Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in “Forward-Looking Statements.” We have acquired and initiated a number of businesses during the periods presented and addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements include the results of operations of those businesses from the date acquired or when they commenced operations. This Management’s Discussion and Analysis of Financial Condition and Results of Operations has been updated to reflect the revision of our financial statements for entities which have been treated as discontinued operations.
Overview
We are an international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand. We employ more than 25,000 people worldwide.
During the three months ended March 31, 2017, our business generated $5.1 billion in total revenue, which is comprised of $4.8 billion from retail automotive dealerships, $211.7 million from retail commercial truck dealerships and $113.0 million from commercial vehicle distribution and other operations.
Retail Automotive Dealership.
We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $18.7 billion in total retail automotive dealership revenue we generated in 2016. As of March 31, 2017, we operated 357 retail automotive franchises, of which 165 franchises are located in the U.S. and 192 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the three months ended March 31, 2017, we retailed and wholesaled more than 154,000 vehicles. We are diversified geographically, with 56% of our total retail automotive dealership revenues in the three months ended March 31, 2017 generated in the U.S. and Puerto Rico and 44% generated outside the U.S. We offer over 40 vehicle brands, with 70% of our retail automotive dealership revenue in the three months ended March 31, 2017 generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our dealerships offer a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts and replacement and aftermarket automotive products.
In the first quarter of 2017, we acquired CarSense in the U.S. and CarShop in the U.K., both businesses representing stand-alone used vehicle retailers which we believe complement our existing franchised retail automotive dealership operations, providing us with synergies in our used vehicle operations at our existing dealerships in the U.S. and the U.K., as well as scalable opportunities across our market areas. Our CarSense operations consist of five locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas, including southern New Jersey. Our CarShop operations consist of five retail locations throughout the United Kingdom. These businesses are expected to generate approximate annual revenues of $700.0 million.
Retail automotive dealerships represented 93.6% of our total revenues and 91.5% of our total gross profit in the three months ended March 31, 2017.
Retail Commercial Truck Dealership.
We operate a heavy and medium duty truck dealership group known as Premier Truck Group (“PTG”) with locations in Texas, Oklahoma, Tennessee, Georgia, and Canada. As of March 31, 2017, PTG operated twenty locations, including fourteen full-service dealerships, offering primarily Freightliner and Western Star branded trucks. Four of these locations were acquired in April 2016 in the greater Toronto, Canada market area, and two of these locations were acquired in December 2016 in the Niagara Falls, Canada market area, also representing Freightliner and Western Star branded trucks. PTG also offers a full range of used trucks available for sale as well as service and parts departments, many of which are open 24 hours a day, seven days a week.
This business represented 4.2% of our total revenues and 4.7% of our total gross profit in the three months ended March 31, 2017.
Commercial Vehicle Distribution.
We are the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand and portions of the Pacific. This business, known as Penske Commercial Vehicles Australia (“PCV Australia”), distributes commercial vehicles and parts to a network of more than 70 dealership locations, including eight company-owned retail commercial vehicle dealerships.
We are also a leading distributor of diesel and gas engines and power systems, principally representing MTU, Detroit Diesel, Mercedes-Benz Industrial, Allison Transmission and MTU Onsite Energy. This business, known as Penske Power Systems (“PPS”), offers products across the on- and off-highway markets in Australia, New Zealand and portions of the Pacific and supports full parts and aftersales service through a network of branches, field locations and dealers across the region. The on-highway portion of this business complements our PCV Australia distribution business,
including integrated operations at retail locations shared with PCV.
These businesses represented 2.2% of our total revenues and 3.8% of our total gross profit in the three months ended March 31, 2017.
Penske Truck Leasing.
We currently hold a 23.4% ownership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading provider of transportation services and supply chain management. PTL is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental and contract maintenance, along with logistic services such as dedicated contract carriage, distribution center management, transportation management and lead logistics provider. On July 27, 2016, we acquired an additional 14.4% ownership interest in PTL from subsidiaries of GE Capital Global Holdings, LLC (collectively, “GE Capital”) for approximately $498.5 million in cash to bring our total ownership interest to 23.4%. Prior to this acquisition, we held a 9.0% ownership interest in PTL. PTL is currently owned 41.1% by Penske Corporation, 23.4% by us, 20.0% by affiliates of Mitsui & Co., Ltd. (“Mitsui”), and 15.5% by GE Capital. We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments.
Outlook
Retail Automotive Dealership.
For the three months ended March 31, 2017, the U.S. light vehicle retail market declined 1.6%, as compared to the same period last year, to 4.0 million units, with passenger car sales declining 12.3% while sales of trucks, cross overs and sport utility vehicles increased 6.1%. We believe the current market for new light vehicle sales in the U.S. will remain near current levels for 2017, as low levels of unemployment, low interest rates, strong credit availability, the age of vehicles on the road, shortened product development timelines and vehicle innovation, strong consumer leasing, and consumer fuel costs are expected to continue to positively impact vehicle sales, although actual sales may differ materially. In addition to the new vehicle market, we expect to see strength across
the used vehicle market, as the number of lease returns increases, providing our business with an additional supply of late model, low mileage vehicles.
During the three months ended March 31, 2017, U.K. new vehicle registrations increased 6.2%, as compared to the same period last year, to 820,016 registrations. While we believe the overall market in the U.K. is being positively impacted by generally strong economic conditions, including low levels of unemployment, access to credit and attractive financing offers, the March 2019 planned exit from the European Union (“Brexit”) may impact the future economic environment and new vehicle registrations. Since no country has previously left the European Union, the outcome of any future negotiations between the U.K. and the European Union is uncertain and may affect the timing, terms of trade, and the level of new vehicle registrations in those markets.
Retail Commercial Truck Dealership.
During the three months ended March 31, 2017, North American sales of Class 5-8 medium and heavy-duty trucks, the principal vehicles for our PTG business, were 108,089 units, a decrease of
13.0% from the same period in 2016. The Class 5-7 medium-duty truck market decreased 0.9% to 58,499 units from 59,003 units in the same period in 2016. The largest North American market, Class 8 heavy-duty trucks, decreased 24.0% to 49,590 units from 65,265 units in the same period in 2016, as softer freight demand and excess fleet capacity has impacted the marketplace. Retail sales of Class 8 heavy-duty trucks are generally expected to decline in 2017. However, we have recently seen stabilization in the values of used trucks, generally indicating improved conditions in the marketplace. The service and parts business of our PTG commercial truck dealerships, which represents approximately 79% of our retail commercial truck dealership gross profit, is expected to remain strong, as end users retain existing equipment longer than previously anticipated.
Commercial Vehicle Distribution.
Our PCV Australia distribution business and the on-highway portion of our PPS business each operate principally in the Australian and New Zealand heavy and medium duty truck markets. For the three months ended March 31, 2017, the Australian heavy-duty truck market reported sales of 2,116 units, representing an increase of 11.1% from the same period in 2016. For the three months ended March 31, 2017, the New Zealand market reported sales of 731 units, representing an increase of 17.3% from the same period in 2016. The brands we represent in Australia hold a 10.6% market share in the Australian heavy-duty truck market, and a 4.8% market share in New Zealand. The Australian heavy-duty commercial vehicle market has lagged behind historical sales levels in recent years partly due to difficult macroeconomic conditions and the relative weak price of commodities in these markets. However, recently we have noted improvements in overall market conditions, as well as a moderate strengthening of the Australian Dollar. While we believe the overall market will remain challenging, we expect to see continued market improvements. We expect the parts distribution portion of this business will continue to be resilient due to the delayed vehicle replacement cycle resulting from the recent difficult macroeconomic conditions. We also expect continued new order growth from the off-highway engine distribution business.
Penske Truck Leasing.
We expect PTL to benefit from continued strong demand for its full-service truck leasing, contract maintenance, and logistics services resulting from continued positive economic conditions in the United States and customers’ desire to increase efficiency and lower costs by outsourcing non-core responsibilities such as fleet ownership. As a global logistics services provider, we also expect PTL to experience increased demand for its logistics supply chain solutions based primarily on optimizing the use of drivers, trucks, warehouses, and other services within the supply chain. In 2016, freight demand did not match projected levels and a decade-high sales year for Class 8 trucks in 2015 led to excess capacity in the market and a reduction in utilization rates. As a result, fleets right-sized their capacity to meet freight demand in the marketplace and new and used truck sales were impacted, resulting in a decline in the North American Class 8 new and used heavy-duty truck market. However, beginning in 2017, we have seen improved conditions within PTL’s commercial truck rental business, and stabilization of used truck prices, which indicate the supply and demand balance may be improving.
As described in “Forward-Looking Statements,” there are a number of factors that could cause actual results to differ materially from our expectations.
Operating Overview
Automotive and commercial truck dealerships represent the majority of our results of operations. New and used vehicle revenues include sales to retail customers and to leasing companies providing consumer leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties and the sales of certain other products. Service and parts revenues include fees paid by customers for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories, as well as warranty repairs that are reimbursed directly by various OEMs.
Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts transactions. Our gross profit varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues resulting in higher gross profit margins. Factors such as inventory and vehicle availability, customer demand, consumer confidence, unemployment, general economic conditions, seasonality, weather, credit availability, fuel prices, and manufacturers’ advertising and incentives also impact the mix of our revenues, and therefore influence our gross profit margin.
Aggregate revenue and gross profit increased $256.5 million and $50.5 million, or 5.3% and 7.0%, respectively, during the three months ended March 31, 2017 compared to the same period in 2016. The increases are largely attributable to increases in new and used vehicle, finance and insurance, and service and parts revenue and gross profit due to net dealership acquisitions.
Additionally, as exchange rates fluctuate, our revenue and results of operations as reported in U.S. Dollars fluctuate. For example, if the British Pound were to weaken against the U.S. Dollar, our U.K. results of operations would translate into less U.S. Dollar reported results. The British Pound weakened against the U.S. Dollar during the three months ended March 31, 2017, compared to the same period in 2016, which negatively impacted our reported results of operations. On June 23, 2016, the United Kingdom held a referendum in which a majority voted to exit the European Union (“Brexit vote”). The British Pound has weakened since the Brexit vote, with an average exchange rate of British Pounds to U.S. Dollars of 1.24 for the three months ended March 31, 2017 compared to 1.43 in the same period in 2016, a decrease of 13.4%. Foreign currency average rate reductions decreased revenue and gross profit by $287.6 million and $37.2 million, respectively, for the three months ended March 31, 2017. Foreign currency average rate reductions also reduced earnings per share from continuing operations by approximately $0.09 per share for the three months ended March 31, 2017. Excluding the impact of foreign currency average rate reductions, revenue and gross profit increased 11.3% and 12.1%, respectively, for the three months ended March 31, 2017.
Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other expenses. As the majority of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, we believe our expenses can be adjusted over time to reflect economic trends.
Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing and includes interest relating to our retail commercial truck dealership and commercial vehicle distribution operations. The cost of our variable rate indebtedness is based on the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Bank of England Base Rate, the Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, or the Australian or New Zealand Bank Bill Swap Rate (“BBSW”).
Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTL.
The results of our commercial vehicle distribution business in Australia and New Zealand are principally driven by the number and types of products and vehicles ordered by our customers.
The future success of our business is dependent upon, among other things, general economic and industry conditions, our ability to consummate and integrate acquisitions, the level of vehicle sales in the markets where we operate, our ability to increase sales of higher margin products, especially service and parts services, our ability to realize returns on our significant capital investment in new and upgraded dealership facilities, the success of our distribution of commercial vehicles, engines, and power systems and the return realized from our investments in various joint ventures and other non-consolidated investments. See “Forward-Looking Statements” below.
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
Dealership Vehicle, Parts and Service Sales.
We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is completed and when parts are delivered to our customers. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general and administrative expenses. The amounts received under certain manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received, or upon attainment of the particular program goals if not associated with individual vehicles. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). During the three months ended March 31, 2017 and 2016, we earned $157.7 million and $151.9 million, respectively, of rebates, incentives and reimbursements from manufacturers, of which $153.1 million and $148.3 million, respectively, were recorded as a reduction of cost of sales. The remaining $4.6 million and $3.6 million, respectively, were recorded as a reduction of selling, general and administrative expenses.
Dealership Finance and Insurance Sales.
Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including guaranteed vehicle protection insurance, vehicle theft protection and extended service contracts. These commissions are recorded as revenue at 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 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 $23.9 million and $23.5 million as of March 31, 2017 and December 31, 2016, respectively.
Commercial Vehicle Distribution.
Revenue from the distribution of vehicles, engines, power systems and parts is recognized at the time of delivery of goods to the retailer or the ultimate customer.
Impairment Testing
Other indefinite-lived intangible assets are assessed for impairment annually on October 1 and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. An indicator of impairment exists if the carrying value exceeds its estimated fair value and an impairment loss may be recognized up to that excess. The fair value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, profit margins, and the cost of capital. We also evaluate in connection with the annual impairment testing whether events and circumstances continue to support our assessment that the other indefinite-lived intangible assets continue to have an indefinite life.
Goodwill impairment is assessed at the reporting unit level annually on October 1 and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined that we have four reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail Automotive, consisting of our retail automotive dealership operations; (ii) Retail Commercial Truck, consisting of our retail commercial truck dealership operations in the U.S. and Canada; (iii) Other, consisting of our commercial vehicle and power systems distribution operations and other non-automotive
consolidated operations; and (iv) Non-Automotive Investments, consisting of our equity method investments in non-automotive operations. We have determined that the dealerships in each of our operating segments within the Retail Automotive reportable segment are components that are aggregated into six reporting units for the purpose of goodwill impairment testing, as they (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and/or used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals), and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). The reporting units are Eastern, Central, and Western United States, CarSense, International, and CarShop. Our Retail Commercial Truck reportable segment has been determined to represent one operating segment and reporting unit. The goodwill included in our Other reportable segment relates primarily to our commercial vehicle distribution operating segment.
There is no goodwill recorded in our Non-Automotive Investments reportable segment.
For our Retail Automotive and Retail Commercial Truck reporting units, we prepare a qualitative assessment of the carrying value of goodwill using the criteria in ASC 350-20-35-3 to determine whether it is more likely than not that a reporting unit’s fair value is less than its carrying value. If it were determined through the qualitative assessment that a reporting unit’s fair value is more likely than not greater than its carrying value, additional analysis would be unnecessary. If additional impairment testing was necessary, we would estimate the fair value of our reporting units using an “income” valuation approach. The “income” valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using the weighted average cost of capital as the discount rate. In connection with this process, we also reconcile the estimated aggregate fair values of our reporting units to our market capitalization. We believe this reconciliation process is consistent with a market participant perspective. This consideration would also include a control premium that represents the estimated amount an investor would pay for our equity securities to obtain a controlling interest, and other significant assumptions including revenue and profitability growth, franchise profit margins, residual values and the cost of capital.
For our Other reporting units, we perform our impairment test by comparing the estimated fair value of each reporting unit with its carrying value. We estimate the fair value of these reporting units using an “income” valuation approach, as described above.
Investments
We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investee’s income each period. The net book value of our investments was $906.8 million and $893.4 million as of March 31, 2017 and December 31, 2016, respectively, including $838.3 million and $823.8 million relating to PTL as of March 31, 2017 and December 31, 2016, respectively.
In July 2016, we increased our ownership interest in PTL from 9.0% to 23.4% as a result of our acquisition of an additional 14.4% ownership interest, as discussed previously.
Investments for which there is not a liquid, actively traded market are reviewed periodically by management for indicators of impairment. If an indicator of impairment is identified, management estimates the fair value of the investment using a discounted cash flow approach, which includes assumptions relating to revenue and profitability growth, profit margins, and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments’ carrying value to fair value.
Self-Insurance
We retain risk relating to certain of our general liability insurance, workers’ compensation insurance, vehicle physical damage insurance, property insurance, employment practices liability insurance, directors and officers insurance and employee medical benefits in the U.S. As a result, we are likely to be responsible for a significant portion of the claims and losses incurred under these programs. The amount of risk we retain varies by program, and for certain exposures, we have pre-determined maximum loss limits for certain individual claims and/or insurance periods. Losses, if any, above the pre-determined loss limits are paid by third-party insurance carriers. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. Our estimate of future losses is prepared by
management using our historical loss experience and industry-based development factors. Aggregate reserves relating to retained risk were $29.9 million and $28.3 million as of March 31, 2017 and December 31, 2016, respectively.
Income Taxes
Tax regulations may require items to be included in our tax returns at different times than the items are reflected in our financial statements. Some of these differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax returns in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax returns that have not yet been recognized as expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not likely to allow for the use of the deduction or credit.
Classification in Continuing and Discontinued Operations
We classify the results of our operations in our consolidated financial statements based on generally accepted accounting principles relating to discontinued operations, which requires judgments, including whether a business will be divested, the period required to complete the divestiture, the likelihood of changes to the divestiture plans, and whether the divestiture represents a strategic shift that has, or will have, a major impact on our operations. If we determine that a business should be either reclassified from continuing operations to discontinued operations or from discontinued operations to continuing operations, our consolidated financial statements for prior periods are revised to reflect such reclassification. Refer to the disclosures provided under “Assets Held for Sale and Discontinued Operations” in Part I, Item 1, Note 1 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of the factors we consider for classification in discontinued operations.
Recent Accounting Pronouncements
Please see the disclosures provided under “Recent Accounting Pronouncements” in Part I, Item 1, Note 1 of the Notes to our Consolidated Condensed Financial Statements which are incorporated by reference herein.
Results of Operations
The following tables present comparative financial data relating to our operating performance in the aggregate and on a “same-store” basis. Dealership results are included in same-store comparisons when we have consolidated the acquired entity during the entirety of both periods being compared. As an example, if a dealership was acquired on January 15, 2015, the results of the acquired entity would be included in annual same-store comparisons beginning with the year ended December 31, 2017 and in quarterly same-store comparisons beginning with the quarter ended June 30, 2016.
Three Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Retail Automotive Dealership New Vehicle Data
(In millions, except unit and per unit amounts)
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2017 vs. 2016
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New Vehicle Data
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2017
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2016
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Change
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% Change
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New retail unit sales
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62,188
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58,753
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3,435
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5.8
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%
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Same-store new retail unit sales
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58,725
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58,387
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338
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0.6
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%
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New retail sales revenue
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$
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2,307.4
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$
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2,268.2
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$
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39.2
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1.7
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%
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Same-store new retail sales revenue
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$
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2,194.6
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$
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2,260.8
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$
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(66.2)
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(2.9)
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%
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New retail sales revenue per unit
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$
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37,103
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$
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38,607
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$
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(1,504)
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(3.9)
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%
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Same-store new retail sales revenue per unit
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$
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37,370
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$
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38,721
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$
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(1,351)
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(3.5)
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%
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Gross profit — new
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$
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177.1
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$
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175.5
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$
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1.6
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0.9
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%
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Same-store gross profit — new
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$
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166.4
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$
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175.0
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$
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(8.6)
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(4.9)
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%
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Average gross profit per new vehicle retailed
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$
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2,848
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$
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2,988
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$
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(140)
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(4.7)
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%
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Same-store average gross profit per new vehicle retailed
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$
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2,833
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$
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2,997
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$
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(164)
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(5.5)
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%
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Gross margin % — new
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7.7
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%
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7.7
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%
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—
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%
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—
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%
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Same-store gross margin % — new
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7.6
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%
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7.7
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%
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(0.1)
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%
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(1.3)
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%
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Units
Retail unit sales of new vehicles increased from 2016 to 2017 due to a 3,097 unit increase from net dealership acquisitions, coupled with a 338 unit, or 0.6%, increase in same-store new retail unit sales. New units increased 18.9% internationally and decreased 3.2% in the U.S. The increase internationally is primarily due to the performance of our U.K. business, which experienced a 17.6% increase in unit sales, including an increase of 9.4% on a same-store basis. Same-store units increased 8.4% internationally primarily due to the strength of our premium brand mix, particularly in the U.K., and decreased 4.8% in the U.S., primarily due to a decline in premium brand sales.
Revenues
New vehicle retail sales revenue increased from 2016 to 2017 due to a $105.4 million increase from net dealership acquisitions, offset by a $66.2 million, or 2.9%, decrease in same-store revenues. Excluding $130.1 million of negative foreign currency fluctuations, same-store new retail revenue increased 2.8%. The same-store revenue decrease is due to a $1,351 per unit decrease in comparative average selling prices (including a $2,216 per unit decrease attributable to negative foreign currency fluctuations), which decreased revenue by $78.8 million, offset by the increase in same-store new retail unit sales, which increased revenue by $12.6 million.
Gross Profit
Retail gross profit from new vehicle sales increased from 2016 to 2017 due to a $10.2 million increase from net dealership acquisitions, offset by an $8.6 million, or 4.9%, decrease in same-store gross profit. Excluding $10.2 million of negative foreign currency fluctuations, same-store gross profit increased 0.9%. The decrease in same-store gross profit is due to a $164 per unit decrease in the average gross profit per new vehicle retailed (including a $175 per unit decrease attributable to negative foreign currency fluctuations), which decreased gross profit by $9.6 million, offset by the increase in same-store new retail unit sales, which increased gross profit by $1.0 million.
Retail Automotive Dealership Used Vehicle Data
(In millions, except unit and per unit amounts)
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2017 vs. 2016
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Used Vehicle Data
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2017
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2016
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Change
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% Change
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Used retail unit sales
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62,284
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52,741
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9,543
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18.1
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%
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Same-store used retail unit sales
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51,852
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52,615
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(763)
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(1.5)
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%
|
|
Used retail sales revenue
|
|
$
|
1,541.0
|
|
$
|
1,412.4
|
|
$
|
128.6
|
|
9.1
|
%
|
|
Same-store used retail sales revenue
|
|
$
|
1,371.9
|
|
$
|
1,410.2
|
|
$
|
(38.3)
|
|
(2.7)
|
%
|
|
Used retail sales revenue per unit
|
|
$
|
24,742
|
|
$
|
26,780
|
|
$
|
(2,038)
|
|
(7.6)
|
%
|
|
Same-store used retail sales revenue per unit
|
|
$
|
26,457
|
|
$
|
26,802
|
|
$
|
(345)
|
|
(1.3)
|
%
|
|
Gross profit — used
|
|
$
|
94.1
|
|
$
|
84.3
|
|
$
|
9.8
|
|
11.6
|
%
|
|
Same-store gross profit — used
|
|
$
|
80.3
|
|
$
|
84.2
|
|
$
|
(3.9)
|
|
(4.6)
|
%
|
|
Average gross profit per used vehicle retailed
|
|
$
|
1,512
|
|
$
|
1,598
|
|
$
|
(86)
|
|
(5.4)
|
%
|
|
Same-store average gross profit per used vehicle retailed
|
|
$
|
1,549
|
|
$
|
1,601
|
|
$
|
(52)
|
|
(3.2)
|
%
|
|
Gross margin % — used
|
|
|
6.1
|
%
|
|
6.0
|
%
|
|
0.1
|
%
|
1.7
|
%
|
|
Same-store gross margin % — used
|
|
|
5.9
|
%
|
|
6.0
|
%
|
|
(0.1)
|
%
|
(1.7)
|
%
|
|
Units
Retail unit sales of used vehicles increased from 2016 to 2017 due to a 10,306 unit increase from net dealership acquisitions, offset by a 763 unit, or 1.5%, decrease in same-store used retail unit sales. Used units increased 32.3% internationally and 8.0% in the U.S. These increases are partially due to our acquisitions of the stand-alone used vehicle dealerships in the U.S. and the U.K., CarSense and CarShop, respectively. Same-store units increased 0.4% internationally and decreased 2.7% in the U.S.
Revenues
Used vehicle retail sales revenue increased from 2016 to 2017 due to a $166.9 million increase from net dealership acquisitions, offset by a $38.3 million, or 2.7%, decrease in same-store revenues. Excluding $95.9 million of negative foreign currency fluctuations, same-store used retail revenue increased 4.1%. The same-store revenue decrease is due to a decrease in same-store used retail unit sales, which decreased revenue by $20.4 million, coupled with a $345 per unit decrease in comparative average selling prices (including a $1,850 per unit decrease attributable to negative foreign currency fluctuations), which decreased revenue by $17.9 million.
Gross Profit
Retail gross profit from used vehicle sales increased from 2016 to 2017 due to a $13.7 million increase from net dealership acquisitions, offset by a $3.9 million, or 4.6%, decrease in same-store gross profit. Excluding $5.0 million of negative foreign currency fluctuations, same-store gross profit increased 1.3%. The decrease in same-store gross profit is due to a $52 per unit decrease in average gross profit per used vehicle retailed (including a $96 per unit decrease attributable to negative foreign currency fluctuations), which decreased gross profit by $2.7 million, coupled with the decrease in same-store used retail unit sales, which decreased gross profit by $1.2 million.
Retail Automotive Dealership Finance and Insurance Data
(In millions, except unit and per unit amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
Finance and Insurance Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
|
Total retail unit sales
|
|
|
124,472
|
|
|
111,494
|
|
|
12,978
|
|
11.6
|
%
|
|
Total same-store retail unit sales
|
|
|
110,577
|
|
|
111,002
|
|
|
(425)
|
|
(0.4)
|
%
|
|
Finance and insurance revenue
|
|
$
|
137.4
|
|
$
|
118.4
|
|
$
|
19.0
|
|
16.0
|
%
|
|
Same-store finance and insurance revenue
|
|
$
|
124.1
|
|
$
|
118.3
|
|
$
|
5.8
|
|
4.9
|
%
|
|
Finance and insurance revenue per unit
|
|
$
|
1,104
|
|
$
|
1,062
|
|
$
|
42
|
|
4.0
|
%
|
|
Same-store finance and insurance revenue per unit
|
|
$
|
1,123
|
|
$
|
1,066
|
|
$
|
57
|
|
5.3
|
%
|
|
Finance and insurance revenue increased from 2016 to 2017 due to a $13.2 million increase from net dealership acquisitions, coupled with a $5.8 million, or 4.9%, increase in same-store revenues. Excluding $7.5 million of negative foreign currency fluctuations, same-store finance and insurance revenue increased 11.2%. The same-store revenue increase is due to a $57 per unit increase in comparative average selling prices (offset by a $67 per unit decrease attributable to negative foreign currency fluctuations), which increased revenue by $6.3 million, offset by the decrease in same-store retail unit sales, which decreased revenue by $0.5 million. We believe the increase in same-store finance and insurance revenue per unit, particularly in the U.S., is due to our efforts to increase finance and insurance revenue, which include adding resources to target underperforming locations, product penetration, and changes to product portfolios.
Retail Automotive Dealership Service and Parts Data
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
Service and Parts Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
|
Service and parts revenue
|
|
$
|
498.9
|
|
$
|
478.1
|
|
$
|
20.8
|
|
4.4
|
%
|
|
Same-store service and parts revenue
|
|
$
|
481.2
|
|
$
|
477.1
|
|
$
|
4.1
|
|
0.9
|
%
|
|
Gross profit — service and parts
|
|
$
|
293.7
|
|
$
|
281.4
|
|
$
|
12.3
|
|
4.4
|
%
|
|
Same-store service and parts gross profit
|
|
$
|
282.8
|
|
$
|
281.1
|
|
$
|
1.7
|
|
0.6
|
%
|
|
Gross margin % — service and parts
|
|
|
58.9
|
%
|
|
58.9
|
%
|
|
—
|
%
|
—
|
%
|
|
Same-store service and parts gross margin %
|
|
|
58.8
|
%
|
|
58.9
|
%
|
|
(0.1)
|
%
|
(0.2)
|
%
|
|
Revenues
Service and parts revenue increased from 2016 to 2017, with an increase of 4.9% internationally and 4.1% in the U.S. The overall increase in service and parts revenue is due to a $16.7 million increase from net dealership acquisitions, coupled with a $4.1 million, or 0.9%, increase in same-store revenues. Excluding $19.3 million of negative foreign currency fluctuations, same-store service and parts revenue increased 4.9%. The increase in same-store revenue is due to a $10.8 million, or 9.7%, increase in warranty revenue, offset by a $6.4 million, or 2.0%, decrease in customer pay revenue, and a $0.3 million, or 0.8%, decrease in vehicle preparation and body shop revenue.
Gross Profit
Service and parts gross profit increased from 2016 to 2017 due to a $10.6 million increase from net dealership acquisitions, coupled with a $1.7 million, or 0.6%, increase in same-store gross profit. Excluding $11.7 million of negative foreign currency fluctuations, same-store gross profit increased 4.8%. The same-store gross profit increase is due to the increase in same-store revenues, which increased gross profit by $2.4 million, offset by a 0.1% decrease in gross margin, which decreased gross profit by $0.7 million. The same-store gross profit increase is due to
a $7.3 million, or 12.9%, increase in warranty gross profit, a $0.5 million, or 0.7%, increase in vehicle preparation and body shop gross profit, offset by a $6.1 million, or 3.9%, decrease in customer pay gross profit.
Retail Commercial Truck Dealership Data
(In millions, except unit and per unit amounts)
Premier Truck Group generated $211.7 million of revenue during the three months ended March 31, 2017 compared to $206.7 million of revenue during the three months ended March 31, 2016, an increase of 2.4%. Premier Truck Group generated $36.4 million of gross profit during the three months ended March 31, 2017 compared to $33.2 million of gross profit during the three months ended March 31, 2016, an increase of 9.6%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
New Commercial Truck Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
New retail unit sales
|
|
|
1,126
|
|
|
1,160
|
|
|
(34)
|
|
(2.9)
|
%
|
Same-store new retail unit sales
|
|
|
959
|
|
|
1,160
|
|
|
(201)
|
|
(17.3)
|
%
|
New retail sales revenue
|
|
$
|
110.7
|
|
$
|
116.7
|
|
$
|
(6.0)
|
|
(5.1)
|
%
|
Same-store new retail sales revenue
|
|
$
|
92.5
|
|
$
|
116.7
|
|
$
|
(24.2)
|
|
(20.7)
|
%
|
New retail sales revenue per unit
|
|
$
|
98,271
|
|
$
|
100,618
|
|
$
|
(2,347)
|
|
(2.3)
|
%
|
Same-store new retail sales revenue per unit
|
|
$
|
96,461
|
|
$
|
100,618
|
|
$
|
(4,157)
|
|
(4.1)
|
%
|
Gross profit — new
|
|
$
|
4.5
|
|
$
|
4.9
|
|
$
|
(0.4)
|
|
(8.2)
|
%
|
Same-store gross profit — new
|
|
$
|
4.1
|
|
$
|
4.9
|
|
$
|
(0.8)
|
|
(16.3)
|
%
|
Average gross profit per new truck retailed
|
|
$
|
3,981
|
|
$
|
4,201
|
|
$
|
(220)
|
|
(5.2)
|
%
|
Same-store average gross profit per new truck retailed
|
|
$
|
4,279
|
|
$
|
4,201
|
|
$
|
78
|
|
1.9
|
%
|
Gross margin % — new
|
|
|
4.1
|
%
|
|
4.2
|
%
|
|
(0.1)
|
%
|
(2.4)
|
%
|
Same-store gross margin % — new
|
|
|
4.4
|
%
|
|
4.2
|
%
|
|
0.2
|
%
|
4.8
|
%
|
Units
Retail unit sales of new trucks decreased from 2016 to 2017 due to a 201 unit decrease in same-store retail unit sales, offset by a 167 unit increase from net dealership acquisitions. Same-store new truck units decreased 17.3% from 2016 to 2017, which outperformed the 24.0% decline in the North American Class 8 heavy-duty truck market during the three months ended March 31, 2017. The decline in Class 8 retail sales is a result of lower orders due in part to excess fleet capacity and softer freight demand.
Revenues
New commercial truck retail sales revenue decreased from 2016 to 2017 due to a $24.2 million decrease in same-store revenues, offset by an $18.2 million increase from net dealership acquisitions. The same-store revenue decrease is due to the decrease in same-store new retail unit sales, which decreased revenue by $20.2 million, coupled with a $4,157 per unit decrease in comparative average selling prices, which decreased revenue by $4.0 million.
Gross Profit
New commercial truck retail gross profit decreased from 2016 to 2017 due to a $0.8 million decrease in same-store gross profit, offset by a $0.4 million increase from net dealership acquisitions. The decrease in same-store gross profit is due to the decrease in same-store new retail unit sales, which decreased gross profit by $0.9 million, offset by a $78 per unit increase in average gross profit per new truck retailed, which increased gross profit by $0.1 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
Used Commercial Truck Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Used retail unit sales
|
|
|
381
|
|
|
271
|
|
|
110
|
|
40.6
|
%
|
Same-store used retail unit sales
|
|
|
320
|
|
|
271
|
|
|
49
|
|
18.1
|
%
|
Used retail sales revenue
|
|
$
|
19.0
|
|
$
|
13.5
|
|
$
|
5.5
|
|
40.7
|
%
|
Same-store used retail sales revenue
|
|
$
|
16.2
|
|
$
|
13.5
|
|
$
|
2.7
|
|
20.0
|
%
|
Used retail sales revenue per unit
|
|
$
|
49,845
|
|
$
|
49,727
|
|
$
|
118
|
|
0.2
|
%
|
Same-store used retail sales revenue per unit
|
|
$
|
50,607
|
|
$
|
49,727
|
|
$
|
880
|
|
1.8
|
%
|
Gross profit — used
|
|
$
|
1.0
|
|
$
|
(0.4)
|
|
$
|
1.4
|
|
350.0
|
%
|
Same-store gross profit — used
|
|
$
|
0.9
|
|
$
|
(0.4)
|
|
$
|
1.3
|
|
325.0
|
%
|
Average gross profit per used truck retailed
|
|
$
|
2,589
|
|
$
|
(1,471)
|
|
$
|
4,060
|
|
276.0
|
%
|
Same-store average gross profit per used truck retailed
|
|
$
|
2,660
|
|
$
|
(1,471)
|
|
$
|
4,131
|
|
280.8
|
%
|
Gross margin % — used
|
|
|
5.3
|
%
|
|
(3.0)
|
%
|
|
8.3
|
%
|
276.7
|
%
|
Same-store gross margin % — used
|
|
|
5.6
|
%
|
|
(3.0)
|
%
|
|
8.6
|
%
|
286.7
|
%
|
Units
Retail unit sales of used trucks increased from 2016 to 2017 due to a 61 unit increase from net dealership acquisitions, coupled with a 49 unit increase in same-store retail unit sales.
The overall increase from 2016 to 2017 is primarily due to our acquisitions of our Canadian truck dealerships, which occurred during the second and fourth quarters of 2016, and a more stable used truck pricing environment due in part to a reduction in excess capacity in the market and our ability to proactively manage our used truck inventory through the purchase and sale of more desirable trucks.
Revenues
Used commercial truck retail sales revenue increased from 2016 to 2017 due to a $2.8 million increase from net dealership acquisitions, coupled with a $2.7 million increase in same-store revenues. The same-store revenue increase is due to the increase in same-store used retail unit sales, which increased revenue by $2.5 million, coupled with an $880 per unit increase in comparative average selling prices, which increased revenue by $0.2 million.
Gross Profit
Used commercial truck retail gross profit increased from 2016 to 2017 due to a $1.3 million increase in same-store gross profit, coupled with a $0.1 million increase from net dealership acquisitions. The increase in same-store gross profit is due to a $4,131 per unit increase in average gross profit per used truck retailed, which increased gross profit by $1.1 million, coupled with the increase in same-store used retail unit sales, which increased gross profit by $0.2 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
Service and Parts Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Service and parts revenue
|
|
$
|
78.0
|
|
$
|
71.4
|
|
$
|
6.6
|
|
9.2
|
%
|
Same-store service and parts revenue
|
|
$
|
67.6
|
|
$
|
71.4
|
|
$
|
(3.8)
|
|
(5.3)
|
%
|
Gross profit — service and parts
|
|
$
|
28.8
|
|
$
|
26.4
|
|
$
|
2.4
|
|
9.1
|
%
|
Same-store service and parts gross profit
|
|
$
|
25.4
|
|
$
|
26.4
|
|
$
|
(1.0)
|
|
(3.8)
|
%
|
Gross margin % — service and parts
|
|
|
36.9
|
%
|
|
37.0
|
%
|
|
(0.1)
|
%
|
(0.3)
|
%
|
Same-store service and parts gross margin %
|
|
|
37.6
|
%
|
|
37.0
|
%
|
|
0.6
|
%
|
1.6
|
%
|
Revenues
Service and parts revenue increased from 2016 to 2017 due to a $10.4 million increase from net dealership acquisitions, offset by a $3.8 million decrease in same-store revenues. Customer pay work represents approximately 85% of PTG’s service and parts revenue, largely due to the significant amount of retail sales of parts and accessories.
The decrease in same-store revenue is due to a $2.5 million, or 4.2%, decrease in customer pay revenue, a $0.8 million, or 8.9%, decrease in warranty revenue, and a $0.5 million, or 16.1%, decrease in body shop revenue.
The decrease in same-store service and parts revenue is largely due to the decline in wholesale parts sales due to fewer trucks in operation related to the excess capacity seen in the marketplace over the last twelve months.
Gross Profit
Service and parts gross profit increased from 2016 to 2017 due to a $3.4 million increase from net dealership acquisitions, offset by a $1.0 million decrease in same-store gross profit. The same-store gross profit decrease is due to the decrease in same-store revenues, which decreased gross profit by $1.4 million, offset by a 0.6% increase in gross margin, which increased gross profit by $0.4 million. The same-store gross profit decrease is due to a $0.4 million, or 9.5%, decrease in warranty gross profit, a $0.3 million, or 1.6%, decrease in customer pay gross profit, and a $0.3 million, or 10.3%, decrease in body shop gross profit. Consistent with the decline in same-store revenues, the decrease in same-store service and parts gross profit is largely due to the decline in wholesale parts sales due to fewer trucks in operation related to the excess capacity seen in the marketplace over the last twelve months.
Commercial Vehicle Distribution Data
(In millions, except unit amounts)
Our commercial vehicle distribution business is comprised of our Penske Commercial Vehicles Australia business and our Penske Power Systems business. These businesses generated $112.1 million of revenue during the three months ended March 31, 2017 compared to $100.7 million of revenue during the three months ended March 31, 2016, an increase of 11.3%. Excluding $5.6 million of favorable foreign currency fluctuations, revenues increased 5.7%.
These businesses generated $29.3 million of gross profit during the three months ended March 31, 2017 compared to $24.8 million of gross profit during the three months ended March 31, 2016, an increase of 18.1%. Excluding $1.5 million of favorable foreign currency fluctuations, gross profit increased 12.1%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
Penske Commercial Vehicles Australia Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Vehicle and parts unit sales
|
|
|
312
|
|
|
294
|
|
|
18
|
|
6.1
|
%
|
Sales revenue
|
|
$
|
64.8
|
|
$
|
55.9
|
|
$
|
8.9
|
|
15.9
|
%
|
Gross profit
|
|
$
|
10.9
|
|
$
|
7.9
|
|
$
|
3.0
|
|
38.0
|
%
|
The increase in revenue and gross profit of PCV Australia from 2016 to 2017 is primarily attributable to recently acquired business. The increase in units is due to an overall improvement in market conditions, as well as due to the recent strengthening of the Australian Dollar versus the U.S. Dollar and British Pound, including the pricing impact on the products sold by PCV Australia.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
Penske Power Systems Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Sales revenue
|
|
$
|
47.3
|
|
$
|
44.8
|
|
$
|
2.5
|
|
5.6
|
%
|
Gross profit
|
|
$
|
18.4
|
|
$
|
16.9
|
|
$
|
1.5
|
|
8.9
|
%
|
The increase in revenue and gross profit of PPS from 2016 to 2017 is primarily attributable to continued new order growth when compared to the same period last year, a change in mix of product related sales, as well as the addition of Western Star and MAN franchises at selected branches, and improving economic conditions which have led to an increase in mining repowers and parts sales.
Selling, General and Administrative Data
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
Selling, General and Administrative Data
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Personnel expense
|
|
$
|
345.3
|
|
$
|
326.7
|
|
$
|
18.6
|
|
5.7
|
%
|
Advertising expense
|
|
$
|
28.0
|
|
$
|
24.0
|
|
$
|
4.0
|
|
16.7
|
%
|
Rent & related expense
|
|
$
|
76.0
|
|
$
|
72.0
|
|
$
|
4.0
|
|
5.6
|
%
|
Other expense
|
|
$
|
152.4
|
|
$
|
136.2
|
|
$
|
16.2
|
|
11.9
|
%
|
Total SG&A expenses
|
|
$
|
601.7
|
|
$
|
558.9
|
|
$
|
42.8
|
|
7.7
|
%
|
Same-store SG&A expenses
|
|
$
|
561.1
|
|
$
|
556.5
|
|
$
|
4.6
|
|
0.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel expense as % of gross profit
|
|
|
44.6
|
%
|
|
45.1
|
%
|
|
(0.5)
|
%
|
(1.1)
|
%
|
Advertising expense as % of gross profit
|
|
|
3.6
|
%
|
|
3.3
|
%
|
|
0.3
|
%
|
9.1
|
%
|
Rent & related expense as % of gross profit
|
|
|
9.8
|
%
|
|
10.0
|
%
|
|
(0.2)
|
%
|
(2.0)
|
%
|
Other expense as % of gross profit
|
|
|
19.7
|
%
|
|
18.8
|
%
|
|
0.9
|
%
|
4.8
|
%
|
Total SG&A expenses as % of gross profit
|
|
|
77.7
|
%
|
|
77.2
|
%
|
|
0.5
|
%
|
0.6
|
%
|
Same-store SG&A expenses as % of same-store gross profit
|
|
|
77.9
|
%
|
|
77.1
|
%
|
|
0.8
|
%
|
1.0
|
%
|
Selling, general and administrative expenses (“SG&A”) increased from 2016 to 2017 due to a $38.2 million increase from net acquisitions, coupled with a $4.6 million, or 0.8%, increase in same-store SG&A. Excluding the $23.8 million reduction related to foreign currency fluctuations, same-store SG&A increased 5.1%. The increase in SG&A is primarily due to an increase in variable personnel expenses as a result of the 7.0% increase in gross profit compared to the prior year. SG&A as a percentage of gross profit was 77.7%, an increase of 50 basis points compared to 77.2% in the prior year. SG&A expenses as a percentage of total revenue was 11.8% and 11.6% in the three months ended March 31, 2017 and 2016, respectively.
Depreciation
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Depreciation
|
|
$
|
22.4
|
|
$
|
20.8
|
|
$
|
1.6
|
|
7.7
|
%
|
The increase in depreciation from 2016 to 2017 is due to a $1.1 million increase from net acquisitions, coupled with a $0.5 million, or 2.4%, increase in same-store depreciation. The overall increase is primarily related to our ongoing facility improvements and expansion programs.
Floor Plan Interest Expense
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Floor plan interest expense
|
|
$
|
13.7
|
|
$
|
12.8
|
|
$
|
0.9
|
|
7.0
|
%
|
The increase in floor plan interest expense from 2016 to 2017 is primarily due to a $0.6 million increase from net dealership acquisitions, coupled with a $0.3 million, or 2.4%, increase in same-store floor plan interest expense. The overall increase is primarily due to increases in the amounts outstanding under floor plan arrangements, due in part to increased levels of inventory, and higher applicable rates.
Other Interest Expense
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Other interest expense
|
|
$
|
25.0
|
|
$
|
17.2
|
|
$
|
7.8
|
|
45.3
|
%
|
The increase in other interest expense from 2016 to 2017 is primarily due to the issuance of our $500.0 million 5.50% senior subordinated notes in May 2016, as well as an increase in outstanding revolver borrowings under the U.S. and U.K. credit agreements and our Australia working capital loan agreement, as well as an increase in applicable rates.
Equity in Earnings of Affiliates
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Equity in earnings of affiliates
|
|
$
|
13.2
|
|
$
|
5.5
|
|
$
|
7.7
|
|
140.0
|
%
|
The increase in equity in earnings of affiliates from 2016 to 2017 is primarily due to an increase in our investment in PTL from 9.0% to 23.4% in July 2016. Equity in earnings of affiliates from PTL increased by $8.4 million from 2016 to 2017. This increase was partially offset by a decrease in earnings from our retail automotive joint ventures.
Income Taxes
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017 vs. 2016
|
|
|
|
2017
|
|
2016
|
|
Change
|
|
% Change
|
|
Income taxes
|
|
$
|
41.1
|
|
$
|
39.4
|
|
$
|
1.7
|
|
4.3
|
%
|
Income taxes increased from 2016 to 2017 primarily due to a $5.1 million increase in our pre-tax income compared to the prior year.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing, the acquisition of new businesses, the improvement and expansion of existing facilities, the purchase or construction of new facilities, debt service and repayments, dividends and potential repurchases of our outstanding securities under the program discussed below. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions, mortgages, dividends and distributions from joint venture investments or the issuance of equity securities.
We have historically expanded our operations through organic growth and the acquisition of dealerships and other businesses. We believe that cash flow from operations, dividends and distributions from our joint venture investments and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our existing operations and current commitments for at least the next twelve months. In the event we pursue significant acquisitions or other expansion opportunities, significant repurchases of our outstanding securities, or refinance or repay existing debt, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional borrowings, which sources of funds may not necessarily be available on terms acceptable to us, if at all. In addition, our liquidity could be negatively impacted in the event we fail to comply with the covenants under our various financing and operating agreements or in the event our floor plan financing is withdrawn.
As of March 31, 2017, we had working capital of $169.3 million, including $72.2 million of cash available to fund our operations and capital commitments. In addition, we had $413.0 million, £43.0 million ($54.0 million), and AU
$24.4 million ($18.6 million) available for borrowing under our U.S. credit agreement, U.K. credit agreement, and Australian working capital loan agreement, respectively.
Securities Repurchases
From time to time, our Board of Directors has authorized securities repurchase programs pursuant to which we may, as market conditions warrant, purchase our outstanding common stock or debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. We have historically funded any such repurchases using cash flow from operations, borrowings under our U.S. credit facility, and borrowings under our U.S. floor plan arrangements. The decision to make repurchases will be based on factors such as the market price of the relevant security versus our view of its intrinsic value, the potential impact of such repurchases on our capital structure, and our consideration of any alternative uses of our capital, such as for acquisitions and strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy. In the fourth quarter of 2015, our Board of Directors increased the authority delegated to management to repurchase our outstanding securities to $200.0 million. As of March 31, 2017, we have $29.5 million in repurchase authorization under the existing securities repurchase program. Refer to the disclosures provided in Part I, Item 1, Note 10 of the Notes to our Consolidated Condensed Financial Statements for a summary of shares repurchased under our securities repurchase program during the three months ended March 31, 2017.
Dividends
We paid the following cash dividends on our common stock in 2016 and 2017:
Per Share Dividends
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.26
|
|
Second Quarter
|
|
|
0.27
|
|
Third Quarter
|
|
|
0.28
|
|
Fourth Quarter
|
|
|
0.29
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
0.30
|
|
Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors, which may include our earnings, capital requirements, restrictions relating to any then-existing indebtedness, financial condition and other factors.
Vehicle Financing
We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale, and a portion of our used vehicle inventories for retail sale, under floor plan and other revolving arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. In the U.S., the floor plan arrangements are due on demand; however, we have not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. We typically make monthly interest payments on the amount financed. Outside of the U.S., substantially all of the floor plan arrangements are payable on demand or have an original maturity of 90 days or less, and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.
The agreements typically grant a security interest in substantially all of the assets of our dealership and distribution subsidiaries and, in the U.S., Australia and New Zealand, are guaranteed or partially guaranteed by us. Interest rates under the arrangements are variable and increase or decrease based on changes in the prime rate, defined LIBOR,
Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, or the Australian or New Zealand Bank Bill Swap Rate. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing. We also receive non-refundable credits from certain of our vehicle manufacturers, which are treated as a reduction of cost of sales as vehicles are sold.
Long-Term Debt Obligations
As of March 31, 2017, we had the following long-term debt obligations outstanding:
|
|
|
|
|
|
|
March 31,
|
|
(In millions)
|
|
2017
|
|
U.S. credit agreement — revolving credit line
|
|
$
|
287.0
|
|
U.K. credit agreement — revolving credit line
|
|
|
146.8
|
|
U.K. credit agreement — overdraft line of credit
|
|
|
—
|
|
5.50% senior subordinated notes due 2026
|
|
|
493.9
|
|
5.375% senior subordinated notes due 2024
|
|
|
296.9
|
|
5.75% senior subordinated notes due 2022
|
|
|
545.3
|
|
Australia working capital loan agreement
|
|
|
19.9
|
|
Mortgage facilities
|
|
|
215.0
|
|
Other
|
|
|
32.6
|
|
Total long-term debt
|
|
$
|
2,037.4
|
|
As of March 31, 2017, we were in compliance with all covenants under our credit agreements and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part I, Item 1, Note 7 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of our long-term debt obligations.
Short-Term Borrowings
We have four principal sources of short-term borrowings: the revolving portion of the U.S. credit agreement, the revolving portion of the U.K. credit agreement, our Australian working capital loan agreement and the floor plan agreements that we utilize to finance our vehicle inventories. We are also able to access availability under the floor plan agreements to fund our cash needs, including payments made relating to our higher interest rate revolving credit agreements.
During the three months ended March 31, 2017, outstanding revolving commitments varied between $233.0 million and $532.0 million under the U.S. credit agreement, between £14.0 million and £117.0 million ($17.6 million and $146.8 million) under the U.K. credit agreement’s revolving credit line (excluding the overdraft facility), and between AU $23.2 million and AU $39.5 million ($17.7 million and $30.1 million) under the Australia working capital loan agreement. The amounts outstanding under our floor plan agreements varied based on the timing of the receipt and expenditure of cash in our operations, driven principally by the levels of our vehicle inventories.
PTL Dividends
We currently hold a 23.4% ownership interest in Penske Truck Leasing. In July 2016, we increased our ownership interest in PTL from 9.0% to 23.4% as a result of our acquisition of an additional 14.4% ownership interest, as discussed previously. We receive pro rata cash distributions relating to this investment, typically in April, May, July and November of each year. We currently expect to continue to receive future distributions from PTL quarterly, subject to its financial performance.
Operating Leases
As of March 31, 2017, we were in compliance with all covenants under these leases, and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part I, Item 1, Note 9 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of our operating leases.
Sale/Leaseback Arrangements
We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds that vary from period to period.
Off-Balance Sheet Arrangements
Refer to the disclosures provided in Part I, Item 1, Note 9 of the Notes to our Consolidated Condensed Financial Statements for a description of our off-balance sheet arrangements which include lease obligations, indemnification to GEC related to PTL senior unsecured notes, and a limited parent guarantee related to our floor plan credit agreement with Mercedes Benz Financial Services Australia.
Cash Flows
Cash and cash equivalents increased by $48.2 million and decreased by $16.8 million during the three months ended March 31, 2017 and 2016, respectively. The major components of these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by continuing operating activities was $198.6 million and $82.6 million during the three months ended March 31, 2017 and 2016, respectively. Cash flows from continuing operating activities includes net income, as adjusted for non-cash items and the effects of changes in working capital.
We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale, and a portion of our used vehicle inventories for retail sale, under floor plan and other revolving arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. We retain the right to select which, if any, financing source to utilize in connection with the procurement of vehicle inventories. Many vehicle manufacturers provide vehicle financing for the dealers representing their brands; however, it is not a requirement that we utilize this financing. Historically, our floor plan finance source has been based on aggregate pricing considerations.
In accordance with generally accepted accounting principles relating to the statement of cash flows, we report all cash flows arising in connection with floor plan notes payable with the manufacturer of a particular new vehicle as an operating activity in our statement of cash flows, and all cash flows arising in connection with floor plan notes payable to a party other than the manufacturer of a particular new vehicle, all floor plan notes payable relating to pre-owned vehicles, and all floor plan notes payable related to our commercial vehicles in Australia and New Zealand, as a financing activity in our statement of cash flows. Currently, the majority of our non-trade vehicle financing is with other manufacturer captive lenders. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing.
We believe that changes in aggregate floor plan liabilities are typically linked to changes in vehicle inventory, and therefore, are an integral part of understanding changes in our working capital and operating cash flow. As a result, we prepare the following reconciliation to highlight our operating cash flows with all changes in vehicle floor plan being classified as an operating activity for informational purposes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
(In millions)
|
|
2017
|
|
2016
|
|
Net cash from continuing operating activities as reported
|
|
$
|
198.6
|
|
$
|
82.6
|
|
Floor plan notes payable — non-trade as reported
|
|
|
63.0
|
|
|
54.9
|
|
Net cash from continuing operating activities including all floor plan notes payable
|
|
$
|
261.6
|
|
$
|
137.5
|
|
Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $342.1 million and $72.9 million during the three months ended March 31, 2017 and 2016, respectively. Cash flows from continuing investing activities consist primarily of cash used for capital expenditures and net expenditures for acquisitions and other investments. Capital expenditures were $36.9 million and $46.8 million during the three months ended March 31, 2017 and 2016, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities, the construction of new facilities, the acquisition of the property or buildings associated with existing leased facilities, and the acquisition of land for future development. We currently expect to finance our retail automotive segment and retail commercial truck segment capital expenditures with operating cash flows or borrowings under our U.S. or U.K. credit facilities. Cash used in acquisitions and other investments, net of cash acquired, was $314.2 million and $0.4 million during the three months ended March 31, 2017 and 2016, respectively, and included cash used to repay sellers floor plan liabilities in such business acquisitions of $81.2 million during the three months ended March 31, 2017.
Cash Flows from Continuing Financing Activities
Cash provided by continuing financing activities was $187.8 million and cash used in continuing financing activities was $29.4 million during the three months ended March 31, 2017 and 2016, respectively. Cash flows from continuing financing activities include net borrowings or repayments of long-term debt, repurchases of common stock, net borrowings or repayments of floor plan notes payable non-trade, and dividends.
We had net borrowings of long-term debt of $153.1 million and $111.5 million during the three months ended March 31, 2017 and 2016, respectively. We had net borrowings of floor plan notes payable non-trade of $63.0 million and $54.9 million during the three months ended March 31, 2017 and 2016, respectively. We repurchased common stock for a total of $2.7 million and $167.9 million during the three months ended March 31, 2017 and 2016, respectively. We also paid cash dividends to our stockholders of $25.6 million and $23.3 million during the three months ended March 31, 2017 and 2016, respectively.
Cash Flows from Discontinued Operations
Cash flows relating to discontinued operations are not currently considered, nor are they expected to be, material to our liquidity or our capital resources. Management does not believe that there are any material past, present or upcoming cash transactions relating to discontinued operations.
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 18% 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 up to two directors who are representatives 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 2024, upon the mutual consent of the parties, or when either party no longer owns any of our common stock.
Other Related Party Interests and Transactions
Roger S. Penske is also a managing member of Transportation Resource Partners, an organization that invests in transportation-related industries. Robert H. Kurnick, Jr., our President and a director, is also the President and a director of Penske Corporation. Greg Penske, one of our directors, is the son of our chairman and is also a board member of Penske Corporation. Kanji Sasaki, one of our directors and officers, is also an employee of Mitsui & Co.
We sometimes pay to and/or receive fees from Penske Corporation, its subsidiaries, and its affiliates, for services rendered in the ordinary course of business or to reimburse payments made to third parties on each other’s behalf. These transactions are reviewed periodically by our Audit Committee and reflect the provider’s cost or an amount mutually agreed upon by both parties.
On July 27, 2016, we acquired an additional 14.4% ownership interest in PTL from GE Capital for approximately $498.5 million in cash. After the transaction, PTL is owned 41.1% by Penske Corporation, 23.4% by us, 20.0% by Mitsui, and 15.5% by GE Capital. In connection with this transaction, the PTL partners agreed to amend and restate the existing partnership agreement among the partners which, among other things, provides us with specified partner distribution and governance rights and restricts our ability to transfer our interests. Specifically, as a limited partner, we are now entitled to one of seven representatives of PTL’s Advisory Committee and approval rights over significant governance items of PTL. We continue to have the right to pro rata quarterly distributions equal to 50% of PTL’s consolidated net income, and we expect to realize significant cash tax savings.
We may only transfer our 23.4% ownership interest in PTL with the unanimous consent of the other partners, or if we provide the remaining partners with a right of first offer to acquire our interests, except that we may transfer up to 9.02% of our interests to Penske Corporation without complying with the right of first offer to the remaining partners. We and Penske Corporation have previously agreed that (1) in the event of any transfer by Penske Corporation of their partnership interests to a third party, we shall be entitled to “tag-along” by transferring a pro rata amount of our partnership interests on similar terms and conditions, and (2) Penske Corporation is entitled to a right of first refusal in the event of any transfer of our partnership interests, subject to the terms of the partnership agreement. Additionally, PTL has agreed to indemnify the general partner for any actions in connection with managing PTL, except those taken in bad faith or in violation of the partnership agreement.
The partnership agreement allows GE Capital or Penske Corporation, beginning December 31, 2017, to give notice to require PTL to begin to effect an initial public offering of equity securities, subject to certain limitations, as soon as practicable after the first anniversary of the initial notice. The party that is not exercising this right may seek to find a third party to purchase all of the partnership interests from the exercising party or to propose another alternative to such equity offers. In connection with the right to cause PTL to conduct an initial public offering, the PTL partners have agreed to customary demand and piggyback registration rights. As part of the transaction, beginning in 2025, PAG and Mitsui have been granted a similar right to require PTL to begin an initial public offering of equity securities, subject to certain limitations, as soon as reasonably practicable. The term of the partnership agreement was extended to December 31, 2035 or such later date as the limited partners may agree.
We have also entered into other joint ventures with certain related parties as more fully discussed below.
Joint Venture Relationships
We are party to a number of joint ventures pursuant to which we own and operate automotive dealerships together with other investors. We may provide these dealerships with working capital and other debt financing at costs that are based on our incremental borrowing rate. As of March 31, 2017, our retail automotive joint venture relationships included:
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
Dealerships
|
|
Ownership Interest
|
Fairfield, Connecticut
|
|
Audi, Mercedes-Benz, Sprinter, Porsche, smart
|
|
80.00
|
% (A) (B)
|
Greenwich, Connecticut
|
|
Mercedes-Benz
|
|
80.00
|
% (A) (B)
|
Northern Italy
|
|
BMW, MINI, Maserati, Porsche, Audi, Land Rover, Volvo, Nissan
|
|
84.00
|
% (B)
|
Aachen, Germany
|
|
Audi, Maserati, SEAT, Skoda, Volkswagen
|
|
68.00
|
% (C)
|
Frankfurt, Germany
|
|
Lexus, Toyota, Volkswagen
|
|
50.00
|
% (D)
|
Barcelona, Spain
|
|
BMW, MINI
|
|
50.00
|
% (D)
|
Tokyo, Japan
|
|
BMW, MINI, Rolls-Royce, Ferrari, ALPINA
|
|
49.00
|
% (D)
|
|
(A)
|
|
An entity controlled by one of our directors, Lucio A. Noto, owns a 20% interest in this joint venture.
|
|
(B)
|
|
Entity is consolidated in our financial results.
|
|
(C)
|
|
Entity is consolidated in our financial statements as a result of our purchase of an additional 10% interest in this joint venture in the third quarter of 2015. In March 2016, we acquired an additional 8% interest in this joint venture.
|
|
(D)
|
|
Entity is accounted for using the equity method of accounting.
|
Additionally, we are party to non-automotive joint ventures including our investments in Penske Commercial Leasing Australia (33%), Penske Vehicle Services (31%), PTL (23.4%), and National Powersport Auctions (7%), that are accounted for under the equity method.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, fluctuating with general economic cycles. During economic downturns, the automotive and truck 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
Dealership
. Our business is modestly seasonal overall. Our U.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, vehicle demand, and to a lesser extent demand for service and parts, is generally lower during the winter months than in other seasons, particularly in regions of the U.S. where dealerships may be subject to severe winters. Our U.K. operations generally experience higher volumes of vehicle sales in the first and third quarters of each year, due primarily to vehicle registration practices in the U.K.
Commercial Vehicle Distribution
. Our commercial vehicle distribution business generally experiences higher sales volumes during the second quarter of the year, which is primarily attributable to commercial vehicle customers completing annual capital expenditures before their fiscal year-end, which is typically June 30 in Australia.
Effects of Inflation
We believe that inflation rates over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services; however, we cannot be sure there will be no such effect in the future. We finance substantially all of our inventory through various revolving floor plan arrangements with interest rates that vary based on various benchmarks. Such rates have historically increased during periods of increasing inflation.
Forward-Looking Statements
Certain statements and information set forth herein, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “goal,” “plan,” “seek,” “project,” “continue,” “will,” “would,” and variations of such words and similar expressions are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this report or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements include, without limitation, statements with respect to:
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our future financial and operating performance;
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future acquisitions and dispositions;
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future potential capital expenditures and securities repurchases;
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our ability to realize cost savings and synergies;
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our ability to respond to economic cycles;
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trends in the automotive retail industry and commercial vehicles industries and in the general economy in the various countries in which we operate;
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our ability to access the remaining availability under our credit agreements;
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performance of joint ventures, including PTL;
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future foreign exchange rates;
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the outcome of various legal proceedings;
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results of self-insurance plans;
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trends affecting our future financial condition or results of operations; and
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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 2016 annual report on Form 10-K filed February 24, 2017. Important factors that could cause actual results to differ materially from our expectations include the following:
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our business and the automotive retail and commercial vehicles industries in general are susceptible to adverse economic conditions, including changes in interest rates, foreign exchange rates, customer demand, customer confidence, fuel prices, unemployment rates and credit availability;
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the political and economic outcome of Brexit in the U.K.;
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the number of new and used vehicles sold in our markets;
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the effect on our businesses of new mobility technologies such as shared vehicle services, such as Uber and Lyft, and the eventual availability of driverless vehicles;
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vehicle manufacturers exercise significant control over our operations, and we depend on them and the continuation of our franchise and distribution agreements in order to operate our business;
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we depend on the success, popularity and availability of the brands we sell, and adverse conditions affecting one or more vehicle manufacturers, including the adverse impact on the vehicle and parts supply chain due to natural disasters or other disruptions that interrupt the supply of vehicles and parts to us, may negatively impact our revenues and profitability;
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we are subject to the risk that a substantial number of our new or used inventory may be unavailable due to recall or other reasons;
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the success of our commercial vehicle distribution and engine and power systems distribution operations depends upon continued availability of the vehicles, engines, power systems, and other parts we distribute, demand for those vehicles, engines, power systems, and parts and general economic conditions in those markets;
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a restructuring of any significant vehicle manufacturers or suppliers;
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our operations may be affected by severe weather or other periodic business interruptions;
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we have substantial risk of loss not covered by insurance;
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we may not be able to satisfy our capital requirements for acquisitions, facility renovation projects, financing the purchase of our inventory, or refinancing of our debt when it becomes due;
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our level of indebtedness may limit our ability to obtain financing generally and may require that a significant portion of our cash flow be used for debt service;
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non-compliance with the financial ratios and other covenants under our credit agreements and operating leases;
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higher interest rates may significantly increase our variable rate interest costs and, because many customers finance their vehicle purchases, decrease vehicle sales;
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our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign currency values, which have most recently occurred as a result of the June 2016 U.K. referendum for Brexit;
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import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;
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with
respect to PTL, changes in the financial health of its customers, labor strikes or work stoppages by its employees, a reduction in PTL’s asset utilization rates, continued availability from truck manufacturers and
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suppliers of vehicles and parts for its fleet, changes in values of used trucks which affects PTL’s profitability on truck sales, compliance costs in regards to its trucking fleet and truck drivers, its ability to retain qualified drivers and technicians, conditions in the capital markets to assure PTL’s continued availability of capital to purchase trucks, the effect of changes in lease accounting rules on PTL customers’ purchase/lease decisions, and industry competition, each of which could impact distributions to us;
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we are dependent on continued availability of our information technology systems;
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if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional qualified personnel;
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new or enhanced regulations relating to automobile dealerships including those that may be issued by the Consumer Finance Protection Bureau in the U.S. or the Financial Conduct Authority in the U.K. restricting automotive financing;
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changes in tax, financial or regulatory rules or requirements;
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we could be subject to legal and administrative proceedings which, if the outcomes are adverse to us, could have a material adverse effect on our business;
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if state dealer laws in the U.S. are repealed or weakened, our automotive dealerships may be subject to increased competition and may be more susceptible to termination, non-renewal or renegotiation of their franchise agreements; some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests; and
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shares of our common stock eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well.
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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 the Securities and Exchange Commission’s rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rates.
We are exposed to market risk from changes in 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 LIBOR or the Bank of England Base Rate. Based on the amount outstanding under these facilities as of March 31, 2017, a 100 basis point change in interest rates would result in an approximate $4.3 million change to our annual other interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over the prime rate, defined LIBOR, the Finance House Base Rate, or the Euro Interbank Offered Rate, the Canadian Prime Rate, or the Australian or New Zealand Bank Bill Swap Rate (BBSW).
Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements subject to variable interest payments during the trailing twelve months ended March 31, 2017, a 100 basis point change in interest rates would result in an approximate $32.2 million change to our annual floor plan interest expense.
We evaluate our exposure to interest rate fluctuations and follow established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to mitigate the effect of interest rate fluctuations on our earnings and cash flows. These policies include:
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the maintenance of our overall debt portfolio with targeted fixed and variable rate components;
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the use of authorized derivative instruments;
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the prohibition of using derivatives for trading or other speculative purposes; and
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the prohibition of highly leveraged derivatives or derivatives which we are unable to reliably value, or for which we are unable to obtain a market quotation.
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Interest rate fluctuations affect the fair market value of our fixed rate debt, mortgages, and certain seller financed promissory notes, but with respect to such fixed rate debt instruments, do not impact our earnings or cash flows.
Foreign Currency Exchange Rates.
As of March 31, 2017, we had consolidated operations in the U.K., Germany, Italy, Canada, Australia and New Zealand. In each of these markets, the local currency is the functional currency. 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 $224.4 million change to our revenues for the three months ended March 31, 2017.
We purchase certain of our new vehicles, parts and other products from non-U.S. manufacturers. Although we purchase the majority of our inventories in the local functional currency, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions and foreign exchange rate volatility which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including the principal executive and financial officers, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive and financial officers, to allow timely discussions regarding required disclosure.
Based upon this evaluation, our 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.