United States and Puerto Rico. The
smart fortwo is manufactured by Mercedes-Benz Cars and is a Daimler brand. This
technologically advanced vehicle achieves 40-plus miles per gallon on the highway and is an
ultra-low emissions vehicle. Though launched in the United States in 2008, more than
850,000 fortwo vehicles have previously been sold outside the U.S. smart USA has certified
a network of 69 smart dealerships in 31 states. Additional dealerships are expected to
commence retailing vehicles during 2008 upon completion of their facilities and obtaining
licensing approval. Of the 74 dealerships currently planned in the U.S., eight are owned and
operated by us. The smart fortwo offers three different versions, the pure, passion coupe
and passion cabriolet with base prices ranging from $11,600 to $16,600. We currently expect
to distribute at least 24,000 smart fortwo vehicles in 2008.
On June 26, 2008, we acquired a 9% limited partnership interest in Penske Truck Leasing
Co., L.P. (PTL), a leading global transportation services provider, from subsidiaries of
General Electric Capital Corporation (collectively, GE Capital) in exchange for $219.0
million. PTL operates and maintains more than 200,000 vehicles and serves customers in North
America, South America, Europe and Asia. Product lines include full-service leasing,
contract maintenance, commercial and consumer truck rental and logistics services,
including, transportation and distribution center management and supply chain management.
The general partner is Penske Truck Leasing Corporation, a wholly owned subsidiary of Penske Corporation, which together with other wholly
owned subsidiaries of Penske Corporation, owns 40% of PTL. The remaining 51% of PTL is owned
by subsidiaries of General Electric Capital Corporation (collectively GE Capital).
We and Sirius Satellite Radio Inc. (Sirius) have agreed to jointly promote Sirius
Satellite Radio service. Pursuant to the terms of our arrangement with Sirius, our
dealerships in the United States endeavor to order a significant percentage of eligible
vehicles with a factory installed Sirius radio. We and Sirius have also agreed to jointly
market the Sirius service under a best efforts arrangement through January 4, 2009. Our
costs relating to such marketing initiatives are expensed as incurred. As compensation for
our efforts, we received warrants to purchase ten million shares of Sirius common stock at
$2.392 per share in 2004 that are being earned ratably on an annual basis through
January 2009. We measure the fair value of the warrants earned ratably on the date they are
earned as there are no significant disincentives for non-performance. Since we can
reasonably estimate the number of warrants that will be earned pursuant to the ratable
schedule, the estimated fair value (based on current fair value) of these warrants is
recognized ratably during each annual period. We also had the right to earn additional
warrants to purchase Sirius common stock at $2.392 per share based upon the sale of certain
units of specified brands through December 31, 2007. We earned 123,800 of these warrants
during the six months ended June 30, 2007. The value of Sirius stock has been and is
expected to be subject to significant fluctuations, which may result in variability in the
amount we earn under this arrangement. The warrants may be cancelled upon the termination of
our arrangement.
25
Our gross profit varies with the mix of revenues we derive from the sale of new
vehicles, used vehicles, finance and insurance products, and service and parts. 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 customer demand, general economic conditions, seasonality, weather, credit availability,
fuel prices and manufacturers advertising and incentives may impact the mix of our
revenues, and therefore influence our gross profit margin.
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 outside services. We believe a significant portion of our
selling expenses are variable, and a significant portion of our general and administrative
expenses are subject to our control, allowing us to adjust them over time to reflect
economic trends.
Floor plan interest expense relates to financing obligations incurred in connection
with the acquisition of new and used vehicle inventories which is secured by those vehicles.
Other interest expense consists of interest charges on all of our interest-bearing debt,
other than interest relating to floor plan financing.
The future success of our business will likely be dependent on, among other things, our
ability to consummate and integrate acquisitions, our ability to increase sales of higher
margin products, especially service and parts services, our ability to realize returns on
our significant capital investment in new and upgraded dealerships and the success of our
distribution of the smart for two. See Forward-Looking Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires the application of accounting
policies that often involve making estimates and employing judgments. Such judgments
influence the assets, liabilities, revenues and expenses recognized in our financial
statements. Management, on an ongoing basis, reviews these estimates and assumptions.
Management may determine that modifications in assumptions and estimates are required, which
may result in a material change in our results of operations or financial position.
The following are the accounting policies applied in the preparation of our financial
statements that management believes are most dependent upon the use of estimates and
assumptions.
Revenue Recognition
Vehicle, Parts and Service Sales
We record revenue when vehicles are delivered and title has passed to the customer,
when vehicle service or repair work is performed and when parts are delivered to our
customers. Sales promotions that we offer to customers are accounted for as a reduction
of revenues at the time of sale. Rebates and other incentives offered directly to us by
manufacturers are recognized as a reduction of cost of sales. Reimbursement of qualified
advertising expenses are treated as a reduction of selling, general and administrative
expenses. The amounts received under various manufacturer rebate and incentive programs
are based on the attainment of program objectives, and such earnings are recognized
either upon the sale of the vehicle for which the award was received, or upon attainment
of the particular program goals if not associated with individual vehicles. During the
six months ended June 30, 2008 and 2007, we earned $173.1 million and $166.8 million,
respectively, of rebates, incentives and reimbursements from manufacturers, of which
$169.1 million and $159.2 million was recorded as a reduction of cost of sales.
Finance and Insurance Sales
Subsequent to the sale of a vehicle to a customer, we sell our installment sale
contracts to various financial institutions on a non-recourse basis to mitigate the risk of
default. We receive a commission from the lender equal to either the difference between the
interest rate charged to the customer and the interest rate set by the financing
institution or a flat fee. We also receive commissions for facilitating the sale of various
third-party insurance products to customers, including credit and life insurance policies
and extended service contracts. These commissions are recorded as revenue at the time the
customer enters into the contract. 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 to us 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 cancellation rates on extended service contracts and
other insurance products. Aggregate reserves relating to chargeback activity were
$19.2 million and $19.4 million as of June 30, 2008 and December 31, 2007, respectively.
Changes in reserve estimates relate primarily to a decrease in the amount of revenues
subject to chargeback.
26
Intangible Assets
Our principal intangible assets relate to our franchise agreements with vehicle
manufacturers, which represent the estimated value of franchises acquired in business
combinations, and goodwill, which represents the excess of cost over the fair value of
tangible and identified intangible assets acquired in business combinations. We believe the
franchise value of our dealerships have an indefinite useful life based on the following
facts:
|
|
|
Automotive retailing is a mature industry and is based on franchise agreements with the vehicle manufacturers; |
|
|
|
|
There are no known changes or events that would alter the automotive retailing franchise environment; |
|
|
|
|
Certain franchise agreement terms are indefinite; |
|
|
|
|
Franchise agreements that have limited terms have historically been renewed without substantial cost; and |
|
|
|
|
Our history shows that manufacturers have not terminated our franchise agreements. |
Impairment Testing
Franchise value impairment is assessed as of October 1 every year through a comparison
of the carrying amounts of our franchises with their estimated fair values. An indicator of
impairment exists if the carrying value of a franchise exceeds its estimated fair value and
an impairment loss may be recognized equal to that excess. We also evaluate our franchises
in connection with the annual impairment testing to determine whether events and
circumstances continue to support our assessment that the franchise has an indefinite life.
Goodwill impairment is assessed at the reporting unit level as of October 1 every year
and upon the occurrence of an indicator of impairment. An indicator of impairment exists if
the carrying amount of the reporting unit including goodwill is determined to exceed its
estimated fair value. If an indication of impairment exists, the impairment is measured by
comparing the implied fair value of the reporting unit goodwill with the carrying amount of
that goodwill and an impairment loss may be recognized equal to that excess.
The fair values of franchise value and goodwill are determined using a discounted cash
flow approach, which includes assumptions that include revenue and profitability growth,
franchise profit margins, residual values and our cost of capital. If future events and
circumstances cause significant changes in the assumptions underlying our analysis and
result in a reduction of our estimates of fair value, we may incur an impairment charge.
Investments
Investments include marketable securities and investments in businesses accounted
for under the equity method. A majority of our investments are in joint venture
relationships that are more fully described in Joint Venture Relationships below. Such
joint venture relationships are accounted for under the equity method, pursuant to which
we record our proportionate share of the joint ventures income each period. On June 26,
2008, we acquired the 9% limited partnership interest in PTL for $219 million.
The net book value of our investments was $289.0 million and $64.4 million as of June
30, 2008 and December 31, 2007, respectively. Investments for which there is not a liquid,
actively traded market are reviewed periodically by management for indicators of impairment.
If an indicator of impairment was identified, management would estimate the fair value of
the investment using a discounted cash flow approach, which would include 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.
During 2007, we recorded an adjustment to the carrying value of our investment in Internet
Brands to recognize an other than temporary impairment of $3.4 million which became apparent
upon their initial public offering.
Investments in marketable securities held by us are typically classified as available
for sale and are stated at fair value on our balance sheet with unrealized gains and losses
included in other comprehensive income, a separate component of stockholders equity.
Declines in investment values that are deemed to be other than temporary would be an
indicator of impairment and may result in an impairment charge reducing the investments
carrying value to fair value.
27
Self-Insurance
We retain risk relating to certain of our general liability insurance, workers
compensation insurance, auto physical damage insurance, property insurance, employment
practices liability insurance, directors and officers insurance and employee medical
benefits. As a result, we are likely to be responsible for a majority 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. 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 $18.0 million and $12.8 million as of June
30, 2008 and December 31, 2007. Changes in the reserve estimate during 2008 relate primarily
to reserves for current year activity and changes in loss experience in our historical employee medical,
general liability and workers compensation programs.
Income Taxes
Tax regulations may require items to be included in our tax return at different times
than the items are reflected in our financial statements. Some of these differences are
permanent, such as expenses that are not deductible on our tax return, and some are timing
differences, such as the timing of depreciation expense. Timing differences create deferred
tax assets and liabilities. Deferred tax assets generally represent items that will be used
as a tax deduction or credit in our tax return in future years which we have already recorded
in our financial statements. Deferred tax liabilities generally represent deductions taken on
our tax return that have not yet been recognized as expense in our financial statements. We
establish valuation allowances for our deferred tax assets if the amount of expected future
taxable income is not likely to allow for the use of the deduction or credit. A valuation
allowance of $2.5 million has been recorded as of June 30, 2008 relating to state net
operating loss and credit carryforwards in the U.S. based on our determination that it is
more likely than not that they will not be utilized.
Classification of Franchises in Continuing and Discontinued Operations
We classify the results of our operations in our consolidated financial statements based
on the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, which
requires judgment in determining whether a franchise will be reported within continuing or
discontinued operations. Such judgments include whether a franchise will be divested, the
period required to complete the divestiture, and the likelihood of changes to the divestiture
plans. If we determine that a franchise should be either reclassified from continuing
operations to discontinued operations or from discontinued operations to continuing
operations, our consolidated financial statements for prior periods are revised to reflect
such reclassification.
New Accounting Pronouncements
SFAS No. 157, Fair Value Measurements defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands
disclosure requirements relating to fair value measurements. The FASB provided a one year
deferral of the provisions of this pronouncement for non-financial assets and
liabilities, however, the relevant provisions of SFAS 157 required by SFAS 159 were
adopted as of January 1, 2008. SFAS 157 thus becomes effective for our non-financial
assets and liabilities on January 1, 2009. We continue to evaluate the impact of those
elements of this pronouncement.
SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
Including an Amendment of FASB Statement No. 115 permits entities to choose to measure
many financial instruments and certain other items at fair value and consequently report
unrealized gains and losses on such items in earnings. We did not elect the fair value
option with respect to any of our current financial assets or financial liabilities when
the provisions of this statement became effective on January 1, 2008. As a result,
there was no impact upon adoption.
SFAS No. 141(R) Business Combinations requires almost all assets acquired and
liabilities assumed in business combinations to be recorded at fair value as of the
acquisition date, liabilities related to contingent consideration to be remeasured at
fair value in each subsequent reporting period, and all acquisition related costs to be
expensed as incurred. The pronouncement also clarifies the accounting under various
scenarios such as step purchases or situations in which the fair value of assets and
liabilities acquired exceeds the consideration. SFAS 141(R) will be effective for us on
January 1, 2009.
SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements an
Amendment of ARB No. 51 clarifies that a noncontrolling interest in a subsidiary must
be measured at fair value and classified as a separate component of equity. This
pronouncement also outlines the accounting for changes in a parents ownership in a
subsidiary. SFAS 160 will be effective for us on January 1, 2009 and will require us to
reclassify our minority interest liabilities to shareholders equity for the Companys
non-wholly owned consolidated subsidiaries.
SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities
amends and expands the disclosure requirements of SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities to explain why and how an entity uses
derivative instruments, how the hedged items are accounted for under the relevant
literature and how the derivative instruments affect an entitys financial position,
financial performance and cash flows. SFAS 161 will be effective for us on January 1,
2009. This pronouncement will have no impact on our accounting, and we are currently
evaluating the pronouncements additional disclosure requirements.
28
FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments
That May Be Settled in Cash Upon Conversion (Including Partial Cash Settlement) requires
the issuer of a convertible debt instrument that may be settled in cash upon conversion,
including partial cash settlement, to separately account for the debt and equity
components of the instrument. The value to be ascribed to the debt portion of the
instrument is determined using a fair value methodology, with the residual representing
the equity component. The equity component will be recorded as an increase in
stockholders equity, with the debt discount being amortized as additional interest
expense over the expected life of the instrument. FSP APB 14-1 will be effective for our
fiscal year beginning January 1, 2009 and requires retrospective application to all
periods presented. We will apply this guidance to the accounting for our 3.5% Senior
Subordinated Convertible Notes due 2026 (the Notes), which we issued in January 2006.
We expect to assign approximately $70 million to the equity component as of the Notes
issuance date. In addition, interest expense will be restated for all periods presented,
with an increase of approximately $15 million expected for the year ended December 31,
2009. Due to the prepayment features included within the Notes, the recording of
incremental interest expense will be completed in April 2011.
Results of Operations
The following tables present comparative financial data relating to our operating
performance in the aggregate and on a same store basis. Dealership results are only
included in same store comparisons when we have consolidated the acquired entity during the
entirety of both periods being compared. As an example, if a dealership was acquired on
January 15, 2006, the results of the acquired entity would be included in annual same store
comparisons beginning with the year ended December 31, 2008 and in quarterly same store
comparisons beginning with the quarter ended June 30, 2007.
Three Months Ended June 30, 2008 Compared to Three Months Ended June 30, 2007 (dollars
in millions, except per unit amounts)
Total Retail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Total retail unit sales |
|
|
78,472 |
|
|
|
78,028 |
|
|
|
444 |
|
|
|
0.6 |
% |
Total same store retail unit sales |
|
|
71,826 |
|
|
|
74,394 |
|
|
|
(2,568 |
) |
|
|
(3.5 |
%) |
Total retail sales revenue |
|
$ |
2,993.8 |
|
|
$ |
3,068.0 |
|
|
$ |
(74.2 |
) |
|
|
(2.4 |
%) |
Total same store retail sales revenue |
|
$ |
2,778.6 |
|
|
$ |
2,953.1 |
|
|
$ |
(174.5 |
) |
|
|
(5.9 |
%) |
Total retail gross profit |
|
$ |
489.8 |
|
|
$ |
491.4 |
|
|
$ |
(1.6 |
) |
|
|
(0.3 |
%) |
Total same store retail gross profit |
|
$ |
456.9 |
|
|
$ |
476.1 |
|
|
$ |
(19.2 |
) |
|
|
(4.0 |
%) |
Total retail gross margin |
|
|
16.4 |
% |
|
|
16.0 |
% |
|
|
0.4 |
% |
|
|
2.5 |
% |
Total same store retail gross margin |
|
|
16.4 |
% |
|
|
16.1 |
% |
|
|
0.3 |
% |
|
|
1.9 |
% |
Units
Retail data includes retail new vehicle, retail used vehicle, finance and insurance and
service and parts transactions. Retail unit sales of vehicles increased by 444 units, or
0.6%, from 2007 to 2008. The increase is due to a 3,012 unit increase from net dealership
acquisitions during the period, offset by a 2,568, or 3.5%, decrease in same store retail
unit sales. The decrease in same store retail unit sales was driven primarily by decreases
in new retail units sales at our premium brand stores in the U.S. and U.K. and volume foreign
brand stores in the U.S., which was somewhat offset by increases in used retail unit sales at our premium and volume foreign brand stores in the U.S.
Revenues
Retail sales revenue decreased $74.2 million, or 2.4%, from 2007 to 2008. The decrease
is due to a $174.5 million, or 5.9%, decrease in same store revenues, offset by a
$100.3 million increase from net dealership acquisitions. The same store retail revenue
decrease is due to (1) the 3.5% decrease in retail unit sales, which decreased revenue by
$102.5 million, (2) a $409, or 1.1%, decrease
in average new vehicle revenue per unit, which decreased revenue by $18.5 million, and
(3) a $2,189, or 7.1%, decrease in average used vehicle revenue per unit, which decreased
revenue by $55.8 million. These decreases were somewhat offset by a $2.3 million, or 0.7%,
increase in service and parts revenues.
Gross Profit
Retail gross profit decreased $1.6 million, or 0.3%, from 2007 to 2008. The decrease is
due to a $19.2 million, or 4.0%, decrease in same store retail gross profit, offset by a
$17.6 million increase from net dealership acquisitions. The same store retail gross profit
decrease is due to (1) the 3.5% decrease in retail unit sales, which decreased retail gross
profit by $11.0 million, (2) a $249, or 9.9%, decrease in average gross profit per used
vehicle retailed, which decreased retail gross profit by $6.4 million, and (3) a $44, or
1.5%, decrease in average gross profit per new vehicle retailed, which decreased retail
gross profit by $2.0 million. These decreases were somewhat offset by a $0.2 million, or
0.1%, increase in service and parts gross profit.
29
New Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
New retail unit sales |
|
|
50,299 |
|
|
|
51,175 |
|
|
|
(876 |
) |
|
|
(1.7 |
%) |
Same store new retail unit sales |
|
|
45,153 |
|
|
|
48,895 |
|
|
|
(3,742 |
) |
|
|
(7.7 |
%) |
New retail sales revenue |
|
$ |
1,734.4 |
|
|
$ |
1,814.2 |
|
|
$ |
(79.8 |
) |
|
|
(4.4 |
%) |
Same store new retail sales revenue |
|
$ |
1,596.4 |
|
|
$ |
1,748.7 |
|
|
$ |
(152.3 |
) |
|
|
(8.7 |
%) |
New retail sales revenue per unit |
|
$ |
34,483 |
|
|
$ |
35,450 |
|
|
$ |
(967 |
) |
|
|
(2.7 |
%) |
Same store new retail sales revenue per unit |
|
$ |
35,356 |
|
|
$ |
35,765 |
|
|
$ |
(409 |
) |
|
|
(1.1 |
%) |
Gross profit new |
|
$ |
145.8 |
|
|
$ |
151.7 |
|
|
$ |
(5.9 |
) |
|
|
(3.9 |
%) |
Same store gross profit new |
|
$ |
132.6 |
|
|
$ |
145.8 |
|
|
$ |
(13.2 |
) |
|
|
(9.1 |
%) |
Average gross profit per new vehicle retailed |
|
$ |
2,898 |
|
|
$ |
2,965 |
|
|
$ |
(67 |
) |
|
|
(2.3 |
%) |
Same store average gross profit per new
vehicle retailed |
|
$ |
2,937 |
|
|
$ |
2,981 |
|
|
$ |
(44 |
) |
|
|
(1.5 |
%) |
Gross margin % new |
|
|
8.4 |
% |
|
|
8.4 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Same store gross margin % new |
|
|
8.3 |
% |
|
|
8.3 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Units
Retail unit sales of new vehicles decreased 876 units, or 1.7%, from 2007 to 2008. The
decrease is due a 3,742 unit, or 7.7%, decrease in same store retail unit sales during the
period, somewhat offset by a 2,866 unit increase from net dealership acquisitions. The same
store decrease was due primarily to unit sales decreases in our premium brand stores in the
U.S. volume foreign brand stores in the U.S.
Revenues
New vehicle retail sales revenue decreased $79.8 million, or 4.4%, from 2007 to 2008.
The decrease is due to a $152.3 million, or 8.7%, decrease in same store revenues, somewhat
offset by a $72.5 million increase from net dealership acquisitions. The same store revenue
decrease is due primarily to the 7.7% decrease in retail unit sales, which reduced revenue
by $133.8 million, coupled with the $409, or 1.1%, decrease in average selling prices per
unit, which decreased revenue by $18.5 million.
Gross Profit
Retail gross profit from new vehicle sales decreased $5.9 million, or 3.9%, from 2007
to 2008. The decrease is due to a $13.2 million, or 9.1%, decrease in same store gross
profit, offset by a $7.3 million increase from net dealership acquisitions. The same store
decrease is due primarily to the 7.7% decrease in retail unit sales, which reduced gross
profit by $11.2 million, coupled with a $44, or 1.5%, decrease in the average gross profit
per new vehicle retailed, which decreased gross profit by $2.0 million.
30
Used Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Used retail unit sales |
|
|
28,173 |
|
|
|
26,853 |
|
|
|
1,320 |
|
|
|
4.9 |
% |
Same store used retail unit sales |
|
|
26,673 |
|
|
|
25,499 |
|
|
|
1,174 |
|
|
|
4.6 |
% |
Used retail sales revenue |
|
$ |
819.2 |
|
|
$ |
825.2 |
|
|
$ |
(6.0 |
) |
|
|
(0.7 |
%) |
Same store used retail sales revenue |
|
$ |
767.4 |
|
|
$ |
789.5 |
|
|
$ |
(22.1 |
) |
|
|
(2.8 |
%) |
Used retail sales revenue per unit |
|
$ |
29,077 |
|
|
$ |
30,729 |
|
|
$ |
(1,652 |
) |
|
|
(5.4 |
%) |
Same store used retail sales revenue per unit |
|
$ |
28,772 |
|
|
$ |
30,961 |
|
|
$ |
(2,189 |
) |
|
|
(7.1 |
%) |
Gross profit used |
|
$ |
63.7 |
|
|
$ |
65.6 |
|
|
$ |
(1.9 |
) |
|
|
(2.9 |
%) |
Same store gross profit used |
|
$ |
60.5 |
|
|
$ |
64.2 |
|
|
$ |
(3.7 |
) |
|
|
(5.8 |
%) |
Average gross profit per used vehicle retailed |
|
$ |
2,262 |
|
|
$ |
2,444 |
|
|
$ |
(182 |
) |
|
|
(7.4 |
%) |
Same store average gross profit per used
vehicle retailed |
|
$ |
2,270 |
|
|
$ |
2,519 |
|
|
$ |
(249 |
) |
|
|
(9.9 |
%) |
Gross margin % used |
|
|
7.8 |
% |
|
|
8.0 |
% |
|
|
(0.2 |
%) |
|
|
(2.5 |
%) |
Same store gross margin % used |
|
|
7.9 |
% |
|
|
8.1 |
% |
|
|
(0.2 |
%) |
|
|
(2.5 |
%) |
Units
Retail unit sales of used vehicles increased 1,320 units, or 4.9%, from 2007 to 2008.
The increase is due to a 1,174 unit, or 4.6%, increase in same store retail unit sales,
coupled with a 146 unit increase from net dealership acquisitions. The same store increase
was due primarily to unit sales increases in our premium and volume foreign brand stores in the U.S.
Revenues
Used vehicle retail sales revenue decreased $6.0 million, or 0.7%, from 2007 to 2008.
The decrease is due to a $22.1 million, or 2.8%, decrease in same store revenues, somewhat
offset by a $16.1 million increase from net dealership acquisitions. The same store revenue
decrease is due to a $2,189, or 7.1% decrease in comparative average selling prices per
vehicle, which decreased revenue by $55.8 million, somewhat offset by the 4.6% increase in
same store retail unit sales which increased revenue by $33.7 million.
Gross Profit
Retail gross profit from used vehicle sales decreased $1.9 million, or 2.9%, from 2007
to 2008. The decrease is due to a $3.7 million, or 5.8%, decrease in same store gross
profit, somewhat offset by a $1.8 million increase from net dealership acquisitions. The
decrease in same store gross profit is due to the $249, or 9.9%, decrease in average gross
profit per used vehicle retailed which decreased retail gross profit by $6.4 million,
somewhat offset by the 4.6% increase in used retail unit sales, which increased gross profit
by $2.7 million.
Finance and Insurance Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Finance and insurance revenue |
|
$ |
76.0 |
|
|
$ |
75.1 |
|
|
$ |
0.9 |
|
|
|
1.2 |
% |
Same store finance and insurance revenue |
|
$ |
70.8 |
|
|
$ |
73.3 |
|
|
$ |
(2.5 |
) |
|
|
(3.4 |
%) |
Finance and insurance revenue per unit |
|
$ |
968 |
|
|
$ |
963 |
|
|
$ |
5 |
|
|
|
0.5 |
% |
Same store finance and insurance revenue per unit |
|
$ |
985 |
|
|
$ |
985 |
|
|
$ |
0.0 |
|
|
|
0.0 |
% |
Finance and insurance revenue increased $0.9 million, or 1.2%, from 2007 to 2008. The
increase is due to a $3.4 million increase from net dealership acquisitions during the
period, somewhat offset by a $2.5 million, or 3.4%, decrease in same store revenues. The
same store revenue decrease is due to the 3.5% decrease in retail unit sales which decreased
revenue by $2.5 million.
31
Service and Parts Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Service and parts revenue |
|
$ |
364.1 |
|
|
$ |
353.5 |
|
|
$ |
10.6 |
|
|
|
3.0 |
% |
Same store service and parts revenue |
|
$ |
343.9 |
|
|
$ |
341.6 |
|
|
$ |
2.3 |
|
|
|
0.7 |
% |
Gross profit |
|
$ |
204.3 |
|
|
$ |
198.9 |
|
|
$ |
5.4 |
|
|
|
2.7 |
% |
Same store gross profit |
|
$ |
193.0 |
|
|
$ |
192.8 |
|
|
$ |
0.2 |
|
|
|
0.1 |
% |
Gross margin |
|
|
56.1 |
% |
|
|
56.3 |
% |
|
|
(0.2 |
%) |
|
|
(0.4 |
%) |
Same store gross margin |
|
|
56.1 |
% |
|
|
56.4 |
% |
|
|
(0.3 |
%) |
|
|
(0.5 |
%) |
Revenues
Service and parts revenue increased $10.6 million, or 3.0%, from 2007 to 2008. The
increase is due to a $2.3 million, or 0.7%, increase in same store revenues, coupled with an
$8.3 million increase from net dealership acquisitions during the period. We believe that
our service and parts business is being positively impacted by the growth in total retail
unit sales at our dealerships in recent years and capacity increases in our service and
parts operations resulting from our ongoing facility improvement and expansion programs.
Gross Profit
Service and parts gross profit increased $5.4 million, or 2.7%, from 2007 to 2008. The
increase is due to a $0.2 million, or 0.1%, increase in same store gross profit, coupled
with a $5.2 million increase from net dealership acquisitions during the period. The same
store gross profit increase is due to the $2.3 million, or 0.7%, increase in same store
revenues, which increased gross profit by $1.3 million, somewhat offset by a 30 basis point
decrease in gross margin, which decreased gross profit by $1.1 million.
Distribution
The Companys wholly-owned subsidiary, smart USA Distributor LLC (smart USA), began
distributing the smart for two vehicle in the U.S. during 2008. Total distribution segment
revenue during the three months ended June 30, 2008 aggregated to $116.9 million. Segment
gross profit totaled $15.8 million, which includes gross profit on vehicle and parts sales.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) increased $13.3 million, or 3.5%,
from $385.2 million to $398.5 million. The aggregate increase is primarily due to a
$19.0 million increase from net dealership acquisitions, somewhat offset by a $5.7 million,
or 1.5%, decrease in same store SG&A. The decrease in same store SG&A is due to a net
decrease in variable selling expenses, including decreases in variable compensation as a
result of the 4.0% decrease in same store retail gross profit versus the prior year,
somewhat offset by additional costs associated with the smart distribution business and
increased rent and other costs relating to our ongoing facility improvement and expansion
programs. SG&A expenses increased as a percentage of gross profit from 78.2% to 79.5%.
Depreciation and Amortization
Depreciation and amortization increased $0.7 million, or 5.7%, from $12.9 million to
$13.6 million. The increase is due to a $0.5 million, or 3.7%, increase in same store
depreciation and amortization, coupled with a $0.2 million increase from net dealership
acquisitions. The same store increase is due in large part to our ongoing facility
improvement and expansion program.
Floor Plan Interest Expense
Floor plan interest expense decreased $2.6 million, or 13.8%, from $19.2 million to
$16.6 million. The decrease is due to a $3.1 million, or 16.6%, decrease in same store floor
plan interest expense, somewhat offset by a $0.5 million increase from net dealership
acquisitions. The same store decrease is due in large part to decreases in the underlying
variable rates of our revolving floor plan arrangements.
32
Other Interest Expense
Other interest expense decreased $0.3 million, or 2.1%, from $12.9 million to $12.6
million. The decrease is due primarily to a decrease in our weighted average interest rate,
somewhat offset by an increase in our average total outstanding indebtedness in 2008 versus
2007.
Income Taxes
Income taxes decreased $1.8 million, or 7.5%, from $24.1 million to $22.3 million. The
decrease from 2007 to 2008 is due to the decrease in our pre-tax income versus the prior
year, coupled with a decrease in our overall effective income tax rate.
Six Months Ended June 30, 2008 Compared to Six Months Ended June 30, 2007 (dollars in
millions, except per unit amounts)
Our results for the six months ended June 30, 2007 include a charge of $18.6 million
($12.3 million after-tax), or $0.13 per share, relating to the redemption of our
$300.0 million aggregate principal amount of 9.625% Senior Subordinated Notes at a price of
104.813% in March of 2007.
Total Retail Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Total retail unit sales |
|
|
150,933 |
|
|
|
148,683 |
|
|
|
2,250 |
|
|
|
1.5 |
% |
Total same store retail unit sales |
|
|
138,838 |
|
|
|
143,180 |
|
|
|
(4,342 |
) |
|
|
(3.0 |
%) |
Total retail sales revenue |
|
$ |
5,870.3 |
|
|
$ |
5,888.9 |
|
|
$ |
(18.6 |
) |
|
|
(0.3 |
%) |
Total same store retail sales revenue |
|
$ |
5,460.6 |
|
|
$ |
5,702.4 |
|
|
$ |
(241.8 |
) |
|
|
(4.2 |
%) |
Total retail gross profit |
|
$ |
973.3 |
|
|
$ |
950.1 |
|
|
$ |
23.2 |
|
|
|
2.4 |
% |
Total same store retail gross profit |
|
$ |
911.7 |
|
|
$ |
926.6 |
|
|
$ |
(14.9 |
) |
|
|
(1.6 |
%) |
Total retail gross margin |
|
|
16.6 |
% |
|
|
16.1 |
% |
|
|
0.5 |
% |
|
|
3.1 |
% |
Total same store retail gross margin |
|
|
16.7 |
% |
|
|
16.3 |
% |
|
|
0.4 |
% |
|
|
2.5 |
% |
Units
Retail data includes retail new vehicle, retail used vehicle, finance and insurance and
service and parts transactions. Retail unit sales of vehicles increased by 2,250 units, or
1.5%, from 2007 to 2008. The increase is due to a 6,592 unit increase from net dealership
acquisitions during the period, offset by a 4,342 unit, or 3.0%, decrease in same store
retail unit sales. The decrease in same store retail unit sales was driven primarily by
decreases in new retail units sales at our premium brand stores in the U.S. and U.K., volume
foreign brand stores in the U.S. and used retail unit sales at our premium brand stores in
the U.K., which was somewhat offset by increases in used retail unit sales at our premium
brand stores in the U.S. and volume foreign brand stores in the U.S. and U.K.
Revenues
Retail sales revenue decreased $18.6 million, or 0.3%, from 2007 to 2008. The decrease
is due to a $241.8 million, or 4.2%, decrease in same store revenues, offset by a
$223.2 million increase from net dealership acquisitions during the period. The same store
revenue decrease is due to (1) the 3.0% decrease in retail unit sales, which decreased
revenue by $175.5 million and (2) a $1,525, or 5.0%, decrease in average used vehicle
revenue per unit, which decreased revenue by $76.3 million. These decreases were somewhat
offset by (1) a $35, or 3.6%, increase in average finance and insurance revenue per unit,
which increased revenue by $4.8 million, and (2) a $5.2 million, or 0.8%, increase in
service and parts revenues.
Gross Profit
Retail gross profit increased $23.2 million, or 2.4%, from 2007 to 2008. The increase
is due to a $38.1 million increase from net dealership acquisitions during the period,
offset by a $14.9 million, or 1.6%, decrease in same store retail gross profit. The same
store retail gross profit decrease is due to (1) the 3.0% decrease in retail unit sales,
which decreased retail gross profit by $18.8 million, (2) a $3, or 0.1%, decrease in average
gross profit per new vehicle retailed, which decreased retail gross profit by $0.3 million
and (3) an $85, or 3.4%, decrease in average gross profit per used vehicle retailed, which
decreased retail gross profit by $4.3 million. These decreases were offset by (1) a $35, or
3.6%, increase in average finance and insurance revenue per unit, which increased retail
gross profit by $5.0 million, and (2) a $3.5 million, or 0.9%, increase in service and parts
gross profit.
33
New Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
New retail unit sales |
|
|
95,849 |
|
|
|
96,280 |
|
|
|
(431 |
) |
|
|
(0.4 |
%) |
Same store new retail unit sales |
|
|
86,431 |
|
|
|
93,158 |
|
|
|
(6,727 |
) |
|
|
(7.2 |
%) |
New retail sales revenue |
|
$ |
3,370.0 |
|
|
$ |
3,438.9 |
|
|
$ |
(68.9 |
) |
|
|
(2.0 |
%) |
Same store new retail sales revenue |
|
$ |
3,098.8 |
|
|
$ |
3,339.9 |
|
|
$ |
(241.1 |
) |
|
|
(7.2 |
%) |
New retail sales revenue per unit |
|
$ |
35,160 |
|
|
$ |
35,718 |
|
|
$ |
(558 |
) |
|
|
(1.6 |
%) |
Same store new retail sales
revenue per unit |
|
$ |
35,853 |
|
|
$ |
35,852 |
|
|
$ |
1 |
|
|
|
0.0 |
% |
Gross profit new |
|
$ |
283.7 |
|
|
$ |
288.3 |
|
|
$ |
(4.6 |
) |
|
|
(1.6 |
%) |
Same store gross profit new |
|
$ |
259.2 |
|
|
$ |
279.7 |
|
|
$ |
(20.5 |
) |
|
|
(7.3 |
%) |
Average gross profit per new
vehicle retailed |
|
$ |
2,960 |
|
|
$ |
2,994 |
|
|
$ |
(34 |
) |
|
|
(1.1 |
%) |
Same store average gross profit
per new vehicle retailed |
|
$ |
2,999 |
|
|
$ |
3,002 |
|
|
$ |
(3 |
) |
|
|
(0.1 |
%) |
Gross margin % new |
|
|
8.4 |
% |
|
|
8.4 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Same store gross margin % new |
|
|
8.4 |
% |
|
|
8.4 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Units
Retail unit sales of new vehicles decreased 431 units, or 0.4%, from 2007 to 2008. The
decrease is due to a 6,727 unit, or 7.2%, decrease in same store retail unit sales, offset
by a 6,296 unit increase from net dealership acquisitions during the period. The same store
decrease was due primarily to decreases in our premium brands in the U.S. and U.K. and
volume foreign brands in the U.S.
Revenues
New vehicle retail sales revenue decreased $68.9 million, or 2.0%, from 2007 to 2008.
The decrease is due to a $241.1 million, or 7.2%, decrease in same store revenues, offset by
a $172.2 million increase from net dealership acquisitions during the period. The same store
revenue decrease is due primarily to the 7.2% decrease in retail unit sales.
Gross Profit
Retail gross profit from new vehicle sales decreased $4.6 million, or 1.6%, from 2007
to 2008. The decrease is due to a $20.5 million, or 7.3%, decrease in same store gross
profit, offset by a $15.9 million increase from net dealership acquisitions during the
period. The same store decrease is due to the 7.2% decrease in new retail unit sales, which
decreased gross profit by $20.2 million, coupled with a $3, or 0.1%, decrease in average
gross profit per new vehicle retailed, which decreased gross profit by $0.3 million.
34
Used Vehicle Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Used retail unit sales |
|
|
55,084 |
|
|
|
52,403 |
|
|
|
2,681 |
|
|
|
5.1 |
% |
Same store used retail unit sales |
|
|
52,407 |
|
|
|
50,022 |
|
|
|
2,385 |
|
|
|
4.8 |
% |
Used retail sales revenue |
|
$ |
1,622.6 |
|
|
$ |
1,605.5 |
|
|
$ |
17.1 |
|
|
|
1.1 |
% |
Same store used retail sales revenue |
|
$ |
1,533.3 |
|
|
$ |
1,539.8 |
|
|
$ |
(6.5 |
) |
|
|
(0.4 |
%) |
Used retail sales revenue per unit |
|
$ |
29,458 |
|
|
$ |
30,638 |
|
|
$ |
(1,180 |
) |
|
|
(3.9 |
%) |
Same store used retail sales revenue per unit |
|
$ |
29,257 |
|
|
$ |
30,782 |
|
|
$ |
(1,525 |
) |
|
|
(5.0 |
%) |
Gross profit used |
|
$ |
131.3 |
|
|
$ |
126.7 |
|
|
$ |
4.6 |
|
|
|
3.6 |
% |
Same store gross profit used |
|
$ |
125.4 |
|
|
$ |
123.9 |
|
|
$ |
1.5 |
|
|
|
1.2 |
% |
Average gross profit per used vehicle
retailed |
|
$ |
2,384 |
|
|
$ |
2,418 |
|
|
$ |
(34 |
) |
|
|
(1.4 |
%) |
Same store average gross profit per used
vehicle retailed |
|
$ |
2,392 |
|
|
$ |
2,477 |
|
|
$ |
(85 |
) |
|
|
(3.4 |
%) |
Gross margin % used |
|
|
8.1 |
% |
|
|
7.9 |
% |
|
|
0.2 |
% |
|
|
2.5 |
% |
Same store gross margin % used |
|
|
8.2 |
% |
|
|
8.0 |
% |
|
|
0.2 |
% |
|
|
2.5 |
% |
Units
Retail unit sales of used vehicles increased 2,681 units, or 5.1%, from 2007 to 2008.
The increase is due to a 2,385 unit, or 4.8%, increase in same store retail unit sales,
coupled with a 296 unit increase from net dealership acquisitions during the period. The
same store increase was due primarily to increases in premium brands in the U.S. and volume
foreign brands in the U.S and U.K.
Revenues
Used vehicle retail sales revenue increased $17.1 million, or 1.1%, from 2007 to 2008.
The increase is due to a $23.6 million increase from net dealership acquisitions during the
period, somewhat offset by a $6.5 million, or 0.4%, decrease in same store revenues. The
same store revenue decrease is due primarily to a $1,525, or 5.0%, decrease in comparative
average selling prices per vehicle, which decreased revenue by $76.3 million, offset by the
4.8% increase in retail unit sales, which increased revenue by $69.8 million.
Gross Profit
Retail gross profit from used vehicle sales increased $4.6 million, or 3.6%, from 2007
to 2008. The increase is due to a $1.5 million, or 1.2%, increase in same store gross
profit, coupled with a $3.1 million increase from net dealership acquisitions during the
period. The increase in same store gross profit is due primarily to the 4.8% increase in
used retail unit sales, which increased gross profit by $5.8 million, offset by the $85, or
3.4%, decrease in average gross profit per used vehicle retailed, which decreased retail
gross profit by $4.3 million.
Finance and Insurance Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Finance and insurance revenue |
|
$ |
150.6 |
|
|
$ |
143.0 |
|
|
$ |
7.6 |
|
|
|
5.3 |
% |
Same store finance and insurance revenue |
|
$ |
141.1 |
|
|
$ |
140.6 |
|
|
$ |
0.5 |
|
|
|
0.4 |
% |
Finance and insurance revenue per unit |
|
$ |
998 |
|
|
$ |
962 |
|
|
$ |
36 |
|
|
|
3.7 |
% |
Same store finance and insurance
revenue per unit |
|
$ |
1,017 |
|
|
$ |
982 |
|
|
$ |
35 |
|
|
|
3.6 |
% |
Finance and insurance revenue increased $7.6 million, or 5.3%, from 2007 to 2008. The
increase is due to a $0.5 million, or 0.4%, increase in same store revenues, coupled with a
$7.1 million increase from net dealership acquisitions during the period. The same store
revenue increase is due primarily to the $35, or 3.6%, increase in average finance and
insurance revenue per unit, which increased revenue by $4.8 million, somewhat offset by the
3.0% decrease in retail unit sales, which decreased revenue by $4.3 million.
35
Service and Parts Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 vs. 2007 |
|
|
|
2008 |
|
|
2007 |
|
|
Change |
|
|
% Change |
|
Service and parts revenue |
|
$ |
727.0 |
|
|
$ |
701.5 |
|
|
$ |
25.5 |
|
|
|
3.6 |
% |
Same store service and parts revenue |
|
$ |
687.4 |
|
|
$ |
682.2 |
|
|
$ |
5.2 |
|
|
|
0.8 |
% |
Gross profit |
|
$ |
407.7 |
|
|
$ |
392.0 |
|
|
$ |
15.7 |
|
|
|
4.0 |
% |
Same store gross profit |
|
$ |
385.9 |
|
|
$ |
382.4 |
|
|
$ |
3.5 |
|
|
|
0.9 |
% |
Gross margin |
|
|
56.1 |
% |
|
|
55.9 |
% |
|
|
0.2 |
% |
|
|
0.4 |
% |
Same store gross margin |
|
|
56.1 |
% |
|
|
56.1 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Revenues
Service and parts revenue increased $25.5 million, or 3.6%, from 2007 to 2008. The
increase is due to the $5.2 million, or 0.8%, increase in same store revenues, coupled with
a $20.3 million increase from net dealership acquisitions during the period. We believe that
our service and parts business is being positively impacted by the growth in total retail
unit sales at our dealerships in recent years and capacity increases in our service and
parts operations resulting from our ongoing facility improvement and expansion programs.
Gross Profit
Service and parts gross profit increased $15.7 million, or 4.0%, from 2007 to 2008. The
increase is due to the $3.5 million, or 0.9%, increase in same store gross profit, coupled
with a $12.2 million increase from net dealership acquisitions during the period. The same
store gross profit increase is due to the $5.2 million, or 0.8%, increase in same store
revenues, which increased gross profit by $3.5 million.
Distribution
The Companys wholly-owned subsidiary, smart USA Distributor LLC (smart USA), began
distributing the smart for two vehicle in the U.S. during 2008. Total distribution segment
revenue during the first six months of 2008 aggregated to $192.4 million. Segment gross
profit totaled $26.5 million, which includes gross profit on vehicle and parts sales.
Selling, General and Administrative
Selling, general and administrative expenses (SG&A) increased $42.1 million, or 5.6%,
from $754.9 million to $797.0 million. The aggregate increase is primarily due to a
$41.6 million increase from net dealership acquisitions during the period, coupled with a
$0.5 million, or 0.1%, increase in same store SG&A. The increase in same store SG&A is due
in large part to additional costs associated with the smart distribution business and
increased rent and other costs relating to our ongoing facility improvement and expansion
programs, largely offset by a net decrease in variable selling expenses, including decreases
in variable compensation, as a result of the 1.6% decrease in same store retail gross profit
over the prior year. SG&A expenses increased as a percentage of gross profit from 79.1% to
80.1%.
Depreciation and Amortization
Depreciation and amortization increased $1.9 million, or 7.4%, from $25.2 million to
$27.1 million. The increase is due to a $1.3 million, or 5.4%, increase in same store
depreciation and amortization, coupled with a $0.6 million increase from net dealership
acquisitions during the period. The same store increase is due in large part to our ongoing
facility improvement and expansion program.
Floor Plan Interest Expense
Floor plan interest expense decreased $1.2 million, or 3.3%, from $35.1 million to
$33.9 million. The decrease is due to a $2.4 million, or 7.1%, decrease in same store floor
plan interest expense, somewhat offset by a $1.2 million increase from net dealership
acquisitions during the period. The same store decrease is due in large part to decreases in
the underlying variable rates of our revolving floor plan arrangements, somewhat offset by
increases in our average amounts outstanding.
36
Other Interest Expense
Other interest expense decreased $7.0 million, or 22.2%, from $31.7 million to
$24.7 million. The decrease is due primarily to a decrease in our average total outstanding
indebtedness in 2008 versus 2007, coupled with a decrease in our weighted average interest
rate.
In March 2007, we redeemed our outstanding $300.0 million 9.625% Senior Subordinated
Notes due 2012 at a price of 104.813%. We incurred an $18.6 million pretax charge in
connection with the redemption, consisting of the $14.4 million redemption premium and the
write-off of $4.2 million of unamortized deferred financing costs.
Income Taxes
Income taxes increased $8.5 million, or 26.1%, from $32.9 million to $41.4 million. The
increase from 2007 to 2008 is due to our increase in pre-tax income versus the prior year,
somewhat offset by a reduction in our overall effective income tax rate.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing, the
acquisition of new dealerships, the improvement and expansion of existing facilities, the
construction of new facilities, dividends and potentially repurchases of common stock under
the program discussed below. Historically, these cash requirements have been met through
cash flow from operations, borrowings under our credit agreements and floor plan
arrangements, the issuance of debt securities, sale-leaseback transactions or the issuance
of equity securities. As of June 30, 2008, we had working capital of $151.5 million,
including $17.7 million of cash available to fund our operations and capital commitments. In
addition, we had $250.0 million and £65 million ($130.0 million) available for borrowing
under our U.S. credit agreement and our U.K. credit agreement, respectively, each of which
is discussed below.
We paid dividends of seven cents per share on March 1, 2007, June 1, 2007 and September
4, 2007 and dividends of nine cents per share on December 3, 2007, March 3, 2008 and June 2,
2008. We have also declared a dividend of nine cents per share payable on September 2, 2008
to shareholders of record on August 11, 2008. Future quarterly or other cash dividends will
depend upon our earnings, capital requirements, financial condition, restrictions on any
then existing indebtedness and other factors considered relevant by our Board of Directors.
We have historically expanded our automotive retail operations through organic growth
and the acquisition of retail automotive dealerships. In addition, one of our subsidiaries
is the exclusive distributor of smart fortwo vehicles in the United States and Puerto Rico.
We believe that cash flow from operations and our existing capital resources, including the
liquidity provided by our credit agreements and floor plan financing arrangements, will be
sufficient to fund our operations and commitments for at least the next twelve months. To
the extent we pursue additional significant acquisitions, other expansion opportunities,
significant repurchases of our common stock, or refinance existing debt, we may need to
raise additional capital either through the public or private issuance of equity or debt
securities or through additional borrowings which sources of funds may not necessarily be
available on terms acceptable to us, if at all.
Our board of directors has approved a stock repurchase program for up to $150.0 million
of our outstanding common stock. We may, from time to time as market conditions warrant,
purchase our outstanding common stock on the open market and in privately negotiated
transactions and, potentially, via a tender offer or a pre-arranged trading plan. We
currently intend to fund any repurchases through cash flow from operations and borrowings
under our U.S. credit facility. The decision to make stock repurchases will be based on such
factors as the market price of our common stock versus our view of its intrinsic value, the
potential impact on our capital structure and the expected return on competing uses of
capital such as strategic store acquisitions and capital investments in our current
businesses, as well as any then-existing limits imposed by our finance agreements and
securities trading policy. We have not made any repurchases under this program as of June 30, 2008.
Inventory Financing
We finance substantially all of our new and a portion of our used vehicle inventories
under revolving floor plan arrangements with various lenders. In the U.S., the floor plan
arrangements are due on demand; however, we are generally not required to make loan
principal repayments prior to the sale of the vehicles financed. We typically make monthly
interest payments on the amount financed. In the U.K., substantially all of our floor plan
arrangements are payable on demand or have an original maturity of 90 days or less and we
are generally required to repay floor plan advances at the earlier of the sale of the
vehicles financed or the stated maturity. The floor plan agreements grant a security
interest in substantially all of the assets of our dealership subsidiaries and in the United
States are guaranteed by the Company. Interest rates under the floor plan arrangements are
variable and increase or decrease based on changes in various benchmarks. We receive
non-refundable credits from certain of our vehicle manufacturers, which are treated as a
reduction of cost of sales as vehicles are sold.
37
U.S. Credit Agreement
We are party to a $479.0 million credit agreement with DCFS USA LLC and Toyota Motor
Credit Corporation, as amended (the U.S. credit agreement), which provides for up to
$250.0 million of borrowing capacity for working capital, acquisitions, capital
expenditures, investments and for other general corporate purposes, a $219.0 million
non-amortizing term loan, and an additional $10 million of availability for letters of
credit, through September 30, 2010. The revolving loans bear interest at defined LIBOR plus
1.75%, subject to an incremental 0.50% for uncollateralized borrowings in excess of a
defined borrowing base. The credit agreement was amended on June 26, 2008 in conjunction
with our purchase of the limited partnership interest in Penske Truck Leasing Co., L.P. to
provide the additional non-amortizing term loan of $219.0 million. The term loan, which
bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be
re-borrowed.
The U.S. credit agreement is fully and unconditionally guaranteed on a joint and
several basis by our domestic subsidiaries and contains a number of significant covenants
that, among other things, restrict our ability to dispose of assets, incur additional
indebtedness, repay other indebtedness, pay dividends, create liens on assets, make
investments or acquisitions and engage in mergers or consolidations. We are also required to
comply with specified financial and other tests and ratios, each as defined in the U.S.
credit agreement, including: a ratio of current assets to current liabilities, a fixed
charge coverage ratio, a ratio of debt to stockholders equity, a ratio of debt to earnings
before interest, taxes, depreciation and amortization (EBITDA), a ratio of domestic debt
to domestic EBITDA, and a measurement of stockholders equity. A breach of these
requirements would give rise to certain remedies under the agreement, the most severe of
which is the termination of the agreement and acceleration of the amounts owed. As of June
30, 2008, the Company was in compliance with all covenants under the U.S. credit agreement,
and we believe we will remain in compliance with such covenants for the foreseeable future.
In making such determination, we have considered the current margin of compliance with the
covenants and our expected future results of operations, working capital requirements,
acquisitions, capital expenditures and investments in the U.S. See Forward Looking
Statements.
The U.S. credit agreement also contains typical events of default, including change of
control, non-payment of obligations and cross-defaults to our other material indebtedness.
Substantially all of our domestic assets are subject to security interests granted to
lenders under the U.S. credit agreement. As of June 30, 2008, $219.0 million of term loans
and $0.5 million of letters of credit were outstanding under this facility. No revolving
loans were outstanding as of June 30, 2008.
U.K. Credit Agreement
Our subsidiaries in the U.K. are party to an agreement with the Royal Bank of Scotland
plc, as agent for National Westminster Bank plc, which provides for a multi-option credit
agreement, a fixed rate credit agreement and a seasonally adjusted overdraft line of credit
to be used to finance acquisitions, working capital, and general corporate purposes. The
U.K. credit agreement provides for (1) up to £70.0 million in revolving loans through
August 31, 2011, which have an original maturity of 90 days or less and bear interest
between defined LIBOR plus 0.65% and defined LIBOR plus 1.25%, (2) a £30.0 million funded
term loan which bears interest between 5.94% and 6.54% and is payable ratably in quarterly
intervals through June 30, 2011, and (3) a seasonally adjusted overdraft line of credit for
up to £30.0 million that bears interest at the Bank of England Base Rate plus 1.00%, and
matures on August 31, 2011.
The U.K. credit agreement is fully and unconditionally guaranteed on a joint and
several basis by our U.K. subsidiaries, and contains a number of significant covenants that,
among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose
of assets, incur additional indebtedness, repay other indebtedness, create liens on assets,
make investments or acquisitions and engage in mergers or consolidations. In addition, our
U.K. subsidiaries are required to comply with specified ratios and tests, each as defined in
the U.K. credit agreement, including: a ratio of earnings before interest and taxes plus
rental payments to interest plus rental payments (as defined), a measurement of maximum
capital expenditures, and a debt to EBITDA ratio (as defined). A breach of these
requirements would give rise to certain remedies under the agreement, the most severe of
which is the termination of the agreement and acceleration of the amounts owed. As of June
30, 2008, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit
agreement, and we believe we will remain in compliance with such covenants for the
foreseeable future. In making such determination, we have considered the current margin of
compliance with the covenants and our expected future results of operations, working capital
requirements, acquisitions, capital expenditures and investments in the U.K. See Forward
Looking Statements.
The U.K. credit agreement also contains typical events of default, including change of
control and non-payment of obligations and cross-defaults to other material indebtedness of
our U.K. subsidiaries. Substantially all of our U.K. subsidiaries assets not pledged as
security under floor plan arrangements are subject to security interests granted to lenders
under the U.K. credit agreement. As of June 30, 2008, outstanding loans under the U.K.
credit agreement amounted to £48.6 million ($96.8 million).
38
7.75% Senior Subordinated Notes
On December 7, 2006 we issued $375.0 million aggregate principal amount of 7.75% Senior
Subordinated Notes due 2016 (the 7.75% Notes). The 7.75% Notes are unsecured senior
subordinated notes and are subordinate to all existing and future senior debt, including
debt under our credit agreements and floor plan indebtedness. The 7.75% Notes are guaranteed
by substantially all wholly-owned domestic subsidiaries on an unsecured senior subordinated
basis. We can redeem all or some of the 7.75% Notes at our option beginning in December 2011
at specified redemption prices, or prior to December 2011 at 100% of the principal amount of
the notes plus an applicable make-whole premium, as defined. In addition, we may redeem up
to 40% of the 7.75% Notes at specified redemption prices using the proceeds of certain
equity offerings before December 15, 2009. Upon certain sales of assets or specific kinds of
changes of control, we are required to make an offer to purchase the 7.75% Notes. The 7.75%
Notes also contain customary negative covenants and events of default. As of June 30, 2008,
we were in compliance with all negative covenants and there were no events of default.
Senior Subordinated Convertible Notes
On January 31, 2006, we issued $375.0 million aggregate principal amount of 3.50%
senior subordinated convertible notes due 2026 (the Convertible Notes). The Convertible
Notes mature on April 1, 2026, unless earlier converted, redeemed or purchased by us. The
Convertible Notes are unsecured senior subordinated obligations and are subordinate to all
future and existing debt under our credit agreement and floor plan indebtedness. The
convertible notes are guaranteed on an unsecured senior subordinated basis by substantially
all of our wholly owned domestic subsidiaries. The guarantees are full and unconditional
and joint and several. The Convertible Notes also contain customary negative covenants and
events of default. As of June 30, 2008, we were in compliance with all negative covenants
and there were no events of default.
Holders of the convertible notes may convert them based on a conversion rate of 42.2052
shares of our common stock per $1,000 principal amount of the Convertible Notes (which is
equal to a conversion price of approximately $23.69 per share), subject to adjustment, only
under the following circumstances: (1) in any quarterly period, if the closing price of our
common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.43
(subject to adjustment), (2) for specified periods, if the trading price of the Convertible
Notes falls below specific thresholds, (3) if the Convertible Notes are called for
redemption, (4) if specified distributions to holders of our common stock are made or
specified corporate transactions occur, (5) if a fundamental change (as defined) occurs, or
(6) during the ten trading days prior to, but excluding, the maturity date.
Upon conversion of the Convertible Notes, for each $1,000 principal amount of the
Convertible Notes, a holder will receive an amount in cash, in lieu of shares of our common
stock, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the
manner set forth in the related indenture covering the Convertible Notes, of the number of
shares of common stock equal to the conversion rate. If the conversion value exceeds $1,000,
we will also deliver, at our election, cash, common stock or a combination of cash and
common stock with respect to the remaining value deliverable upon conversion.
In the event of a conversion due to a change of control on or before April 6, 2011, we
will pay, to the extent described in the indenture, a make-whole premium by increasing the
conversion rate applicable to such Convertible Notes. In addition, we will pay contingent
interest in cash, commencing with any six-month period from April 1 to September 30 and from
October 1 to March 31, beginning on April 1, 2011, if the average trading price of a
Convertible Note for the five trading days ending on the third trading day immediately
preceding the first day of that six-month period equals 120% or more of the principal amount
of the Convertible Note.
On or after April 6, 2011, we may redeem the Convertible Notes, in whole at any time or
in part from time to time, for cash at a redemption price of 100% of the principal amount of
the Convertible Notes to be redeemed, plus any accrued and unpaid interest to the applicable
redemption date. Holders of the Convertible Notes may require us to purchase all or a
portion of their Convertible Notes for cash on each of April 1, 2011, April 1, 2016 or
April 1, 2021 at a purchase price equal to 100% of the principal amount of the Convertible
Notes to be purchased, plus accrued and unpaid interest, if any, to the applicable purchase
date.
9.625% Senior Subordinated Notes
In March 2007, we redeemed our outstanding $300.0 million aggregate principal amount of
9.625% senior subordinated notes due 2012 (the 9.625% Notes). The 9.625% Notes were
unsecured senior subordinated notes and were subordinate to all existing senior debt,
including debt under our credit agreements and floor plan indebtedness. We incurred an
$18.6 million pre-tax charge in connection with the redemption, consisting of a
$14.4 million redemption premium and the write-off of $4.2 million of unamortized deferred
financing costs.
39
Interest Rate Swaps
The Company is party to interest rate swap agreements through January 7, 2011 pursuant
to which the LIBOR portion of $300.0 million of the Companys floating rate floor plan debt
was fixed at 3.67%. We may terminate this arrangement at any time subject to the settlement
of the then current fair value of the swap arrangement. The swaps are designated as cash
flow hedges of future interest payments of LIBOR based U.S. floor plan borrowings. During
the six months ended June 30, 2008, the swaps increased the weighted average interest rate
on floor plan borrowings by approximately 0.1%. As of June 30, 2008, the Company expects
approximately $2.5 million associated with the swaps to be recognized as an increase of
interest expense over the next twelve months.
The Company was party to an interest rate swap agreement which expired in January
2008, pursuant to which a notional $200.0 of its U.S. floating rate debt was exchanged for
fixed rate debt. The swap was designated as a cash flow hedge of future interest payments of
the LIBOR based U.S. floor plan borrowings.
Other Financing Arrangements
We have in the past and expect in the future to enter into significant sale-leaseback
transactions to finance certain property acquisitions and capital expenditures, pursuant to
which we sell property and/or leasehold improvements to third parties and agree to lease
those assets back for a certain period of time. Such sales generate proceeds which vary from
period to period.
Off-Balance Sheet Arrangements 3.5% Convertible Senior Subordinated Notes due 2026
The Convertible Notes are convertible into shares of our common stock, at the option of
the holder, based on certain conditions described above. Certain of these conditions are
linked to the market value of our common stock. This type of financing arrangement was
selected by us in order to achieve a more favorable interest rate (as opposed to other forms
of available financing). Since we or the holders of the Convertible Notes can redeem these
notes on April 2011, a conversion or a redemption of these notes is likely to occur in 2011.
Such redemption conversion will include cash for the principal amount of the Convertible
Notes then outstanding plus an amount payable in either cash or stock, at our option,
depending on the trading price of our common stock.
Cash Flows
Cash and cash equivalents increased by $6.0 million and $4.8 million during the six
months ended June 30, 2008 and 2007, respectively. The major components of these changes are
discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by continuing operating activities was $176.2 million and $287.2 million
during the six months ended June 30, 2008 and 2007, respectively. Cash flows from operating
activities include net income, as adjusted for non-cash items, and the effects of changes in
working capital.
We finance substantially all of our new and a portion of our used vehicle inventories
under revolving floor plan notes payable with various lenders. In accordance with SFAS No.
95, Statement of Cash Flows, we report all cash flows arising in connection with floor
plan notes payable with the manufacturer of a particular new vehicle as an operating
activity in our statement of cash flows, and all cash flows arising in connection with floor
plan notes payable to a party other than the manufacturer of a particular new vehicle and
all floor plan notes payable relating to pre-owned vehicles as a financing activity in our
statement of cash flows.
40
We believe that changes in aggregate floor plan liabilities are typically linked to
changes in vehicle inventory and, therefore, are an integral part of understanding changes
in our working capital and operating cash flow. As a result, we have presented the following
reconciliation of cash flow from operating activities as reported in our condensed
consolidated statement of cash flows as if all changes in vehicle floor plan were classified
as an operating activity for informational purposes:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2008 |
|
|
2007 |
|
Net cash from operating activities as reported |
|
$ |
176,231 |
|
|
$ |
287,165 |
|
Floor plan notes payable non-trade as reported |
|
|
(22,032 |
) |
|
|
137,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities including all floor plan notes payable |
|
$ |
154,199 |
|
|
$ |
424,878 |
|
|
|
|
|
|
|
|
Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $386.9 million and $141.7 million
during the six months ended June 30, 2008 and 2007, respectively. Cash flows from investing
activities consist primarily of cash used for capital expenditures, proceeds from
sale-leaseback transactions and net expenditures for dealership acquisitions. Capital
expenditures were $117.1 million and $73.6 million during the six months ended June 30, 2008
and 2007, respectively. Capital expenditures relate primarily to improvements to our
existing dealership facilities and the construction of new facilities. Proceeds from
sale-leaseback transactions were $19.7 million and $76.5 million during the six months ended
June 30, 2008 and 2007, respectively. Cash used in business acquisitions and other
investments, net of cash acquired, was $69.1 million and $157.9 million during the six
months ended June 30, 2008 and 2007, respectively, and included cash used to repay sellers
floor plan liabilities in such business acquisitions of $4.9 million and $48.5 million
during the six months ended June 30, 2008 and 2007, respectively. We used $220.5 million
for other investing activities during the six months ended June 30, 2008, including $219.0
million for the acquisition of a 9% partnership interest in Penske Truck Leasing Co., L.P.
(PTL).
Cash Flows from Continuing Financing Activities
Cash provided by continuing financing activities was $181.1 million during the six
months ended June 30, 2008 and cash used by continuing financing activities was
$227.3 million during the six months ended June 30, 2007. Cash flows from financing
activities include net borrowings or repayments of long-term debt, net borrowings or
repayments of floor plan notes payable non-trade, payments of deferred financing costs,
proceeds from the issuance of common stock, including proceeds from the exercise of stock
options, repurchases of common stock and dividends. We had net borrowings of long-term debt
of $219.5 million during the six months ended June 30, 2008 and net repayments of
$353.3 million during the six months ended June 30, 2007. The borrowings in the six months
ended June 30, 2008 included the $219.0 million loan to finance the purchase of the PTL
limited partnership interest. The repayments in the six months ended June 30, 2007 included
$14.4 million of premium paid on the redemption of our 9.625% Senior Subordinated Notes. We
had net repayments of floor plan notes payable non-trade of $22.0 million during the six
months ended June 30, 2008 and net borrowings of floor plan notes payable non-trade of
$137.7 million during the six months ended June 30, 2007. During the six months ended June
30, 2008 and 2007 we received proceeds of $0.8 million and $1.5 million, respectively, from
the issuance of common stock. During the six months ended June 30, 2008 and 2007, we paid
$17.1 million and $13.3 million, respectively, of cash dividends to our stockholders.
Cash Flows from Discontinued Operations
Cash flows relating to discontinued operations are not currently considered, nor are
they expected to become material to our liquidity or our capital resources. Management does
not believe that there is any significant past, present or future cash transactions relating
to discontinued operations.
Commitments
We were party to a joint venture agreement with respect to our Honda of Mentor
dealership in Ohio. We were required to repurchase our partners interest in this joint
venture in July 2008 and completed the repurchase on July 23, 2008 with a payment of $5.1
million.
41
Related Party Transactions
Stockholders Agreement
Several of our directors and officers are affiliated with Penske Corporation or related
entities. Roger S. Penske, our Chairman of the Board and Chief Executive Officer, is also
Chairman of the Board and Chief Executive Officer of Penske Corporation, and through
entities affiliated with Penske Corporation, our largest stockholder owning approximately
40% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc.
(collectively, Mitsui) own approximately 16% of our outstanding common stock. Mitsui,
Penske Corporation and certain other affiliates of Penske Corporation are parties to a
stockholders agreement pursuant to which the Penske affiliated companies agreed to vote
their shares for one director who is a representative of Mitsui. In turn, Mitsui agreed to
vote their shares for up to fourteen directors voted for by the Penske affiliated companies.
This agreement terminates in March 2014, upon the mutual consent of the parties, or when
either party no longer owns any of our common stock.
Other Related Party Interests and Transactions
Roger S. Penske is also a managing member of Penske Capital Partners and Transportation
Resource Partners, each organizations that undertake investments in transportation-related
industries. Richard J. Peters, one of our directors, is a managing director of
Transportation Resource Partners and is a director of Penske Corporation. Eustace W. Mita
and Lucio A. Noto (two of our directors) are investors in Transportation Resource Partners.
One of our directors, Hiroshi Ishikawa, serves as our Executive Vice President
International Business Development and serves in a similar capacity for Penske Corporation.
Robert H. Kurnick, Jr., our President and a director, is also the President and a director
of Penske Corporation.
We sometimes pay to and/or receive fees from Penske Corporation and its affiliates for
services rendered in the normal course of business, or to reimburse payments made to third
parties on each others behalf. These transactions are reviewed periodically by our Audit
Committee and reflect the providers cost or an amount mutually agreed upon by both parties.
We and Penske Corporation have entered into a joint insurance agreement which provides
that, with respect to our joint insurance policies (which includes our property policy),
available coverage with respect to a loss shall be paid to each party as stipulated in the
policies. In the event of losses by us and Penske Corporation that exceed the limit of
liability for any policy or policy period, the total policy proceeds shall be allocated
based on the ratio of premiums paid.
We are a 9% limited partner of PTL, a leading global transportation services provider.
PTL operates and maintains more than 200,000 vehicles and serves customers in North America,
South America, Europe and Asia. Product lines include full-service leasing, contract
maintenance, commercial and consumer truck rental and logistics services, including,
transportation and distribution center management and supply chain management. The general
partner is Penske Truck Leasing Corporation, a wholly owned subsidiary of Penske
Corporation, which together with other wholly owned subsidiaries of Penske Corporation, owns
40% of PTL. The remaining 51% of PTL is owned by GE Capital. We joined a previously existing partnership
agreement among the other partners which, among other things, provides us with specified
partner distribution and governance rights and restricts our ability to transfer our
interests.
We have entered into other joint ventures with certain related parties as more fully
discussed below.
42
Joint Venture Relationships
From time to time, we enter into other joint venture relationships in the ordinary
course of business, through which we acquire automotive dealerships together with other
investors. We may provide these dealerships with working capital and other debt financing at
costs that are based on our incremental borrowing rate. As of June 30, 2008, our automotive
joint venture relationships were as follows:
|
|
|
|
|
|
|
|
|
|
|
Ownership |
|
Location |
|
Dealerships |
|
Interest |
|
Fairfield, Connecticut |
|
Audi, Mercedes-Benz, Porsche, smart |
|
|
90.00 |
%(A)(B) |
Edison, New Jersey |
|
Ferrari, Maserati |
|
|
70.00 |
%(B) |
Las Vegas, Nevada |
|
Ferrari, Maserati |
|
|
50.00 |
%(C) |
Mentor, Ohio |
|
Honda |
|
|
75.00 |
%(B)(D) |
Munich, Germany |
|
BMW, MINI |
|
|
50.00 |
%(C) |
Frankfurt, Germany |
|
Lexus, Toyota |
|
|
50.00 |
%(C) |
Aachen, Germany |
|
Audi, Lexus, Toyota, Volkswagen |
|
|
50.00 |
%(C) |
Mexico |
|
Toyota |
|
|
48.70 |
%(C) |
Mexico |
|
Toyota |
|
|
45.00 |
%(C) |
|
|
|
(A) |
|
An entity controlled by one of our directors, Lucio A. Noto (the
Investor), owns a 10% interest in this joint venture, which entitles
the Investor to 20% of the joint ventures operating profits. In
addition, the Investor has an option to purchase up to a 20% interest
in the joint venture for specified amounts |
|
(B) |
|
Entity is consolidated in our financial statements |
|
(C) |
|
Entity is accounted for using the equity method of accounting. |
|
(D) |
|
On July 23, 2008, we purchased the 25% interest. |
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, historically have been
cyclical, fluctuating with general economic cycles. During economic downturns, the
automotive retailing industry tends to experience periods of decline and recession similar
to those experienced by the general economy. We believe that the industry is influenced by
general economic conditions and particularly by consumer confidence, the level of personal
discretionary spending, fuel prices, interest rates and credit availability.
Seasonality
Our business is modestly seasonal overall. Our U.S. operations generally experience
higher volumes of vehicle sales in the second and third quarters of each year due in part to
consumer buying trends and the introduction of new vehicle models. Also, vehicle demand, and
to a lesser extent demand for service and parts, is generally lower during the winter months
than in other seasons, particularly in regions of the United States where dealerships may be
subject to severe winters. Our U.K. operations generally experience higher volumes of
vehicle sales in the first and third quarters of each year, due primarily to vehicle
registration practices in the U.K.
Effects of Inflation
We believe that inflation rates over the last few years have not had a significant
impact on revenues or profitability. We do not expect inflation to have any near-term
material effects on the sale of our products and services, however, we cannot be sure there
will be no such effect in the future. We finance substantially all of our inventory through
various revolving floor plan arrangements with interest rates that vary based on various
benchmarks. Such rates have historically increased during periods of increasing inflation.
43
Forward Looking Statements
This quarterly report on Form 10-Q contains forward-looking statements which
generally can be identified by the use of terms such as may, will, should, expect,
anticipate, believe, intend, plan, estimate, predict, potential, forecast,
continue or variations of such terms, or the use of these terms in the negative.
Forward-looking statements include statements regarding our current plans, forecasts,
estimates, beliefs or expectations, including, without limitation, statements with respect
to:
|
|
|
our future financial performance; |
|
|
|
|
future acquisitions; |
|
|
|
|
future capital expenditures and share repurchases; |
|
|
|
|
our ability to obtain cost savings and synergies; |
|
|
|
|
our ability to respond to economic cycles; |
|
|
|
|
trends in the automotive retail industry and in the general economy in the
various countries in which we operate dealerships; |
|
|
|
|
our ability to access the remaining availability under our credit agreements; |
|
|
|
|
our liquidity; |
|
|
|
|
interest rates; |
|
|
|
|
trends affecting our future financial condition or results of operations; and |
|
|
|
|
our business strategy. |
Forward-looking statements involve known and unknown risks and uncertainties and are
not assurances of future performance. Actual results may differ materially from anticipated
results due to a variety of factors, including the factors identified in our 2007 annual
report on Form 10-K filed February 26, 2008. Important factors that could cause actual
results to differ materially from our expectations include the following:
|
|
|
the ability of automobile manufacturers to exercise significant control over our operations,
since we depend on them in order to operate our business; |
|
|
|
|
because we depend on the success and popularity of the brands we sell, adverse conditions
affecting one or more automobile manufacturers may negatively impact our revenues and
profitability; |
|
|
|
|
we may not be able to satisfy our capital requirements for acquisitions, dealership renovation
projects or financing the purchase of our inventory; |
|
|
|
|
our failure to meet a manufacturers consumer satisfaction requirements may adversely affect
our ability to acquire new dealerships, our ability to obtain incentive payments from
manufacturers and our profitability; |
|
|
|
|
our business and the automotive retail industry in general are susceptible to adverse economic
conditions, including changes in interest rates, consumer confidence, fuel prices and credit
availability; |
|
|
|
|
with respect to PTL, changes in tax, financial or regulatory rules on requirements, changes in
the financial health of PTLs customers, labor strikes or work stoppages, asset utilization
rates and industry competition; |
|
|
|
|
substantial competition in automotive sales and services may adversely affect our profitability; |
44
|
|
|
if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional
qualified personnel, our business could be adversely affected; |
|
|
|
|
because most customers finance the cost of purchasing a vehicle, increased interest rates in the U.S. or the
U.K. may adversely affect our vehicle sales; |
|
|
|
|
our business may be adversely affected by import product restrictions and foreign trade risks that may impair
our ability to sell foreign vehicles profitably; |
|
|
|
|
our automobile dealerships are subject to substantial regulation which may adversely affect our profitability; |
|
|
|
|
if state dealer laws in the United States are repealed or weakened, our automotive dealerships may be subject
to increased competition and may be more susceptible to termination, non-renewal or renegotiation of their
franchise agreements; |
|
|
|
|
our U.K. dealerships are not afforded the same legal franchise protections as those in the U.S. so we could
be subject to addition competition from other local dealerships in the U.K.; |
|
|
|
|
our smart distribution operations represents a new line of business for us whose profitability is unproven; |
|
|
|
|
our automotive dealerships are subject to environmental regulations that may result in claims and liabilities; |
|
|
|
|
our dealership operations may be affected by severe weather or other periodic business interruptions; |
|
|
|
|
our principal stockholders have substantial influence over us and may make decisions with which other
stockholders may disagree; |
|
|
|
|
some of our directors and officers may have conflicts of interest with respect to certain related party
transactions and other business interests; |
|
|
|
|
our level of indebtedness may limit our ability to obtain financing for acquisitions and may require that a
significant portion of our cash flow be used for debt service; |
|
|
|
|
we may be involved in legal proceedings that could have a material adverse effect on our business; |
|
|
|
|
our operations outside of the United States subject our profitability to fluctuations relating to changes in
foreign currency valuations; and |
|
|
|
|
we are a holding company and, as a result, must rely on the receipt of payments from our subsidiaries, which
are subject to limitations, in order to meet our cash needs and service our indebtedness. |
In addition:
|
|
|
the price of our common stock is subject to substantial fluctuation, which may be unrelated to our performance; and |
|
|
|
|
shares eligible for future sale, or issuable under the terms of our convertible notes, may cause the market price
of our common stock to drop significantly, even if our business is doing well. |
We urge you to carefully consider these risk factors in evaluating all forward-looking
statements regarding our business. Readers of this report are cautioned not to place undue
reliance on the forward-looking statements contained in this report. All forward-looking
statements attributable to us are qualified in their entirety by this cautionary statement.
Except to the extent required by the federal securities laws and Securities and Exchange
Commission rules and regulations, we have no intention or obligation to update publicly any
forward-looking statements whether as a result of new information, future events or
otherwise.
45
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rates. We are exposed to market risk from changes in the interest rates on a
significant portion of our outstanding debt. Outstanding revolving balances under our credit
agreements bear interest at variable rates based on a margin over defined benchmarks. Based
on the amount outstanding as of June 30, 2008, a 100 basis point change in interest rates
would result in an approximate $2.6 million change to our annual interest expense.
Similarly, amounts outstanding under floor plan financing arrangements bear interest at a
variable rate based on a margin over defined benchmarks. Based on an average of the
aggregate amounts outstanding under our floor plan financing arrangements subject to
variable interest payments during the trailing twelve months ended June 30, 2008, a 100
basis point change in interest rates would result in an approximate $13.0 million change to
our annual interest expense.
We continually evaluate our exposure to interest rate fluctuations and follow
established policies and procedures to implement strategies designed to manage the amount of
variable rate indebtedness outstanding at any point in time in an effort to mitigate the
effect of interest rate fluctuations on our earnings and cash flows. We are currently party
to swap agreements pursuant to which a notional $300.0 million of our floating rate floor
plan debt was exchanged for fixed rate debt through January 2011.
Interest rate fluctuations affect the fair market value of our swaps and fixed rate
debt, including the 7.75% Notes, the Convertible Notes and certain seller financed
promissory notes, but, with respect to such fixed rate debt instruments, do not impact our
earnings or cash flows.
Foreign Currency Exchange Rates. As of June 30, 2008, we have dealership operations in
the U.K. and Germany. In each of these markets, the local currency is the functional
currency. Due to our intent to remain permanently invested in these foreign markets, we do
not hedge against foreign currency fluctuations. In the event we change our intent with
respect to the investment in any of our international operations, we would expect to
implement strategies designed to manage those risks in an effort to mitigate the effect of
foreign currency fluctuations on our earnings and cash flows. A ten percent change in
average exchange rates versus the U.S. Dollar would have resulted in an approximate
$249.5 million change to our revenues for the six months ended June 30, 2008.
In common with other automotive retailers, we purchase certain of our new vehicle and
parts inventories from foreign manufacturers. Although we purchase the majority of our
inventories in the local functional currency, our business is subject to certain risks,
including, but not limited to, differing economic conditions, changes in political climate,
differing tax structures, other regulations and restrictions and foreign exchange rate
volatility which may influence such manufacturers ability to provide their products at
competitive prices in the local jurisdictions. Our future results could be materially and
adversely impacted by changes in these or other factors.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including the
principal executive and financial officers, we conducted an evaluation of the effectiveness
of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of
the end of the period covered by this report. Our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the reports we file
under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms, and that such information is accumulated and
communicated to management, including our principal executive and financial officers, to
allow timely discussions regarding required disclosure.
Based upon this evaluation, the Companys principal executive and financial officers
concluded that our disclosure controls and procedures were effective as of the end of the
period covered by this report. In addition, we maintain internal controls designed to
provide us with the information required for accounting and financial reporting purposes.
There were no changes in our internal control over financial reporting that occurred during
the most recent quarter that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
46
PART II OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we are involved in litigation relating to claims arising in the
normal course of business. Such claims may relate to litigation with customers, employment
related lawsuits, class action lawsuits, purported class action lawsuits and actions brought
by governmental authorities. As of June 30, 2008, we are not a party to any legal
proceedings, including class action lawsuits, that, individually or in the aggregate, are
reasonably expected to have a material adverse effect on our results of operations,
financial condition or cash flows. However, the results of these matters cannot be predicted
with certainty, and an unfavorable resolution of one or more of these matters could have a
material adverse effect on our results of operations, financial condition or cash flows.
Item 1A. Risk Factors
The following is an risk factor that should be considered in addition to those set forth in
Part I, Item 1A of our Annual Report on Form 10-K for fiscal year ended December 31, 2007.
Our investment in Penske Truck Leasing Co., L.P. (PTL) subjects us to additional business
risks, including the potential for a future impairment charge if PTL does not perform as
expected.
On June 26, 2008, we acquired a 9% limited partnership interest in Penske Truck Leasing, a
leading global transportation services provider, in exchange for $219 million. PTL operates and
maintains more than 200,000 vehicles and serves customers in North America, South America,
Europe and Asia. Product lines include full-service leasing, contract maintenance, commercial
and consumer truck rental and logistics services, including transportation and distribution
center management and supply chain management. We expect to receive future partnership operating
distributions and U.S tax savings as a result of the investment. These benefits may not be
realized if we or PTL do not perform as expected, which could result from changes in tax, financial
or regulatory requirements, changes in the financial health of PTLs customers, labor strikes or
work stoppages, lower asset utilization rates and industry competition. In addition, if the
business does not perform as expected, we may recognize an impairment charge on our statement of
income which could be material and which could adversely affect our financial results for the
periods in which any charge occurs.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Stockholders was held on May 1, 2008. Proxies for the Annual
Meeting of Stockholders were solicited pursuant to regulation 14A under the Securities
Exchange Act of 1934, as amended. There were no solicitations in opposition to the nominees
or proposals listed in the proxy statement. Each of the twelve nominees listed in the proxy
statement was elected. The results of the voting at the Annual Meeting of Stockholders is as
follows:
1. Election of Directors
|
|
|
|
|
|
|
|
|
Nominee |
|
For |
|
|
Withheld |
|
John D. Barr |
|
|
90,198,584 |
|
|
|
1,127,208 |
|
Michael R. Eisenson |
|
|
88,812,620 |
|
|
|
2,513,172 |
|
Hiroshi Ishikawa |
|
|
90,233,008 |
|
|
|
1,092,784 |
|
Robert H. Kurnick, Jr. |
|
|
90,237,212 |
|
|
|
1,088,580 |
|
William J. Lovejoy |
|
|
91,047,810 |
|
|
|
277,982 |
|
Kimberly J. McWaters |
|
|
89,011,833 |
|
|
|
2,313,959 |
|
Eustace W. Mita |
|
|
89,010,433 |
|
|
|
2,315,359 |
|
Lucio A. Noto |
|
|
76,426,977 |
|
|
|
14,898,815 |
|
Roger S. Penske |
|
|
90,376,277 |
|
|
|
949,565 |
|
Richard J. Peters |
|
|
90,234,939 |
|
|
|
1,090,853 |
|
Ronald G. Steinhart |
|
|
90,462,620 |
|
|
|
863,172 |
|
H. Brian Thompson |
|
|
90,721,306 |
|
|
|
604,486 |
|
47
Item 6. Exhibits
|
|
|
|
|
|
4.1 |
|
|
Fifth Amendment dated June 26, 2008 to the Second Amended and
Restated Credit Agreement dated September 8, 2004 by and among us,
DCFS USA LLC and Toyota Motor Credit Corporation (incorporated by
reference to exhibit 4.1 to our July 2, 2008 Form 8-K). |
|
|
|
|
|
|
10.1 |
|
|
Purchase and Sale Agreement dated June 26, 2008 by and among General
Electric Credit Corporation of Tennessee, Logistics Holding Corp.,
RTLC Acquisition Corp., NTFC Capital Corporation, Penske Truck
Leasing Corporation, PTLC Holdings Co., LLC, PTLC2 Holdings Co., LLC,
Penske Automotive Group, Inc. and Penske Truck Leasing Co., L.P.
(incorporated by reference to exhibit 10.1 to our July 2, 2008 Form 8-K). |
|
|
|
|
|
|
10.2 |
|
|
Amendment No. 11 to the Amended and Restated Agreement of Limited
Partnership of Penske Truck Leasing Co., L.P. dated June 26, 2008 by
and among General Electric Credit Corporation of Tennessee, Logistics
Holding Corp., RTLC Acquisition Corp., NTFC Capital Corporation,
Penske Truck Leasing Corporation, PTLC Holdings Co., LLC, PTLC2
Holdings Co., LLC and Penske Automotive Group, Inc. (incorporated by
reference to exhibit 10.2 to our July 2, 2008 Form 8-K) |
|
|
|
|
|
|
10.3 |
|
|
Form of Second Amended and Restated Limited Partnership Agreement of
Penske Truck Leasing Co., L.P. (incorporated by reference to exhibit
10.3 to our July 2, 2008 Form 8-K) |
|
|
|
|
|
|
10.4 |
|
|
Rights Agreement dated June 26, 2008 by and among PTLC Holdings Co.,
LLC, PTLC2 Holdings Co., LLC, Penske Truck Leasing Corporation and
Penske Automotive Group, Inc. (incorporated by reference to exhibit
10.4 to our July 2, 2008 Form 8-K) |
|
|
|
|
|
|
12 |
|
|
Computation of Ratio of Earnings to Fixed Charges |
|
|
|
|
|
|
31 |
|
|
Rule 13a-14(a)/15(d)-14(a) Certifications |
|
|
|
|
|
|
32 |
|
|
Section 1350 Certifications |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
|
|
|
|
|
|
|
|
PENSKE AUTOMOTIVE GROUP, INC. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Roger S. Penske
Roger S. Penske
|
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Date: August 1, 2008
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Chief Executive Officer |
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By:
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/s/ Robert T. OShaughnessy
Robert T. OShaughnessy
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Date: August 1, 2008
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Chief Financial Officer |
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49
EXHIBIT INDEX
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Exhibit |
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No. |
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Description |
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4.1 |
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Fifth Amendment dated June 26, 2008 to the Second Amended and
Restated Credit Agreement dated September 8, 2004 by and among
us, DCFS USA LLC and Toyota Motor Credit Corporation
(incorporated by reference to exhibit 4.1 to our July 2, 2008
Form 8-K). |
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10.1 |
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Purchase and Sale Agreement dated June 26, 2008 by and among
General Electric Credit Corporation of Tennessee, Logistics
Holding Corp., RTLC Acquisition Corp., NTFC Capital Corporation,
Penske Truck Leasing Corporation, PTLC Holdings Co., LLC, PTLC2
Holdings Co., LLC, Penske Automotive Group, Inc. and Penske
Truck Leasing Co., L.P. (incorporated by reference to exhibit
10.1 to our July 2, 2008 Form 8-K). |
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10.2 |
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Amendment No. 11 to the Amended and Restated Agreement of
Limited Partnership of Penske Truck Leasing Co., L.P. dated June
26, 2008 by and among General Electric Credit Corporation of
Tennessee, Logistics Holding Corp., RTLC Acquisition Corp., NTFC
Capital Corporation, Penske Truck Leasing Corporation, PTLC
Holdings Co., LLC, PTLC2 Holdings Co., LLC and Penske Automotive
Group, Inc. (incorporated by reference to exhibit 10.2 to our
July 2, 2008 Form 8-K) |
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10.3 |
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Form of Second Amended and Restated Limited Partnership
Agreement of Penske Truck Leasing Co., L.P. (incorporated by
reference to exhibit 10.3 to our July 2, 2008 Form 8-K) |
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10.4 |
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Rights Agreement dated June 26, 2008 by and among PTLC Holdings
Co., LLC, PTLC2 Holdings Co., LLC, Penske Truck Leasing
Corporation and Penske Automotive Group, Inc. (incorporated by
reference to exhibit 10.4 to our July 2, 2008 Form 8-K) |
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4.1 |
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Fifth Amendment dated June 26, 2008 to the Second Amended and
Restated Credit Agreement dated September 8, 2004 by and among
us, DCFS USA LLC and Toyota Motor Credit Corporation
(incorporated by reference to exhibit 4.1 to our July 2, 2008
Form 8-K). |
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12 |
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Computation of Ratio of Earnings to Fixed Charges |
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31 |
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Rule 13a-14(a)/15(d)-14(a) Certifications |
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32 |
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Section 1350 Certifications |
50