UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12297
Penske Automotive Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
|
22-3086739 |
(State or other jurisdiction of |
|
(I.R.S. Employer |
incorporation or organization) |
|
Identification No.) |
2555 Telegraph Road, |
|
|
Bloomfield Hills, Michigan |
|
48302-0954 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrants telephone number, including area code:
(248) 648-2500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 22, 2013, there were 90,201,959 shares of voting common stock outstanding.
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
|
|
June 30, |
|
December 31, |
| ||
|
|
(Unaudited) |
| ||||
|
|
(In thousands, except |
| ||||
ASSETS |
|
|
|
|
| ||
Cash and cash equivalents |
|
$ |
26,254 |
|
$ |
43,447 |
|
Accounts receivable, net of allowance for doubtful accounts of $2,522 and $2,979 |
|
530,647 |
|
554,851 |
| ||
Inventories |
|
2,125,771 |
|
2,000,206 |
| ||
Other current assets |
|
90,352 |
|
90,485 |
| ||
Assets held for sale |
|
33,849 |
|
73,398 |
| ||
|
|
|
|
|
| ||
Total current assets |
|
2,806,873 |
|
2,762,387 |
| ||
Property and equipment, net |
|
1,148,495 |
|
1,031,188 |
| ||
Goodwill |
|
956,180 |
|
978,147 |
| ||
Franchise value |
|
274,986 |
|
283,152 |
| ||
Equity method investments |
|
332,503 |
|
303,160 |
| ||
Other long-term assets |
|
18,595 |
|
20,956 |
| ||
|
|
|
|
|
| ||
Total assets |
|
$ |
5,537,632 |
|
$ |
5,378,990 |
|
|
|
|
|
|
| ||
LIABILITIES AND EQUITY |
|
|
|
|
| ||
Floor plan notes payable |
|
$ |
1,474,440 |
|
$ |
1,408,362 |
|
Floor plan notes payable non-trade |
|
753,130 |
|
725,526 |
| ||
Accounts payable |
|
314,050 |
|
263,881 |
| ||
Accrued expenses |
|
226,968 |
|
223,972 |
| ||
Current portion of long-term debt |
|
44,896 |
|
19,493 |
| ||
Liabilities held for sale |
|
23,547 |
|
51,279 |
| ||
|
|
|
|
|
| ||
Total current liabilities |
|
2,837,031 |
|
2,692,513 |
| ||
Long-term debt |
|
875,307 |
|
918,024 |
| ||
Deferred tax liabilities |
|
313,756 |
|
287,818 |
| ||
Other long-term liabilities |
|
155,273 |
|
164,314 |
| ||
|
|
|
|
|
| ||
Total liabilities |
|
4,181,367 |
|
4,062,669 |
| ||
Commitments and contingent liabilities |
|
|
|
|
| ||
Equity |
|
|
|
|
| ||
Penske Automotive Group stockholders equity: |
|
|
|
|
| ||
Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding |
|
|
|
|
| ||
Common Stock, $0.0001 par value, 240,000 shares authorized; 90,202 shares issued and outstanding at June 30, 2013; 90,295 shares issued and outstanding at December 31, 2012 |
|
9 |
|
9 |
| ||
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding |
|
|
|
|
| ||
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding |
|
|
|
|
| ||
Additional paid-in-capital |
|
689,020 |
|
700,013 |
| ||
Retained earnings |
|
704,516 |
|
611,026 |
| ||
Accumulated other comprehensive income (loss) |
|
(41,505 |
) |
(6,833 |
) | ||
|
|
|
|
|
| ||
Total Penske Automotive Group stockholders equity |
|
1,352,040 |
|
1,304,215 |
| ||
|
|
|
|
|
| ||
Non-controlling interest |
|
4,225 |
|
12,106 |
| ||
|
|
|
|
|
| ||
Total equity |
|
1,356,265 |
|
1,316,321 |
| ||
|
|
|
|
|
| ||
Total liabilities and equity |
|
$ |
5,537,632 |
|
$ |
5,378,990 |
|
See Notes to Consolidated Condensed Financial Statements
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
June 30, |
|
June 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(Unaudited) |
| ||||||||||
|
|
(In thousands, except per share amounts) |
| ||||||||||
Revenue: |
|
|
|
|
|
|
|
|
| ||||
New vehicle |
|
$ |
1,930,040 |
|
$ |
1,711,868 |
|
$ |
3,678,822 |
|
$ |
3,261,792 |
|
Used vehicle |
|
1,082,310 |
|
936,978 |
|
2,084,338 |
|
1,872,273 |
| ||||
Finance and insurance, net |
|
95,849 |
|
81,279 |
|
182,595 |
|
159,242 |
| ||||
Service and parts |
|
391,554 |
|
362,194 |
|
776,919 |
|
723,314 |
| ||||
Other |
|
199,422 |
|
222,732 |
|
381,100 |
|
462,143 |
| ||||
Total revenues |
|
3,699,175 |
|
3,315,051 |
|
7,103,774 |
|
6,478,764 |
| ||||
Cost of sales: |
|
|
|
|
|
|
|
|
| ||||
New vehicle |
|
1,786,015 |
|
1,574,457 |
|
3,399,029 |
|
2,994,512 |
| ||||
Used vehicle |
|
1,000,703 |
|
864,454 |
|
1,924,164 |
|
1,723,791 |
| ||||
Service and parts |
|
156,358 |
|
150,160 |
|
317,196 |
|
303,002 |
| ||||
Other |
|
187,076 |
|
221,009 |
|
360,155 |
|
457,524 |
| ||||
Total cost of sales |
|
3,130,152 |
|
2,810,080 |
|
6,000,544 |
|
5,478,829 |
| ||||
Gross profit |
|
569,023 |
|
504,971 |
|
1,103,230 |
|
999,935 |
| ||||
Selling, general and administrative expenses |
|
440,331 |
|
400,637 |
|
854,770 |
|
788,619 |
| ||||
Depreciation |
|
14,985 |
|
13,319 |
|
29,516 |
|
26,310 |
| ||||
Operating income |
|
113,707 |
|
91,015 |
|
218,944 |
|
185,006 |
| ||||
Floor plan interest expense |
|
(10,900 |
) |
(9,845 |
) |
(21,168 |
) |
(19,368 |
) | ||||
Other interest expense |
|
(12,066 |
) |
(11,478 |
) |
(23,793 |
) |
(23,572 |
) | ||||
Equity in earnings of affiliates |
|
8,901 |
|
8,168 |
|
11,249 |
|
12,578 |
| ||||
Income from continuing operations before income taxes |
|
99,642 |
|
77,860 |
|
185,232 |
|
154,644 |
| ||||
Income taxes |
|
(35,164 |
) |
(27,093 |
) |
(63,571 |
) |
(53,926 |
) | ||||
Income from continuing operations |
|
64,478 |
|
50,767 |
|
121,661 |
|
100,718 |
| ||||
Income (Loss) from discontinued operations, net of tax |
|
(1,983 |
) |
(1,155 |
) |
(1,147 |
) |
(4,100 |
) | ||||
Net income |
|
62,495 |
|
49,612 |
|
120,514 |
|
96,618 |
| ||||
Less: Income attributable to non-controlling interests |
|
453 |
|
520 |
|
808 |
|
708 |
| ||||
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
62,042 |
|
$ |
49,092 |
|
$ |
119,706 |
|
$ |
95,910 |
|
Basic earnings per share attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
|
$ |
0.71 |
|
$ |
0.56 |
|
$ |
1.34 |
|
$ |
1.11 |
|
Discontinued operations |
|
(0.02 |
) |
(0.01 |
) |
(0.01 |
) |
(0.05 |
) | ||||
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
0.69 |
|
$ |
0.54 |
|
$ |
1.33 |
|
$ |
1.06 |
|
Shares used in determining basic earnings per share |
|
90,269 |
|
90,305 |
|
90,344 |
|
90,363 |
| ||||
Diluted earnings per share attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
|
| ||||
Continuing operations |
|
$ |
0.71 |
|
$ |
0.56 |
|
$ |
1.34 |
|
$ |
1.11 |
|
Discontinued operations |
|
(0.02 |
) |
(0.01 |
) |
(0.01 |
) |
(0.05 |
) | ||||
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
0.69 |
|
$ |
0.54 |
|
$ |
1.32 |
|
$ |
1.06 |
|
Shares used in determining diluted earnings per share |
|
90,305 |
|
90,337 |
|
90,380 |
|
90,395 |
| ||||
Amounts attributable to Penske Automotive Group common stockholders: |
|
|
|
|
|
|
|
|
| ||||
Income from continuing operations |
|
$ |
64,478 |
|
$ |
50,767 |
|
$ |
121,661 |
|
$ |
100,718 |
|
Less: Income attributable to non-controlling interests |
|
453 |
|
520 |
|
808 |
|
708 |
| ||||
Income from continuing operations, net of tax |
|
64,025 |
|
50,247 |
|
120,853 |
|
100,010 |
| ||||
Income (Loss) from discontinued operations, net of tax |
|
(1,983 |
) |
(1,155 |
) |
(1,147 |
) |
(4,100 |
) | ||||
Net income attributable to Penske Automotive Group common stockholders |
|
$ |
62,042 |
|
$ |
49,092 |
|
$ |
119,706 |
|
$ |
95,910 |
|
See Notes to Consolidated Condensed Financial Statements
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
|
|
Three Months Ended |
|
Six Months Ended |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
|
|
(Unaudited) |
| ||||||||||
|
|
(In thousands, except per share amounts) |
| ||||||||||
Net Income |
|
$ |
62,495 |
|
$ |
49,612 |
|
$ |
120,514 |
|
$ |
96,618 |
|
Other Comprehensive Income: |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
|
1,556 |
|
(11,415 |
) |
(35,097 |
) |
(1,489 |
) | ||||
Unrealized gain (loss) on interest rate swaps: |
|
|
|
|
|
|
|
|
| ||||
Unrealized gain(loss) arising during the period, net of tax benefit(provision) of ($370), $701, ($335), and $1,524, respectively |
|
566 |
|
(1,072 |
) |
512 |
|
(2,329 |
) | ||||
Reclassification adjustment for loss included in floor plan interest expense, net of tax provision of $364, $692, $1,087, and $1,361, respectively |
|
556 |
|
1,057 |
|
1,661 |
|
2,080 |
| ||||
Unrealized gain (loss) on interest rate swaps, net of tax |
|
1,122 |
|
(15 |
) |
2,173 |
|
(249 |
) | ||||
Other adjustments to Comprehensive Income, net |
|
303 |
|
534 |
|
(1,214 |
) |
1,543 |
| ||||
Other Comprehensive Income (Loss), Net of Taxes |
|
2,981 |
|
(10,896 |
) |
(34,138 |
) |
(195 |
) | ||||
Comprehensive Income |
|
65,476 |
|
38,716 |
|
86,376 |
|
96,423 |
| ||||
Less: Comprehensive income attributable to non-controlling interests |
|
453 |
|
520 |
|
1,342 |
|
708 |
| ||||
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
65,023 |
|
$ |
38,196 |
|
$ |
85,034 |
|
$ |
95,715 |
|
See Notes to Consolidated Condensed Financial Statements
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
|
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
| ||
|
|
(Unaudited) |
| ||||
|
|
(In thousands) |
| ||||
Operating Activities: |
|
|
|
|
| ||
Net income |
|
$ |
120,514 |
|
$ |
96,618 |
|
Adjustments to reconcile net income to net cash from continuing operating activities: |
|
|
|
|
| ||
Depreciation |
|
29,516 |
|
26,310 |
| ||
Earnings of equity method investments |
|
(10,226 |
) |
(12,578 |
) | ||
Loss from discontinued operations, net of tax |
|
1,147 |
|
4,100 |
| ||
Deferred income taxes |
|
25,839 |
|
7,793 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
|
4,405 |
|
(8,400 |
) | ||
Inventories |
|
(144,875 |
) |
(175,406 |
) | ||
Floor plan notes payable |
|
81,365 |
|
176,164 |
| ||
Accounts payable and accrued expenses |
|
62,132 |
|
93,237 |
| ||
Other |
|
5,826 |
|
(5,885 |
) | ||
Net cash from continuing operating activities |
|
175,643 |
|
201,953 |
| ||
Investing Activities: |
|
|
|
|
| ||
Purchase of equipment and improvements |
|
(143,591 |
) |
(57,322 |
) | ||
Acquisitions net, including repayment of sellers floor plan notes payable of $1,758 and $37,779, respectively |
|
(30,734 |
) |
(111,522 |
) | ||
Other |
|
(9,695 |
) |
(3,653 |
) | ||
Net cash from continuing investing activities |
|
(184,020 |
) |
(172,497 |
) | ||
Financing Activities: |
|
|
|
|
| ||
Proceeds from borrowings under U.S. credit agreement revolving credit line |
|
491,700 |
|
396,800 |
| ||
Repayments under U.S. credit agreement revolving credit line |
|
(519,700 |
) |
(414,800 |
) | ||
Repayments under U.S. credit agreement term loan |
|
(12,000 |
) |
|
| ||
Repurchase of 3.5% senior subordinated convertible notes |
|
|
|
(37,778 |
) | ||
Net borrowings (repayments) of car rental revolver |
|
82,115 |
|
|
| ||
Net borrowings (repayments) of other long-term debt |
|
(53,286 |
) |
11,573 |
| ||
Net borrowings (repayments) of floor plan notes payable non-trade |
|
33,478 |
|
35,218 |
| ||
Repurchases of common stock |
|
(15,813 |
) |
(9,829 |
) | ||
Dividends |
|
(26,216 |
) |
(18,918 |
) | ||
Other |
|
235 |
|
|
| ||
Net cash from continuing financing activities |
|
(19,487 |
) |
(37,734 |
) | ||
Discontinued operations: |
|
|
|
|
| ||
Net cash from discontinued operating activities |
|
15,708 |
|
(1,073 |
) | ||
Net cash from discontinued investing activities |
|
2,820 |
|
35,311 |
| ||
Net cash from discontinued financing activities |
|
(7,857 |
) |
(17,010 |
) | ||
Net cash from discontinued operations |
|
10,671 |
|
17,228 |
| ||
Net change in cash and cash equivalents |
|
(17,193 |
) |
8,950 |
| ||
Cash and cash equivalents, beginning of period |
|
43,447 |
|
26,997 |
| ||
Cash and cash equivalents, end of period |
|
$ |
26,254 |
|
$ |
35,947 |
|
|
|
|
|
|
| ||
Supplemental disclosures of cash flow information: |
|
|
|
|
| ||
Cash paid for: |
|
|
|
|
| ||
Interest |
|
$ |
47,019 |
|
$ |
43,780 |
|
Income taxes |
|
11,377 |
|
19,180 |
|
See Notes to Consolidated Condensed Financial Statements
PENSKE AUTOMOTIVE GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF EQUITY
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
Total |
|
|
|
|
| |||||||
|
|
Common Stock |
|
Additional |
|
|
|
Other |
|
Penske Automotive |
|
|
|
|
| |||||||||
|
|
Issued |
|
Amount |
|
Paid-in |
|
Retained |
|
Comprehensive |
|
Group Stockholders |
|
Non-controlling |
|
Total |
| |||||||
|
|
(Unaudited) |
| |||||||||||||||||||||
|
|
(Dollars in thousands) |
| |||||||||||||||||||||
Balance, January 1, 2013 |
|
90,294,765 |
|
$ |
9 |
|
$ |
700,013 |
|
$ |
611,026 |
|
$ |
(6,833 |
) |
$ |
1,304,215 |
|
$ |
12,106 |
|
$ |
1,316,321 |
|
Equity compensation |
|
414,755 |
|
|
|
4,585 |
|
|
|
|
|
4,585 |
|
|
|
4,585 |
| |||||||
Repurchase of common stock |
|
(507,561 |
) |
|
|
(15,813 |
) |
|
|
|
|
(15,813 |
) |
|
|
(15,813 |
) | |||||||
Dividends |
|
|
|
|
|
|
|
(26,216 |
) |
|
|
(26,216 |
) |
|
|
(26,216 |
) | |||||||
Distributions to non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,057 |
) |
(1,057 |
) | |||||||
Sale of subsidiary shares to non-controlling interests |
|
|
|
|
|
235 |
|
|
|
|
|
235 |
|
143 |
|
378 |
| |||||||
Deconsolidation of subsidiary |
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,309 |
) |
(8,309 |
) | |||||||
Foreign currency translation |
|
|
|
|
|
|
|
|
|
(35,631 |
) |
(35,631 |
) |
534 |
|
(35,097 |
) | |||||||
Interest rate swaps |
|
|
|
|
|
|
|
|
|
2,173 |
|
2,173 |
|
|
|
2,173 |
| |||||||
Other |
|
|
|
|
|
|
|
|
|
(1,214 |
) |
(1,214 |
) |
|
|
(1,214 |
) | |||||||
Net income |
|
|
|
|
|
|
|
119,706 |
|
|
|
119,706 |
|
808 |
|
120,514 |
| |||||||
Balance, June 30, 2013 |
|
90,201,959 |
|
$ |
9 |
|
$ |
689,020 |
|
$ |
704,516 |
|
$ |
(41,505 |
) |
$ |
1,352,040 |
|
$ |
4,225 |
|
$ |
1,356,265 |
|
See Notes to Consolidated Condensed Financial Statements
PENSKE AUTOMOTIVE GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. Interim Financial Statements
Business Overview
Unless the context otherwise requires, the use of the terms PAG, we, us, and our in these Notes to the Consolidated Condensed Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries.
We are the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of June 30, 2013, we operated 329 retail franchises, of which 172 franchises are located in the U.S. and 157 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K.
Each of our dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products. We also hold a 9.0% ownership interest in Penske Truck Leasing Co., L.P. (PTL), a leading provider of transportation services and supply chain management.
We are the Hertz rental car franchisee in the Memphis, Tennessee market and certain Indiana markets. We currently operate more than fifty on and off-airport Hertz rental car locations.
In June 2013, we acquired a 27% interest in Around-The Clock Freightliner (ATC), a retailer of Daimler branded medium, heavy and light-duty trucks in Texas and Oklahoma for $15,900. ATC operates five full service retail locations and three additional parts and service locations. We are using the equity method to account for our investment in ATC.
In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218,900 (approximately $200,000), which includes a targeted amount of AU $73,300 (approximately $67,000) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using cash flow from operations and available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.
Basis of Presentation
The following unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of June 30, 2013 and December 31, 2012 and for the three and six month periods ended June 30, 2013 and 2012 is unaudited, but includes all adjustments which the management of PAG believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for prior periods have been revised for entities which have been treated as discontinued operations through June 30, 2013, and the results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2012, which are included as part of our Annual Report on Form 10-K.
Recent Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, we are required to present either on the face of the statement of income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. We complied with the disclosure requirements of this ASU beginning with the quarter ended March 31, 2013.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830) Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, ConsolidationOverall, or Subtopic 830-
30, Foreign Currency MattersTranslation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. This ASU is effective prospectively for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-05 to affect our consolidated financial position, results of operations, or cash flows.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU No. 2013-10 permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. This ASU is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect the adoption of ASU No. 2013-10 to affect our consolidated financial position, results of operations, or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 resolves the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-11 to affect our consolidated financial position, results of operations, or cash flows.
Discontinued Operations
We account for dispositions in our retail operations as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed of will be eliminated from on-going operations and that we will not have any significant continuing involvement in its operations.
In evaluating whether the cash flows of a dealership in our Retail reportable segment will be eliminated from ongoing operations, we consider whether it is likely that customers will migrate to similar franchises that we own in the same geographic market. Our consideration includes an evaluation of the brands sold at other dealerships we operate in the market and their proximity to the disposed dealership. When we dispose of franchises, we typically do not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of PAG owned dealerships, we do not treat the disposition as a discontinued operation if we believe that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.
Combined financial information regarding entities accounted for as discontinued operations follows:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Revenues |
|
$ |
66,766 |
|
$ |
100,970 |
|
$ |
147,795 |
|
$ |
225,487 |
|
Pre-tax income (loss) |
|
(2,923 |
) |
(1,697 |
) |
(1,655 |
) |
(12,856 |
) | ||||
Gain on disposal |
|
840 |
|
|
|
840 |
|
10,160 |
| ||||
|
|
June 30, |
|
December 31, |
| ||
|
|
|
|
|
| ||
Inventories |
|
$ |
14,338 |
|
$ |
44,649 |
|
Other assets |
|
19,511 |
|
28,749 |
| ||
Total assets |
|
$ |
33,849 |
|
$ |
73,398 |
|
|
|
|
|
|
| ||
Floor plan notes payable (including non-trade) |
|
$ |
12,695 |
|
$ |
36,689 |
|
Other liabilities |
|
10,852 |
|
14,590 |
| ||
Total liabilities |
|
$ |
23,547 |
|
$ |
51,279 |
|
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets and certain reserves.
Fair Value of Financial Instruments
Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:
Level 1 |
|
Quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2 |
|
Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities |
|
|
|
Level 3 |
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair |
|
|
value of the assets or liabilities |
Our financial instruments consist of cash and cash equivalents, debt, floor plan notes payable, and interest rate swaps used to hedge future cash flows. Other than our fixed rate debt, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting.
Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on our current market interest rates for similar types of financial instruments (Level 2). A summary of the carrying values and fair values of our 5.75% senior subordinated notes and our fixed rate mortgage facilities are as follows:
|
|
June 30, 2013 |
| ||||
|
|
Carrying Value |
|
Fair Value |
| ||
5.75% senior subordinated notes due 2022 |
|
$ |
550,000 |
|
$ |
561,000 |
|
Mortgage facilities |
|
102,290 |
|
99,549 |
| ||
2. Inventories
Inventories consisted of the following:
|
|
June 30, |
|
December 31, |
| ||
New vehicles |
|
$ |
1,531,040 |
|
$ |
1,429,255 |
|
Used vehicles |
|
508,109 |
|
484,269 |
| ||
Parts, accessories and other |
|
86,622 |
|
86,682 |
| ||
|
|
|
|
|
| ||
Total inventories |
|
$ |
2,125,771 |
|
$ |
2,000,206 |
|
We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $8,797 and $7,057 during the six months ended June 30, 2013 and 2012, respectively.
3. Business Combinations
We acquired one Hertz car rental franchise market area and one automotive retail franchise during the six months ended June 30, 2013. We acquired sixteen automotive retail franchises during the six months ended June 30, 2012. Our financial statements include the results of operations of the acquired dealerships and the rental car franchises from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in our consolidated condensed financial statements, and may be subject to adjustment pending completion of final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the six months ended June 30, 2013 and 2012 follows:
|
|
June 30, |
| ||||
|
|
2013 |
|
2012 |
| ||
Accounts receivable |
|
$ |
300 |
|
$ |
17,025 |
|
Inventory |
|
1,905 |
|
80,766 |
| ||
Other current assets |
|
158 |
|
|
| ||
Property and equipment |
|
20,131 |
|
32,599 |
| ||
Indefinite-lived intangibles |
|
7,303 |
|
57,310 |
| ||
Other non-current assets |
|
|
|
|
| ||
Current liabilities |
|
(55 |
) |
(49,362 |
) | ||
Non-current liabilities |
|
992 |
|
(26,816 |
) | ||
Total consideration |
|
30,734 |
|
111,522 |
| ||
Seller financed/assumed debt |
|
|
|
|
| ||
Cash used in acquisitions |
|
$ |
30,734 |
|
$ |
111,522 |
|
The following unaudited consolidated pro forma results of operations of PAG for the three and six months ended June 30, 2013 and 2012 give effect to acquisitions consummated during 2013 and 2012 as if they had occurred on January 1, 2012:
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
| ||||||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
| ||||
Revenues |
|
$ |
3,704,215 |
|
$ |
3,408,230 |
|
$ |
7,121,402 |
|
$ |
6,661,073 |
|
Income from continuing operations |
|
64,528 |
|
52,803 |
|
121,614 |
|
103,517 |
| ||||
Net income |
|
62,092 |
|
51,128 |
|
119,659 |
|
98,709 |
| ||||
Income from continuing operations per diluted common share |
|
$ |
0.71 |
|
$ |
0.58 |
|
$ |
1.34 |
|
$ |
1.14 |
|
Net income per diluted common share |
|
$ |
0.69 |
|
$ |
0.57 |
|
$ |
1.32 |
|
$ |
1.09 |
|
4. Intangible Assets
Following is a summary of the changes in the carrying amount of goodwill and franchise value during the six months ended June 30, 2013:
|
|
Goodwill |
|
Franchise |
| ||
Balance, January 1, 2013 |
|
$ |
978,147 |
|
$ |
283,152 |
|
Additions |
|
7,303 |
|
|
| ||
Deconsolidation of Italian investment |
|
(7,231 |
) |
(2,908 |
) | ||
Foreign currency translation |
|
(22,039 |
) |
(5,258 |
) | ||
Balance, June 30, 2013 |
|
$ |
956,180 |
|
$ |
274,986 |
|
Goodwill additions of $5,780 were related to our Hertz rental car operations within our Other reportable segment. All other changes were within our Retail reportable segment. As of June 30, 2013, the goodwill balance within our Retail and Other reportable segments was $948,431 and $7,749, respectively.
5. Floor Plan Notes Payable Trade and Non-trade
We finance substantially all of our new and a portion of our used vehicle inventories under revolving floor plan arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. In the U.S., substantially all of our floor plan arrangements are due on demand; however, we have not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. We typically make monthly interest payments on the amount financed. Outside of the U.S., substantially all of the floor plan arrangements are payable on demand or have an original maturity of 90 days or less and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.
The floor plan agreements grant a security interest in substantially all of the assets of our dealership subsidiaries, and in the U.S. are guaranteed by us. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (LIBOR), the Finance House Bank Rate, or the Euro Interbank Offer Rate. We classify floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable non-trade on our consolidated condensed balance sheets and classify related cash flows as a financing activity on our consolidated condensed statements of cash flows.
6. Earnings Per Share
Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, adjusted for any dilutive effects. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 follows:
|
|
Three Months Ended |
|
Six Months Ended |
| ||||
|
|
2013 |
|
2012 |
|
2013 |
|
2012 |
|
Weighted average number of common shares outstanding |
|
90,269 |
|
90,305 |
|
90,344 |
|
90,363 |
|
Effect of non-participatory equity compensation |
|
36 |
|
32 |
|
36 |
|
32 |
|
Weighted average number of common shares outstanding, including effect of dilutive securities |
|
90,305 |
|
90,337 |
|
90,380 |
|
90,395 |
|
7. Long-Term Debt
Long-term debt consisted of the following:
|
|
June 30, |
|
December 31, |
| ||
U.S. credit agreement - revolving credit line |
|
$ |
22,000 |
|
$ |
50,000 |
|
U.S. credit agreement - term loan |
|
98,000 |
|
110,000 |
| ||
U.K. credit agreement - revolving credit line |
|
|
|
48,741 |
| ||
U.K. credit agreement - term loan |
|
31,943 |
|
38,993 |
| ||
U.K. credit agreement - overdraft line of credit |
|
|
|
6,838 |
| ||
5.75% senior subordinated notes due 2022 |
|
550,000 |
|
550,000 |
| ||
Rental car revolver |
|
105,286 |
|
23,171 |
| ||
Mortgage facilities |
|
102,290 |
|
104,043 |
| ||
Other |
|
10,684 |
|
5,731 |
| ||
Total long-term debt |
|
920,203 |
|
937,517 |
| ||
Less: current portion |
|
(44,896 |
) |
(19,493 |
) | ||
Net long-term debt |
|
$ |
875,307 |
|
$ |
918,024 |
|
U.S. Credit Agreement
We are party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the U.S. Credit Agreement), which provides for up to $375,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $98,000, and for an additional $10,000 of availability for letters of credit, through September 2015. The revolving loans bear interest at a defined LIBOR plus 2.25%, subject to an incremental 1.25% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.25%, may be prepaid at any time, but then may not be re-borrowed.
The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of June 30, 2013, we were in compliance with all covenants under the U.S. Credit Agreement.
The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of June 30, 2013, $22,000 of revolver borrowings, $98,000 of term loans and no letters of credit were outstanding under the U.S. Credit Agreement. We repaid $12,000 under the term loan during the six months ended June 30, 2013.
U.K. Credit Agreement
Our subsidiaries in the U.K. (the U.K. subsidiaries) are party to a £100,000 revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10,000 demand overdraft line of credit with RBS (collectively, the U.K. credit agreement) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of June 30, 2013, no amounts were outstanding under the U.K. credit agreement.
The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends,
dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (EBITAR) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of any amounts owed. As of June 30, 2013, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement.
The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries assets are subject to security interests granted to lenders under the U.K. credit agreement. In July 2013, we amended the U.K. credit agreement and U.K. term loan to provide the U.K. subsidiaries with covenant flexibility to fund the purchase of Western Star Trucks Australia (discussed above) and operate the subsidiaries to be acquired.
In January 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30,000 term loan which was used for working capital and an acquisition. The term loan is repayable in £1,500 quarterly installments through 2015 with a final payment of £7,500 due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of June 30, 2013, the amount outstanding under the U.K. term loan was £21,000 ($31,943).
5.75% Senior Subordinated Notes
In August 2012, we issued $550,000 in aggregate principal amount of 5.75% Senior Subordinated Notes due 2022 (the 5.75% Notes).
Interest on the 5.75% Notes is payable semiannually on April 1 and October 1 of each year, beginning on April 1, 2013. The 5.75% Notes mature on October 1, 2022, unless earlier redeemed or purchased by us. The 5.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our existing 100% owned domestic subsidiaries. The 5.75% Notes also contain customary negative covenants and events of default. As of June 30, 2013, we were in compliance with all negative covenants, and there were no events of default.
On or after October 1, 2017, we may redeem the 5.75% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. We may also redeem up to 40% of the 5.75% Notes using the proceeds of specified equity offerings at any time prior to October 1, 2015 at a price specified in the indenture.
If we experience certain change of control events specified in the indenture, holders of the 5.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.
Rental Car Revolver
We are party to a credit agreement with Toyota Motor Credit Corporation that currently provides us with up to $150,000 in revolving loans for the acquisition of rental vehicles. The revolving loans bear interest at three-month LIBOR plus 2.50%. This agreement provides the lender with a secured interest in the vehicles and our rental car operations other assets, requires us to make monthly curtailment payments and expires in October 2014. As of June 30, 2013 outstanding loans under the rental car revolver amounted to $105,286.
Mortgage Facilities
We are party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to our other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of June 30, 2013, we owed $102,290 of principal under our mortgage facilities.
8. Interest Rate Swaps
We periodically use interest rate swaps to manage interest rate risk associated with our variable rate floor plan debt. We are party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300,000 of our floating rate floor plan debt is fixed at 2.135% and $100,000 of our floating rate floor plan debt is fixed at a rate of 1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.
We used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of June 30, 2013 and December 31, 2012, the fair value of the swaps designated as hedging instruments was estimated to be a liability of $10,743 and $14,337, respectively. During 2013 and 2012, there was no hedge ineffectiveness recorded in our income statement. During the three and six months ended June 30, 2013, the swaps increased the weighted average interest rate on our floor plan borrowings by approximately 35 and 37 basis points, respectively.
9. Commitments and Contingent Liabilities
We are involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of June 30, 2013, we were not party to any legal proceedings, including class action lawsuits, that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.
We have historically structured our operations so as to minimize ownership of real property. As a result, we lease or sublease substantially all of our facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at our election. Pursuant to the leases for some of our larger facilities, we are required to comply with specified financial ratios, including a rent coverage ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require us to post collateral in the form of a letter of credit. A breach of the other lease covenants gives rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of June 30, 2013, we were in compliance with all covenants under these leases.
We have sold a number of dealerships to third parties and, as a condition to certain of those sales, remain liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. We are also party to lease agreements on properties that we no longer use in our retail operations that we have sublet to third parties. We rely on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, we may not be able to recover amounts owed to us and we could be required to fulfill these obligations.
We hold a 9.0% ownership interest in PTL. Historically General Electric Capital Corporation (GECC) has provided PTL with a majority of its financing. PTL has refinanced all of its GECC indebtedness. As part of that refinancing, we and the other PTL partners created a new company (Holdings), which, together with GECC, co-issued $700,000 of 3.8% senior unsecured notes due 2019 (the Holdings Bonds). A wholly-owned subsidiary of Holdings contributed $700,000 derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700,000 of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.
Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, we have agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $950 for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9.0% of the required principal repayment due in 2019 (which is expected to be $63,100) and 9.0% of interest payments under the Holdings Bonds, plus fees and default interest, if any.
In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218,900 (approximately $200,000), which includes a targeted amount of AU $73,300 (approximately $67,000) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using cash flow from operations and available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.
We have $18,197 of letters of credit outstanding as of June 30, 2013, and have posted $9,110 of surety bonds in the ordinary course of business.
10. Equity
Share Repurchase
During the six months ended June 30, 2013, we repurchased 410 shares of our outstanding common stock for $12,680, or an average of $30.93 per share, under a program approved by our Board of Directors. During the second quarter of 2013, we acquired 98 shares of our common stock for $3,133, or an average of $32.11, from employees in connection with a net share settlement feature of employee restricted stock awards.
11. Accumulated Other Comprehensive Income / (Loss)
The following tables below present the changes in accumulated other comprehensive income / (loss) by component and the reclassifications out of accumulated other comprehensive income / (loss) during the three and six months ended June 30, 2013 attributable to Penske Automotive Group common stockholders.
Three Months Ended June 30, 2013
|
|
Interest Rate |
|
Foreign |
|
Other |
|
Total |
| ||||
Balance at March 31, 2013 |
|
$ |
(7,627 |
) |
$ |
(38,381 |
) |
$ |
1,522 |
|
$ |
(44,486 |
) |
Other comprehensive income before reclassifications |
|
566 |
|
1,556 |
|
303 |
|
2,425 |
| ||||
Amounts reclassified from accumulated other comprehensive income - net of tax |
|
556 |
|
|
|
|
|
556 |
| ||||
Net current-period other comprehensive income |
|
1,122 |
|
1,556 |
|
303 |
|
2,981 |
| ||||
Balance at June 30, 2013 |
|
$ |
(6,505 |
) |
$ |
(36,825 |
) |
$ |
1,825 |
|
$ |
(41,505 |
) |
Six Months Ended June 30, 2013
|
|
Interest Rate |
|
Foreign |
|
Other |
|
Total |
| ||||
Balance at December 31, 2012 |
|
$ |
(8,678 |
) |
$ |
(1,194 |
) |
$ |
3,039 |
|
$ |
(6,833 |
) |
Other comprehensive income before reclassifications |
|
512 |
|
(34,747 |
) |
(1,214 |
) |
(35,449 |
) | ||||
Amounts reclassified from accumulated other comprehensive income - net of tax |
|
1,661 |
|
(884 |
) |
|
|
777 |
| ||||
Net current-period other comprehensive income |
|
2,173 |
|
(35,631 |
) |
(1,214 |
) |
(34,672 |
) | ||||
Balance at June 30, 2013 |
|
$ |
(6,505 |
) |
$ |
(36,825 |
) |
$ |
1,825 |
|
$ |
(41,505 |
) |
Within the amounts reclassified from accumulated other comprehensive income, the $556 and $1,661 associated with interest rate swaps is included in floor plan interest expense, and the $(884) associated with foreign currency translation is included in selling, general, and administrative expenses.
12. Segment Information
Our operations are organized by management into operating segments by line of business and geography. We have determined that we have two reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail, consisting of our automotive retail operations, and (ii) Other, consisting of our Hertz rental car business operating segment and our investments in non-automotive retail operations operating segment. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and the retail automotive joint ventures. The individual dealership operations included in the Retail reportable segment have been grouped into four geographic operating segments: Eastern, Central, and Western United States and International. The geographic operating segments have been aggregated into one reportable segment as their operations (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions).
Three Months Ended June 30
|
|
Retail |
|
Other |
|
Intersegment |
|
Total |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
2013 |
|
$ |
3,692,798 |
|
$ |
15,090 |
|
$ |
(8,713 |
) |
$ |
3,699,175 |
|
2012 |
|
3,315,051 |
|
|
|
|
|
3,315,051 |
| ||||
Segment income |
|
|
|
|
|
|
|
|
| ||||
2013 |
|
91,441 |
|
8,420 |
|
(219 |
) |
99,642 |
| ||||
2012 |
|
70,659 |
|
7,201 |
|
|
|
77,860 |
| ||||
Six Months Ended June 30
|
|
Retail |
|
Other |
|
Intersegment |
|
Total |
| ||||
Revenues |
|
|
|
|
|
|
|
|
| ||||
2013 |
|
$ |
7,103,195 |
|
$ |
21,976 |
|
$ |
(21,397 |
) |
$ |
7,103,774 |
|
2012 |
|
6,478,764 |
|
|
|
|
|
6,478,764 |
| ||||
Segment income |
|
|
|
|
|
|
|
|
| ||||
2013 |
|
175,868 |
|
9,693 |
|
(329 |
) |
185,232 |
| ||||
2012 |
|
143,609 |
|
11,035 |
|
|
|
154,644 |
| ||||
13. Consolidating Condensed Financial Information
The following tables include condensed consolidating financial information as of June 30, 2013 and December 31, 2012 and for the three and six month periods ended June 30, 2013 and 2012 for Penske Automotive Group, Inc. (as the issuer of the 5.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing foreign entities). Guarantor subsidiaries are directly or indirectly 100% owned by PAG, and the guarantees are full and unconditional, and jointly and several. The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis.
CONDENSED CONSOLIDATING BALANCE SHEET
June 30, 2013
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
26,254 |
|
$ |
|
|
$ |
|
|
$ |
759 |
|
$ |
25,495 |
|
Accounts receivable, net |
|
530,647 |
|
(364,074 |
) |
364,074 |
|
328,455 |
|
202,192 |
| |||||
Inventories |
|
2,125,771 |
|
|
|
|
|
1,318,613 |
|
807,158 |
| |||||
Other current assets |
|
90,352 |
|
|
|
7,068 |
|
33,953 |
|
49,331 |
| |||||
Assets held for sale |
|
33,849 |
|
|
|
|
|
15,984 |
|
17,865 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total current assets |
|
2,806,873 |
|
(364,074 |
) |
371,142 |
|
1,697,764 |
|
1,102,041 |
| |||||
Property and equipment, net |
|
1,148,495 |
|
|
|
4,356 |
|
789,341 |
|
354,798 |
| |||||
Intangible assets |
|
1,231,166 |
|
|
|
|
|
767,816 |
|
463,350 |
| |||||
Equity method investments |
|
332,503 |
|
|
|
273,827 |
|
|
|
58,676 |
| |||||
Other long-term assets |
|
18,595 |
|
(1,490,576 |
) |
1,503,443 |
|
4,030 |
|
1,698 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
|
$ |
5,537,632 |
|
$ |
(1,854,650 |
) |
$ |
2,152,768 |
|
$ |
3,258,951 |
|
$ |
1,980,563 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Floor plan notes payable |
|
$ |
1,474,440 |
|
$ |
|
|
$ |
|
|
$ |
962,001 |
|
$ |
512,439 |
|
Floor plan notes payable non-trade |
|
753,130 |
|
|
|
122,700 |
|
340,030 |
|
290,400 |
| |||||
Accounts payable |
|
314,050 |
|
|
|
3,338 |
|
130,711 |
|
180,001 |
| |||||
Accrued expenses |
|
226,968 |
|
(364,074 |
) |
465 |
|
129,726 |
|
460,851 |
| |||||
Current portion of long-term debt |
|
44,896 |
|
|
|
|
|
35,769 |
|
9,127 |
| |||||
Liabilities held for sale |
|
23,547 |
|
|
|
|
|
9,598 |
|
13,949 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total current liabilities |
|
2,837,031 |
|
(364,074 |
) |
126,503 |
|
1,607,835 |
|
1,466,767 |
| |||||
Long-term debt |
|
875,307 |
|
(38,182 |
) |
670,000 |
|
175,856 |
|
67,633 |
| |||||
Deferred tax liabilities |
|
313,756 |
|
|
|
|
|
288,245 |
|
25,511 |
| |||||
Other long-term liabilities |
|
155,273 |
|
|
|
|
|
79,733 |
|
75,540 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities |
|
4,181,367 |
|
(402,256 |
) |
796,503 |
|
2,151,669 |
|
1,635,451 |
| |||||
Total equity |
|
1,356,265 |
|
(1,452,394 |
) |
1,356,265 |
|
1,107,282 |
|
345,112 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities and equity |
|
$ |
5,537,632 |
|
$ |
(1,854,650 |
) |
$ |
2,152,768 |
|
$ |
3,258,951 |
|
$ |
1,980,563 |
|
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2012
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
|
$ |
43,447 |
|
$ |
|
|
$ |
|
|
$ |
36,478 |
|
$ |
6,969 |
|
Accounts receivable, net |
|
554,851 |
|
(340,917 |
) |
340,917 |
|
375,442 |
|
179,409 |
| |||||
Inventories |
|
2,000,206 |
|
|
|
|
|
1,212,521 |
|
787,685 |
| |||||
Other current assets |
|
90,485 |
|
|
|
3,546 |
|
55,841 |
|
31,098 |
| |||||
Assets held for sale |
|
73,398 |
|
|
|
|
|
29,400 |
|
43,998 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total current assets |
|
2,762,387 |
|
(340,917 |
) |
344,463 |
|
1,709,682 |
|
1,049,159 |
| |||||
Property and equipment, net |
|
1,031,188 |
|
|
|
4,474 |
|
662,722 |
|
363,992 |
| |||||
Intangible assets |
|
1,261,299 |
|
|
|
|
|
760,321 |
|
500,978 |
| |||||
Equity method investments |
|
303,160 |
|
|
|
252,816 |
|
|
|
50,344 |
| |||||
Other long-term assets |
|
20,956 |
|
(1,527,156 |
) |
1,540,447 |
|
5,029 |
|
2,636 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total assets |
|
$ |
5,378,990 |
|
$ |
(1,868,073 |
) |
$ |
2,142,200 |
|
$ |
3,137,754 |
|
$ |
1,967,109 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Floor plan notes payable |
|
$ |
1,408,362 |
|
$ |
|
|
$ |
|
|
$ |
917,391 |
|
$ |
490,971 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Floor plan notes payable non-trade |
|
725,526 |
|
|
|
112,085 |
|
346,683 |
|
266,758 |
| |||||
Accounts payable |
|
263,881 |
|
|
|
3,344 |
|
124,663 |
|
135,874 |
| |||||
Accrued expenses |
|
223,972 |
|
(340,917 |
) |
450 |
|
114,636 |
|
449,803 |
| |||||
Current portion of long-term debt |
|
19,493 |
|
|
|
|
|
9,745 |
|
9,748 |
| |||||
Liabilities held for sale |
|
51,279 |
|
|
|
|
|
17,766 |
|
33,513 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total current liabilities |
|
2,692,513 |
|
(340,917 |
) |
115,879 |
|
1,530,884 |
|
1,386,667 |
| |||||
Long-term debt |
|
918,024 |
|
(38,692 |
) |
710,000 |
|
121,618 |
|
125,098 |
| |||||
Deferred tax liabilities |
|
287,818 |
|
|
|
|
|
260,445 |
|
27,373 |
| |||||
Other long-term liabilities |
|
164,314 |
|
|
|
|
|
85,151 |
|
79,163 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities |
|
4,062,669 |
|
(379,609 |
) |
825,879 |
|
1,998,098 |
|
1,618,301 |
| |||||
Total equity |
|
1,316,321 |
|
(1,488,464 |
) |
1,316,321 |
|
1,139,656 |
|
348,808 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Total liabilities and equity |
|
$ |
5,378,990 |
|
$ |
(1,868,073 |
) |
$ |
2,142,200 |
|
$ |
3,137,754 |
|
$ |
1,967,109 |
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2013
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
3,699,175 |
|
$ |
|
|
$ |
|
|
$ |
2,285,609 |
|
$ |
1,413,566 |
|
Cost of sales |
|
3,130,152 |
|
|
|
|
|
1,913,900 |
|
1,216,252 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
|
569,023 |
|
|
|
|
|
371,709 |
|
197,314 |
| |||||
Selling, general and administrative expenses |
|
440,331 |
|
|
|
4,695 |
|
281,360 |
|
154,276 |
| |||||
Depreciation |
|
14,985 |
|
|
|
411 |
|
8,843 |
|
5,731 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income (loss) |
|
113,707 |
|
|
|
(5,106 |
) |
81,506 |
|
37,307 |
| |||||
Floor plan interest expense |
|
(10,900 |
) |
|
|
(2,459 |
) |
(5,219 |
) |
(3,222 |
) | |||||
Other interest expense |
|
(12,066 |
) |
|
|
(6,668 |
) |
(1,196 |
) |
(4,202 |
) | |||||
Equity in earnings of affiliates |
|
8,901 |
|
|
|
6,918 |
|
|
|
1,983 |
| |||||
Equity in earnings of subsidiaries |
|
|
|
(106,504 |
) |
106,504 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations before income taxes |
|
99,642 |
|
(106,504 |
) |
99,189 |
|
75,091 |
|
31,866 |
| |||||
Income taxes |
|
(35,164 |
) |
37,757 |
|
(35,164 |
) |
(29,130 |
) |
(8,627 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations |
|
64,478 |
|
(68,747 |
) |
64,025 |
|
45,961 |
|
23,239 |
| |||||
(Loss) income from discontinued operations, net of tax |
|
(1,983 |
) |
1,983 |
|
(1,983 |
) |
(540 |
) |
(1,443 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
|
62,495 |
|
(66,764 |
) |
62,042 |
|
45,421 |
|
21,796 |
| |||||
Other comprenhensive income (loss), net of tax |
|
2,981 |
|
(2,676 |
) |
2,981 |
|
1,122 |
|
1,554 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income |
|
65,476 |
|
(69,440 |
) |
65,023 |
|
46,543 |
|
23,350 |
| |||||
Less: Comprehensive income attributable to the non-controlling interests |
|
453 |
|
|
|
|
|
|
|
453 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
65,023 |
|
$ |
(69,440 |
) |
$ |
65,023 |
|
$ |
46,543 |
|
$ |
22,897 |
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended June 30, 2012
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
3,315,051 |
|
$ |
|
|
$ |
|
|
$ |
2,001,589 |
|
$ |
1,313,462 |
|
Cost of sales |
|
2,810,080 |
|
|
|
|
|
1,681,433 |
|
1,128,647 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
|
504,971 |
|
|
|
|
|
320,156 |
|
184,815 |
| |||||
Selling, general and administrative expenses |
|
400,637 |
|
|
|
4,740 |
|
247,494 |
|
148,403 |
| |||||
Depreciation |
|
13,319 |
|
|
|
246 |
|
7,394 |
|
5,679 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income (loss) |
|
91,015 |
|
|
|
(4,986 |
) |
65,268 |
|
30,733 |
| |||||
Floor plan interest expense |
|
(9,845 |
) |
|
|
(2,254 |
) |
(4,175 |
) |
(3,416 |
) | |||||
Other interest expense |
|
(11,478 |
) |
|
|
(7,079 |
) |
(603 |
) |
(3,796 |
) | |||||
Equity in earnings (losses) of affiliates |
|
8,168 |
|
|
|
6,994 |
|
(40 |
) |
1,214 |
| |||||
Equity in earnings of subsidiaries |
|
|
|
(84,665 |
) |
84,665 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations before income taxes |
|
77,860 |
|
(84,665 |
) |
77,340 |
|
60,450 |
|
24,735 |
| |||||
Income taxes |
|
(27,093 |
) |
29,659 |
|
(27,093 |
) |
(23,227 |
) |
(6,432 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations |
|
50,767 |
|
(55,006 |
) |
50,247 |
|
37,223 |
|
18,303 |
| |||||
(Loss) income from discontinued operations, net of tax |
|
(1,155 |
) |
1,155 |
|
(1,155 |
) |
(399 |
) |
(756 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
|
49,612 |
|
(53,851 |
) |
49,092 |
|
36,824 |
|
17,547 |
| |||||
Other comprehensive income (loss), net of tax |
|
(10,896 |
) |
11,430 |
|
(10,896 |
) |
(15 |
) |
(11,415 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income |
|
38,716 |
|
(42,421 |
) |
38,196 |
|
36,809 |
|
6,132 |
| |||||
Less: Comprehensive income attributable to non-controlling interests |
|
520 |
|
|
|
|
|
|
|
520 |
| |||||
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
38,196 |
|
$ |
(42,421 |
) |
$ |
38,196 |
|
$ |
36,809 |
|
$ |
5,612 |
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2013
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
7,103,774 |
|
$ |
|
|
$ |
|
|
$ |
4,319,855 |
|
$ |
2,783,919 |
|
Cost of sales |
|
6,000,544 |
|
|
|
|
|
3,612,699 |
|
2,387,845 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
|
1,103,230 |
|
|
|
|
|
707,156 |
|
396,074 |
| |||||
Selling, general and administrative expenses |
|
854,770 |
|
|
|
9,853 |
|
540,027 |
|
304,890 |
| |||||
Depreciation |
|
29,516 |
|
|
|
789 |
|
17,205 |
|
11,522 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income (loss) |
|
218,944 |
|
|
|
(10,642 |
) |
149,924 |
|
79,662 |
| |||||
Floor plan interest expense |
|
(21,168 |
) |
|
|
(4,746 |
) |
(10,093 |
) |
(6,329 |
) | |||||
Other interest expense |
|
(23,793 |
) |
|
|
(13,395 |
) |
(2,263 |
) |
(8,135 |
) | |||||
Equity in earnings (losses) of affiliates |
|
11,249 |
|
|
|
8,830 |
|
|
|
2,419 |
| |||||
Equity in earnings of subsidiaries |
|
|
|
(204,038 |
) |
204,038 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations before income taxes |
|
185,232 |
|
(204,038 |
) |
184,085 |
|
137,568 |
|
67,617 |
| |||||
Income taxes |
|
(63,571 |
) |
70,461 |
|
(63,571 |
) |
(53,709 |
) |
(16,752 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations |
|
121,661 |
|
(133,577 |
) |
120,514 |
|
83,859 |
|
50,865 |
| |||||
(Loss) income from discontinued operations, net of tax |
|
(1,147 |
) |
808 |
|
(808 |
) |
(33 |
) |
(1,114 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
|
120,514 |
|
(132,769 |
) |
119,706 |
|
83,826 |
|
49,751 |
| |||||
Other comprehensive income (loss), net of tax |
|
(34,138 |
) |
36,313 |
|
(34,138 |
) |
(32 |
) |
(36,281 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income |
|
86,376 |
|
(96,456 |
) |
85,568 |
|
83,794 |
|
13,470 |
| |||||
Less: Comprehensive income attributable to non-controlling interests |
|
1,342 |
|
(534 |
) |
534 |
|
|
|
1,342 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
85,034 |
|
$ |
(95,922 |
) |
$ |
85,034 |
|
$ |
83,794 |
|
$ |
12,128 |
|
CONDENSED CONSOLIDATING STATEMENT OF INCOME
Six Months Ended June 30, 2012
|
|
Total |
|
Eliminations |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| |||||
|
|
(In thousands) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues |
|
$ |
6,478,764 |
|
$ |
|
|
$ |
|
|
$ |
3,824,510 |
|
$ |
2,654,254 |
|
Cost of sales |
|
5,478,829 |
|
|
|
|
|
3,209,681 |
|
2,269,148 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Gross profit |
|
999,935 |
|
|
|
|
|
614,829 |
|
385,106 |
| |||||
Selling, general and administrative expenses |
|
788,619 |
|
|
|
9,335 |
|
484,583 |
|
294,701 |
| |||||
Depreciation |
|
26,310 |
|
|
|
608 |
|
14,438 |
|
11,264 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Operating income (loss) |
|
185,006 |
|
|
|
(9,943 |
) |
115,808 |
|
79,141 |
| |||||
Floor plan interest expense |
|
(19,368 |
) |
|
|
(4,452 |
) |
(7,947 |
) |
(6,969 |
) | |||||
Other interest expense |
|
(23,572 |
) |
|
|
(14,642 |
) |
(1,513 |
) |
(7,417 |
) | |||||
Equity in earnings (losses) of affiliates |
|
12,578 |
|
|
|
10,754 |
|
(40 |
) |
1,864 |
| |||||
Equity in earnings of subsidiaries |
|
|
|
(172,219 |
) |
172,219 |
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations before income taxes |
|
154,644 |
|
(172,219 |
) |
153,936 |
|
106,308 |
|
66,619 |
| |||||
Income taxes |
|
(53,926 |
) |
60,331 |
|
(53,926 |
) |
(43,806 |
) |
(16,525 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Income (loss) from continuing operations |
|
100,718 |
|
(111,888 |
) |
100,010 |
|
62,502 |
|
50,094 |
| |||||
(Loss) income from discontinued operations, net of tax |
|
(4,100 |
) |
4,100 |
|
(4,100 |
) |
(2,049 |
) |
(2,051 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
|
96,618 |
|
(107,788 |
) |
95,910 |
|
60,453 |
|
48,043 |
| |||||
Other comprehensive income (loss), net of tax |
|
(195 |
) |
1,738 |
|
(195 |
) |
(249 |
) |
(1,489 |
) | |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income |
|
96,423 |
|
(106,050 |
) |
95,715 |
|
60,204 |
|
46,554 |
| |||||
Less: Comprehensive income attributable to non-controlling interests |
|
708 |
|
|
|
|
|
|
|
708 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Comprehensive income attributable to Penske Automotive Group common stockholders |
|
$ |
95,715 |
|
$ |
(106,050 |
) |
$ |
95,715 |
|
$ |
60,204 |
|
$ |
45,846 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2013
|
|
Total |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| ||||
|
|
(In thousands) | |||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing operating activities |
|
$ |
175,643 |
|
$ |
72,085 |
|
$ |
51,307 |
|
$ |
52,251 |
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchase of equipment and improvements |
|
(143,591 |
) |
(671 |
) |
(120,322 |
) |
(22,598 |
) | ||||
Dealership acquisitions, net |
|
(30,734 |
) |
|
|
(29,314 |
) |
(1,420 |
) | ||||
Other |
|
(9,695 |
) |
|
|
(15,503 |
) |
5,808 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing investing activities |
|
(184,020 |
) |
(671 |
) |
(165,139 |
) |
(18,210 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Financing activities: |
|
|
|
|
|
|
|
|
| ||||
Net borrowings (repayments) of long-term debt |
|
(11,171 |
) |
(40,000 |
) |
80,273 |
|
(51,444 |
) | ||||
Net borrowings (repayments) of floor plan notes payable non-trade |
|
33,478 |
|
10,615 |
|
(6,654 |
) |
29,517 |
| ||||
Repurchase of common stock |
|
(15,813 |
) |
(15,813 |
) |
|
|
|
| ||||
Dividends |
|
(26,216 |
) |
(26,216 |
) |
|
|
|
| ||||
Distributions from (to) parent |
|
|
|
|
|
392 |
|
(392 |
) | ||||
Other |
|
235 |
|
|
|
|
|
235 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing financing activities |
|
(19,487 |
) |
(71,414 |
) |
74,011 |
|
(22,084 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from discontinued operations |
|
10,671 |
|
|
|
4,102 |
|
6,569 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
|
(17,193 |
) |
|
|
(35,719 |
) |
18,526 |
| ||||
Cash and cash equivalents, beginning of period |
|
43,447 |
|
|
|
36,478 |
|
6,969 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents, end of period |
|
$ |
26,254 |
|
$ |
|
|
$ |
759 |
|
$ |
25,495 |
|
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2012
|
|
Total |
|
Penske |
|
Guarantor |
|
Non-Guarantor |
| ||||
|
|
(In thousands) |
| ||||||||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing operating activities |
|
$ |
201,953 |
|
$ |
56,571 |
|
$ |
10,787 |
|
$ |
134,595 |
|
|
|
|
|
|
|
|
|
|
| ||||
Investing activities: |
|
|
|
|
|
|
|
|
| ||||
Purchase of equipment and improvements |
|
(57,322 |
) |
(754 |
) |
(44,404 |
) |
(12,164 |
) | ||||
Dealership acquisitions, net |
|
(111,522 |
) |
|
|
(3,416 |
) |
(108,106 |
) | ||||
Other |
|
(3,653 |
) |
|
|
(970 |
) |
(2,683 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing investing activities |
|
(172,497 |
) |
(754 |
) |
(48,790 |
) |
(122,953 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Financing activities: |
|
|
|
|
|
|
|
|
| ||||
Repurchase of 3.5% senior subordinated convertible notes |
|
(37,778 |
) |
(37,778 |
) |
|
|
|
| ||||
Net borrowings (repayments) of long-term debt |
|
(6,427 |
) |
(18,000 |
) |
(967 |
) |
12,540 |
| ||||
Net borrowings (repayments) of floor plan notes payable non-trade |
|
35,218 |
|
28,708 |
|
19,651 |
|
(13,141 |
) | ||||
Repurchase of common stock |
|
(9,829 |
) |
(9,829 |
) |
|
|
|
| ||||
Dividends |
|
(18,918 |
) |
(18,918 |
) |
|
|
|
| ||||
Distributions from (to) parent |
|
|
|
|
|
585 |
|
(585 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from continuing financing activities |
|
(37,734 |
) |
(55,817 |
) |
19,269 |
|
(1,186 |
) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Net cash from discontinued operations |
|
17,228 |
|
|
|
9,933 |
|
7,295 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net change in cash and cash equivalents |
|
8,950 |
|
|
|
(8,801 |
) |
17,751 |
| ||||
Cash and cash equivalents, beginning of period |
|
26,997 |
|
|
|
26,767 |
|
230 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents, end of period |
|
$ |
35,947 |
|
$ |
|
|
$ |
17,966 |
|
$ |
17,981 |
|
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in Forward Looking Statements. We have acquired and initiated a number of businesses during the periods presented and addressed in this Managements 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 Managements Discussion and Analysis of Financial Condition and Results of Operations has also been updated to reflect the revision of our financial statements for entities which have been treated as discontinued operations through June 30, 2013.
Overview
We are the second largest automotive retailer headquartered in the U.S. as measured by the $7.1 billion in total revenue we generated during the six months ended June 30, 2013. As of June 30, 2013, we operated 329 retail automotive franchises, of which 172 franchises are located in the U.S. and 157 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. During the six months ended June 30, 2013, we retailed and wholesaled more than 216,000 vehicles. We are diversified geographically, with 64% of our total revenues during the six months ended June 30, 2013, generated in the U.S. and Puerto Rico and 36% generated outside the U.S. We offer approximately 40 brands with 96% of our total retail revenue during the six months ended June 30, 2013, generated from brands of non-U.S. based manufacturers, and 69% generated from premium brands, such as Audi, BMW, Mercedes-Benz and Porsche. Each of our dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services and the sale and placement of finance and insurance products, extended service and maintenance contracts and replacement and aftermarket products.
We also hold a 9.0% ownership interest in Penske Truck Leasing Co., L.P. (PTL), a leading provider of transportation services and supply chain management. PTL operates and maintains more than 200,000 vehicles and serves customers in North America, South America, Europe and Asia and is one of the largest purchasers of commercial trucks in North America. Product lines include full-service truck leasing, truck rental and contract maintenance, logistics services such as dedicated contract carriage, distribution center management, transportation management and acting as lead logistics provider. The general partner of PTL is Penske Truck Leasing Corporation, a wholly-owned subsidiary of Penske Corporation, which, together with other wholly-owned subsidiaries of Penske Corporation, owns 41.1% of PTL. The remaining 49.9% of PTL is owned by General Electric Capital Corporation (GECC). We account for our investment in PTL under the equity method, and we therefore record our share of PTLs earnings each quarter on our statements of income under the caption Equity in Earnings of Affiliates, which also includes the results of our other investments.
We are the Hertz rental car franchisee in the Memphis, Tennessee market and certain Indiana markets. We currently operate more than fifty on and off-airport Hertz rental car locations.
In June 2013, we acquired a 27% interest in Around-The Clock Freightliner (ATC), a retailer of Daimler branded medium, heavy and light-duty trucks in Texas and Oklahoma for $15.9 million. ATC operates five full service retail locations and three additional parts and service locations. We are using the equity method to account for our investment in ATC.
In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218.9 million (approximately $200.0 million), which includes a targeted amount of AU $73.3 million (approximately $67.0 million) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.
Outlook
The level of new automotive unit sales in our markets impacts our results. The new vehicle market and the amount of customer traffic visiting our dealerships have improved during the past few years, and there are market expectations for continued improvement. During the six months ended June 30, 2013, total U.S. industry new vehicle unit sales increased from 7,272,541 to 7,820,966, representing an increase of 7.5%. We believe the U.S. automotive market will continue to improve based upon industry forecasts from companies such as JD Power, coupled with demand in the marketplace, an aging vehicle population, a strong credit environment for consumers, and the planned introduction of new models by many different vehicle brands.
During the six months ended June 30, 2013, vehicle registrations in the U.K. improved from 1,057,680 to 1,163,623, representing an increase of 10.0%. Based on industry forecasts from entities such as the Society of Motor Manufacturers and Traders (www.smmt.co.uk), we believe, despite domestic and international economic concerns, the U.K. market will continue to grow as a result of U.K. motorists responding positively to new products and the latest fuel-efficient technology. We also expect continued resiliency in premium brand sales in the U.K. See Forward-Looking Statements.
Operating Overview
New and used vehicle revenues include sales to retail customers and to leasing companies providing consumer automobile leasing. We generate finance and insurance revenues from sales of extended service and maintenance contracts, sales of 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 for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories.
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 gross profit increased $64.1 million, or 12.7%, and $103.3 million, or 10.3%, during the three and six months ended June 30, 2013, compared to the same periods in prior year. The increase in gross profit is attributable to same-store increases in new and used vehicle, finance and insurance and service and parts gross profit. Our retail gross margin percentage decreased from 16.3% and 16.5% during the three and six months ended June 30, 2012 to 15.9% and 16.1% during the three and six months ended June 30, 2013, respectively, due primarily to gross margin decreases in our new and used vehicle sales.
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. 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, or the Euro Interbank Offered Rate. Our floor plan interest expense has increased during the three and six months ended June 30, 2013, as a result of an increase in the amounts outstanding under floor plan arrangements. Our other interest expense has increased during the three and six months ended June 30, 2013, due to an increased level of borrowing in 2013 relating to the issuance of our $550.0 million 5.75% senior subordinated notes in August 2012. We used the proceeds of these notes to repurchase our $375.0 million 7.75% senior subordinated notes. The overall increase in other interest expense was offset in part by the 200 basis point reduction in the interest rate.
Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTL. Because PTL is engaged in different businesses than we are, its operating performance may vary significantly from ours.
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, our ability to integrate acquisitions and the return realized from our investments in various joint ventures and other non-consolidated investments. See Forward-Looking Statements.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.
The following are the accounting policies applied in the preparation of our financial statements that management believes are most dependent upon the use of estimates and assumptions.
Revenue Recognition
Vehicle, Parts and Service Sales
We record revenue when vehicles are delivered and title has passed to the customer, when vehicle service or repair work is 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 the governmental authorities are recorded on a net basis (excluded from revenue). During the six months ended June 30, 2013 and 2012, we earned $225.8 million and $212.3 million, respectively, of rebates, incentives and reimbursements from manufacturers, of which $222.8 million and $209.2 million, respectively, was recorded as a reduction of cost of sales.
Finance and Insurance Sales
Subsequent to the sale of a vehicle to a customer, we sell 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 insurance products to customers, including credit and life insurance policies and extended service contracts. These commissions are recorded as revenue at the time the customer enters into the contract. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts and other insurance products, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we received may be charged back 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 $23.7 million and $23.4 million as of June 30, 2013 and December 31, 2012, respectively.
Rental Car Revenue
Rental and rental related revenues are recognized over the period the vehicles and accessories are rented based on the terms of the rental contract. Taxes collected from customers and remitted to the governmental authorities are recorded on a net basis (excluded from revenue).
Impairment Testing
Franchise value impairment is assessed as of October 1 every year 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 of a franchise exceeds its estimated fair value and an impairment loss may be recognized up to that excess. The fair value of franchise value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, franchise profit margins, and our cost of capital. We also evaluate our franchise agreements in connection with the annual impairment testing to determine whether events and circumstances continue to support our assessment that the franchise agreements have an indefinite life.
Goodwill impairment is assessed at the reporting unit level as of October 1 every year and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined we have two reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail, consisting of our automotive retail operations and (ii) Other, consisting of our Hertz rental car business operating segment and our investments in non-automotive retail operations operating segment. We have determined that the dealerships in each of our operating segments within the Retail reportable segment are components that are aggregated into four geographical 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 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 geographic reporting units are Eastern, Central, and Western United States and International. The goodwill included in our Other reportable segment relates to our Hertz rental car business operating segment.
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 units fair value is less than its carrying value. If it were determined through the qualitative assessment that a reporting units fair value is more likely than not greater than its carrying value, additional analysis would be unnecessary. During 2012, we concluded that it was not more likely than not that any of the reporting units fair value were less than their carrying amount. If the additional impairment testing was necessary, we would have estimated the fair value of our reporting units using an income valuation approach. The income valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using our 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 that 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 our cost of capital.
Investments
We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investees income each period. The net book value of our investments was $332.5 million and $303.2 million as of June 30, 2013 and December 31, 2012, respectively, including $247.4 million relating to PTL as of June 30, 2013. 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, auto 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 $23.3 million and $20.1 million as of June 30, 2013 and December 31, 2012, respectively. Changes in the reserve estimate during 2013 relate primarily to our general liability and workers compensation programs.
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, and the likelihood of changes to the divestiture plans. 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.
New Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-02, Comprehensive Income (Topic 220) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, we are required to present either on the face of the statement of income or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. We complied with the disclosure requirements of this ASU beginning with the quarter ended March 31, 2013.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830) Parents Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. ASU No. 2013-05 resolves the diversity in practice about whether Subtopic 810-10, ConsolidationOverall, or Subtopic 830-30, Foreign Currency MattersTranslation of Financial Statements, applies to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity. This ASU is effective prospectively for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-05 to affect our consolidated financial position, results of operations, or cash flows.
In July 2013, the FASB issued ASU No. 2013-10, Derivatives and Hedging (Topic 815) Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes. The amendments in ASU No. 2013-10 permit the Fed Funds Effective Swap Rate to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to UST and LIBOR. This ASU is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. We do not expect the adoption of ASU No. 2013-10 to affect our consolidated financial position, results of operations, or cash flows.
In July 2013, the FASB issued ASU No. 2013-11, Income Taxes (Topic 740) Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 resolves the diversity in practice regarding the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This ASU is effective for the first annual period beginning after December 15, 2013. We do not expect adoption of ASU No. 2013-11 to affect our consolidated financial position, results of operations, or cash flows.
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, 2011, the results of the acquired entity would be included in annual same-store comparisons beginning with the year ended December 31, 2013 and in quarterly same store comparisons beginning with the quarter ended June 30, 2012.
Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012
New Vehicle Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
New retail unit sales |
|
51,307 |
|
45,987 |
|
5,320 |
|
11.6 |
% | ||
Same-store new retail unit sales |
|
50,084 |
|
45,453 |
|
4,631 |
|
10.2 |
% | ||
New retail sales revenue |
|
$ |
1,930.0 |
|
$ |
1,711.9 |
|
218.1 |
|
12.7 |
% |
Same-store new retail sales revenue |
|
$ |
1,884.4 |
|
$ |
1,691.2 |
|
193.2 |
|
11.4 |
% |
New retail sales revenue per unit |
|
$ |
37,617 |
|
$ |
37,225 |
|
392 |
|
1.1 |
% |
Same-store new retail sales revenue per unit |
|
$ |
37,625 |
|
$ |
37,207 |
|
418 |
|
1.1 |
% |
Gross profit new |
|
$ |
144.0 |
|
$ |
137.4 |
|
6.6 |
|
4.8 |
% |
Same-store gross profit new |
|
$ |
141.0 |
|
$ |
135.9 |
|
5.1 |
|
3.8 |
% |
Average gross profit per new vehicle retailed |
|
$ |
2,807 |
|
$ |
2,988 |
|
(181 |
) |
(6.1 |
)% |
Same-store average gross profit per new vehicle retailed |
|
$ |
2,815 |
|
$ |
2,990 |
|
(175 |
) |
(5.9 |
)% |
Gross margin % new |
|
7.5 |
% |
8.0 |
% |
(0.5 |
)% |
(6.3 |
)% | ||
Same-store gross margin % new |
|
7.5 |
% |
8.0 |
% |
(0.5 |
)% |
(6.3 |
)% |
Units
Retail unit sales of new vehicles increased 5,320 units, or 11.6%, from 2012 to 2013, including an 11.3% increase in the U.S. and a 12.3% increase internationally. The increase is due to a 4,631 unit, or 10.2%, increase in same-store retail unit sales during the period, coupled with a 689 unit increase from net dealership acquisitions. Same-store units increased 8.9% in the U.S. and 13.6% internationally due in part to more favorable macro-economic conditions in the U.S. and in the U.K. The overall same-store increase was driven by a 13.6% increase in premium/luxury brands, a 7.6% increase in volume foreign brands and a 4.9% increase in domestic brands. Overall, we believe our premium, volume foreign, and domestic brands are being positively impacted by improved market conditions including increased credit availability, pent-up demand, and the introduction of new models.
Revenues
New vehicle retail sales revenue increased $218.1 million, or 12.7%, from 2012 to 2013. The increase is due to a $193.2 million, or 11.4%, increase in same-store revenues, coupled with a $24.9 million increase from net dealership acquisitions. Same-store retail revenue increased 12.0% in the U.S. and 10.2% internationally due in part to more favorable macro-economic conditions in the U.S. and in the U.K. The overall same-store revenue increase is due primarily to the 10.2% increase in retail unit sales, which increased revenue by $174.2 million, coupled with a $418, or 1.1%, increase in average selling prices per unit, which increased revenue by $19.0 million.
Gross Profit
Retail gross profit from new vehicle sales increased $6.6 million, or 4.8%, from 2012 to 2013. The increase is due to a $5.1 million, or 3.8%, increase in same-store gross profit, coupled with a $1.5 million increase from net dealership acquisitions. The same-store increase is due primarily to the 10.2% increase in retail unit sales, which increased gross profit by $13.0 million, somewhat offset by a $175, or 5.9%, decrease in the average gross profit per new vehicle retailed, which decreased gross profit by $7.9 million. During the three months ended June 30, 2013 and 2012, we earned $113.3 million and $106.5 million, respectively, of rebates, incentives and reimbursements from manufacturers, which were recorded as a reduction of cost of sales. This $6.8 million increase in incentives also contributed to the increase in new vehicle gross profit.
Used Vehicle Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
Used retail unit sales |
|
42,332 |
|
36,048 |
|
6,284 |
|
17.4 |
% | ||
Same-store used retail unit sales |
|
41,061 |
|
35,723 |
|
5,338 |
|
14.9 |
% | ||
Used retail sales revenue |
|
$ |
1,082.3 |
|
$ |
937.0 |
|
145.3 |
|
15.5 |
% |
Same-store used retail sales revenue |
|
$ |
1,054.8 |
|
$ |
931.7 |
|
123.1 |
|
13.2 |
% |
Used retail sales revenue per unit |
|
$ |
25,567 |
|
$ |
25,993 |
|
(426 |
) |
(1.6 |
)% |
Same-store used retail sales revenue per unit |
|
$ |
25,688 |
|
$ |
26,083 |
|
(395 |
) |
(1.5 |
)% |
Gross profit used |
|
$ |
81.6 |
|
$ |
72.5 |
|
9.1 |
|
12.6 |
% |
Same-store gross profit used |
|
$ |
79.6 |
|
$ |
72.3 |
|
7.3 |
|
10.1 |
% |
Average gross profit per used vehicle retailed |
|
$ |
1,928 |
|
$ |
2,012 |
|
(84 |
) |
(4.2 |
)% |
Same-store average gross profit per used vehicle retailed |
|
$ |
1,937 |
|
$ |
2,023 |
|
(86 |
) |
(4.3 |
)% |
Gross margin % used |
|
7.5 |
% |
7.7 |
% |
(0.2 |
)% |
(2.6 |
)% | ||
Same-store gross margin % used |
|
7.5 |
% |
7.8 |
% |
(0.3 |
)% |
(3.8 |
)% |
Units
Retail unit sales of used vehicles increased 6,284 units, or 17.4%, from 2012 to 2013 including an 18.4% increase in the U.S. and a 15.5% increase internationally. The increase is due to a 5,338 unit, or 14.9%, increase in same-store retail unit sales, coupled with a 946 unit increase from net dealership acquisitions. Same-store units increased 15.2% in the U.S. and 14.4% internationally. The overall same-store increase was driven by a 14.4% increase in premium/luxury brands, a 17.2% increase in volume foreign brands, and a 6.5% increase in domestic brands. We believe that overall our same-store used vehicle sales are being positively impacted by improved market conditions including increased credit availability, pent-up demand, an increase in trade-in units due to an increase in new unit sales, and our focus on retailing trade-ins and minimizing wholesaled vehicles.
Revenues
Used vehicle retail sales revenue increased $145.3 million, or 15.5%, from 2012 to 2013. The increase is due to a $123.1 million, or 13.2%, increase in same-store revenues, coupled with a $22.2 million increase from net dealership acquisitions. Same-store retail revenue increased 17.1% in the U.S. and increased 8.5% internationally. The overall same-store revenue increase is due to the 14.9% increase in same-store retail unit sales, which increased revenue by $137.1 million, somewhat offset by a $395, or 1.5%, decrease in comparative average selling prices per unit, which decreased revenue by $14.0 million.
Gross Profit
Retail gross profit from used vehicle sales increased $9.1 million, or 12.6%, from 2012 to 2013. The increase is due to a $7.3 million, or 10.1%, increase in same-store gross profit, coupled with a $1.8 million increase from net dealership acquisitions. The increase in same-store gross profit is due to the 14.9% increase in used retail unit sales, which increased gross profit by $10.3 million, somewhat offset by a $86, or 4.3%, decrease in average gross profit per used vehicle retailed, which decreased retail gross profit by $3.0 million.
Finance and Insurance Data
|
|
|
|
|
|
2013 vs. 2012 |
| |||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| |||
Finance and insurance revenue |
|
$ |
95.8 |
|
$ |
81.3 |
|
$ |
14.5 |
|
17.8 |
% |
Same-store finance and insurance revenue |
|
$ |
94.0 |
|
$ |
80.8 |
|
$ |
13.2 |
|
16.3 |
% |
Finance and insurance revenue per unit |
|
$ |
1,024 |
|
$ |
991 |
|
$ |
33 |
|
3.3 |
% |
Same-store finance and insurance revenue per unit |
|
$ |
1,032 |
|
$ |
995 |
|
$ |
37 |
|
3.7 |
% |
Finance and insurance revenue increased $14.5 million, or 17.8%, from 2012 to 2013. The increase is due to a $13.2 million, or 16.3%, increase in same-store revenues during the period, coupled with a $1.3 million increase from net dealership acquisitions. The same-store revenue increase is due to a 12.3% increase in same-store retail unit sales, which increased revenue by $10.2 million, coupled with a $37, or 3.7%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $3.0 million. Finance and insurance revenue per unit was up 8.8% to $1,001 per unit in the U.S. and down 7.0% to $1,077 per unit internationally. We believe the increases in the U.S. are due to our efforts to increase finance and insurance revenue, which include adding resources to drive additional training, product penetration and targeting underperforming locations. We believe the decreases in international are due to increased use of subvented rate customer financing by captive lenders in the U.K., which results in lower finance commissions.
Service and Parts Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
Service and parts revenue |
|
$ |
391.6 |
|
$ |
362.2 |
|
29.4 |
|
8.1 |
% |
Same-store service and parts revenue |
|
$ |
381.8 |
|
$ |
358.1 |
|
23.7 |
|
6.6 |
% |
Gross profit |
|
$ |
235.2 |
|
$ |
212.0 |
|
23.2 |
|
10.9 |
% |
Same-store gross profit |
|
$ |
229.0 |
|
$ |
210.2 |
|
18.8 |
|
8.9 |
% |
Gross margin |
|
60.1 |
% |
58.5 |
% |
1.6 |
% |
2.7 |
% | ||
Same-store gross margin |
|
60.0 |
% |
58.7 |
% |
1.3 |
% |
2.2 |
% |
Revenues
Service and parts revenue increased $29.4 million, or 8.1%, from 2012 to 2013 including a 12.0% increase in the U.S. and a 1.3% decrease internationally. The international decrease is primarily attributable to the deconsolidation of our investment in Italian joint ventures during the first quarter of 2013, which had $2.7 million of service and parts revenue during the three months ended June 30, 2012. The increase is due to a $23.7 million, or 6.6%, increase in same-store revenues during the period, coupled with a $5.7 million increase from net dealership acquisitions. The increase in same-store revenue is due to a $9.9 million, or 3.8%, increase in customer pay revenue, an $11.3 million, or 15.6%, increase in warranty revenue, a $2.1 million, or 9.4%, increase in body shop revenue, and a $0.5 million, or 9.0%, increase in vehicle preparation revenue. We believe that our parts and service business is being positively impacted by increasing units in operation due to increasing new vehicle sales in recent years.
Gross Profit
Service and parts gross profit increased $23.2 million, or 10.9%, from 2012 to 2013 including a 13.7% increase in the U.S. and a 4.1% increase in internationally. The increase is due to an $18.8 million, or 8.9%, increase in same-store gross profit during the period, coupled with a $4.4 million increase from net dealership acquisitions. The same-store gross profit increase is due to the $23.7 million, or 6.6%, increase in same-store revenues, which increased gross profit by $14.2 million, coupled with a 2.7% increase in gross margin, which increased gross profit by $4.6 million. The same-store gross profit increase is composed of a $7.4 million, or 20.1%, increase in warranty gross profit, a $5.5 million, or 16.9%, increase in vehicle preparation gross profit, a $4.5 million, or 3.6%, increase in customer pay gross profit, and a $1.3 million, or 9.6%, increase in body shop gross profit.
Selling, General and Administrative
|
|
|
|
|
|
2013 vs. 2012 |
| |||||
Dollars in millions |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| |||
Personnel expense |
|
$ |
243.8 |
|
$ |
221.1 |
|
$ |
22.7 |
|
10.3 |
% |
Advertising expense |
|
$ |
21.4 |
|
$ |
22.5 |
|
$ |
(1.1 |
) |
(4.9 |
)% |
Rent & related expense |
|
$ |
63.5 |
|
$ |
61.7 |
|
$ |
1.8 |
|
2.9 |
% |
Other expense |
|
$ |
111.6 |
|
$ |
95.3 |
|
$ |
16.3 |
|
17.1 |
% |
Total SG&A expenses |
|
$ |
440.3 |
|
$ |
400.6 |
|
$ |
39.7 |
|
9.9 |
% |
Same-store SG&A expenses |
|
$ |
422.8 |
|
$ |
396.4 |
|
$ |
26.4 |
|
6.7 |
% |
|
|
|
|
|
|
|
|
|
| |||
Personnel expense as % of gross profit |
|
42.8 |
% |
43.8 |
% |
(100 |
) bps |
(2.3 |
)% | |||
Advertising expense as % of gross profit |
|
3.8 |
% |
4.5 |
% |
(70 |
) bps |
(15.6 |
)% | |||
Rent & related expense as % of gross profit |
|
11.2 |
% |
12.2 |
% |
(100 |
) bps |
(8.2 |
)% | |||
Other expense as % of gross profit |
|
19.6 |
% |
18.9 |
% |
70 |
bps |
3.7 |
% | |||
Total SG&A expenses as % of gross profit |
|
77.4 |
% |
79.3 |
% |
(190 |
) bps |
(2.4 |
)% | |||
Same-store SG&A expenses as % of gross profit |
|
77.4 |
% |
79.1 |
% |
(170 |
) bps |
(2.2 |
)% |
Selling, general and administrative expenses (SG&A) increased $39.7 million, or 9.9%, from $400.6 million to $440.3 million. The aggregate increase is due to a $26.4 million, or 6.7%, increase in same-store SG&A, coupled with a $13.3 million increase from net dealership acquisitions. SG&A as a percentage of gross profit was 77.4%, an improvement of 190 basis points compared to 79.3% in the prior year. The increase in same-store SG&A is due primarily to a net increase in variable personnel expenses, as a result of an 8.9% increase in same-store retail gross profit versus the prior year.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, increased $1.1 million, or 10.7%, from $9.8 million to $10.9 million. This increase is due primarily to a $0.9 million, or 9.6%, increase in same-store floor plan interest expense and a $0.2 million increase from net dealership acquisitions. The same-store increase is due primarily to increased amounts outstanding under floor plan arrangements.
Other Interest Expense
Other interest expense increased $0.6 million, or 5.1%, from $11.5 million to $12.1 million. The increase is primarily attributable to an increased level of borrowing in 2013 relating to the issuance of our $550.0 million 5.75% senior subordinated notes in August 2012. We used the proceeds of these notes to repurchase our $375.0 million 7.75% senior subordinated notes. The overall increase in other interest expense was offset in part by the 200 basis point reduction in the interest rate.
Equity in Earnings of Affiliates
Equity in earnings of affiliates increased $0.7 million, or 8.5%, from $8.2 million to $8.9 million. The increase is primarily attributable to an increase in equity in earnings from our investments in foreign automotive retail joint ventures.
Income Taxes
Income taxes increased $8.1 million, or 29.8%, from $27.1 million to $35.2 million. The increase is due primarily to an increase in our pre-tax income versus the prior year.
Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012
New Vehicle Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
New retail unit sales |
|
97,270 |
|
87,914 |
|
9,356 |
|
10.6 |
% | ||
Same-store new retail unit sales |
|
94,120 |
|
86,746 |
|
7,374 |
|
8.5 |
% | ||
New retail sales revenue |
|
$ |
3,678.8 |
|
$ |
3,261.8 |
|
417.0 |
|
12.8 |
% |
Same-store new retail sales revenue |
|
$ |
3,566.0 |
|
$ |
3,220.9 |
|
345.1 |
|
10.7 |
% |
New retail sales revenue per unit |
|
$ |
37,821 |
|
$ |
37,102 |
|
719 |
|
1.9 |
% |
Same-store new retail sales revenue per unit |
|
$ |
37,888 |
|
$ |
37,130 |
|
758 |
|
2.0 |
% |
Gross profit new |
|
$ |
279.8 |
|
$ |
267.3 |
|
12.5 |
|
4.7 |
% |
Same-store gross profit new |
|
$ |
271.9 |
|
$ |
264.2 |
|
7.7 |
|
2.9 |
% |
Average gross profit per new vehicle retailed |
|
$ |
2,877 |
|
$ |
3,040 |
|
(163 |
) |
(5.4 |
)% |
Same-store average gross profit per new vehicle retailed |
|
$ |
2,889 |
|
$ |
3,046 |
|
(157 |
) |
(5.2 |
)% |
Gross margin % new |
|
7.6 |
% |
8.2 |
% |
(0.6 |
)% |
(7.3 |
)% | ||
Same-store gross margin % new |
|
7.6 |
% |
8.2 |
% |
(0.6 |
)% |
(7.3 |
)% |
Units
Retail unit sales of new vehicles increased 9,356 units, or 10.6%, from 2012 to 2013, including an 11.5% increase in the U.S. and an 8.6% increase internationally. The increase is due to a 7,374 unit, or 8.5%, increase in same-store retail unit sales during the period, coupled with a 1,982 unit increase from net dealership acquisitions. Same-store units increased 8.8% in the U.S. and 7.8% internationally due in part to more favorable macro-economic conditions in the U.S. and in the U.K. The overall same-store increase was driven by an 11.0% increase in premium/luxury brands, a 6.8% increase in volume foreign brands and a 4.0% increase in domestic brands. Overall, we believe our premium, volume foreign, and domestic brands are being positively impacted by improved market conditions including increased credit availability, pent-up demand, and the introduction of new models.
Revenues
New vehicle retail sales revenue increased $417.0 million, or 12.8%, from 2012 to 2013. The increase is due to a $345.1 million, or 10.7%, increase in same-store revenues, coupled with a $71.9 million increase from net dealership acquisitions. Same-store retail revenue increased 12.5% in the U.S. and 7.2% internationally due in part to more favorable macro-economic conditions in the U.S. and in the U.K. The overall same-store revenue increase is due primarily to the 8.5% increase in retail unit sales, which increased revenue by $279.4 million, coupled with a $758, or 2.0%, increase in average selling prices per unit, which increased revenue by $65.7 million.
Gross Profit
Retail gross profit from new vehicle sales increased $12.5 million, or 4.7%, from 2012 to 2013. The increase is due to a $7.7 million, or 2.9%, increase in same-store gross profit, coupled with a $4.8 million increase from net dealership acquisitions. The same-store increase is due primarily to the 8.5% increase in retail unit sales, which increased gross profit by $21.3 million, somewhat offset by a $157, or 5.2%, decrease in the average gross profit per new vehicle retailed, which decreased gross profit by $13.6 million. During the six months ended June 30, 2013 and 2012, we earned $222.9 million and $209.2 million, respectively, of rebates, incentives and reimbursements from manufactures, which were recorded as a reduction of cost of sales. This $13.7 million increase in incentives also contributed to the increase in new vehicle gross profit.
Used Vehicle Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
Used retail unit sales |
|
82,429 |
|
72,519 |
|
9,910 |
|
13.7 |
% | ||
Same-store used retail unit sales |
|
79,304 |
|
71,778 |
|
7,526 |
|
10.5 |
% | ||
Used retail sales revenue |
|
$ |
2,084.3 |
|
$ |
1,872.3 |
|
212.0 |
|
11.3 |
% |
Same-store used retail sales revenue |
|
$ |
2,020.9 |
|
$ |
1,860.1 |
|
160.8 |
|
8.6 |
% |
Used retail sales revenue per unit |
|
$ |
25,286 |
|
$ |
25,818 |
|
(532 |
) |
(2.1 |
)% |
Same-store used retail sales revenue per unit |
|
$ |
25,483 |
|
$ |
25,915 |
|
(432 |
) |
(1.7 |
)% |
Gross profit used |
|
$ |
160.2 |
|
$ |
148.5 |
|
11.7 |
|
7.9 |
% |
Same-store gross profit used |
|
$ |
155.2 |
|
$ |
147.7 |
|
7.5 |
|
5.1 |
% |
Average gross profit per used vehicle retailed |
|
$ |
1,943 |
|
$ |
2,048 |
|
(105 |
) |
(5.1 |
)% |
Same-store average gross profit per used vehicle retailed |
|
$ |
1,957 |
|
$ |
2,058 |
|
(101 |
) |
(4.9 |
)% |
Gross margin % used |
|
7.7 |
% |
7.9 |
% |
(0.2 |
)% |
(2.5 |
)% | ||
Same-store gross margin % used |
|
7.7 |
% |
7.9 |
% |
(0.2 |
)% |
(2.5 |
)% |
Units
Retail unit sales of used vehicles increased 9,910 units, or 13.7%, from 2012 to 2013 including a 15.9% increase in the U.S. and a 9.4% increase internationally. The increase is due to a 7,526 unit, or 10.5%, increase in same-store retail unit sales, coupled with a 2,384 unit increase from net dealership acquisitions. Same-store units increased 12.4% in the U.S. and 6.9% internationally. The overall same-store increase was driven by an 8.6% increase in premium/luxury brands, a 14.2% increase in volume foreign brands, and a 6.9% increase in domestic brands. We believe that overall our same-store used vehicle sales are being positively impacted by improved market conditions including increased credit availability, pent-up demand, an increase in trade-in units due to an increase in new unit sales, and our focus on retailing trade-ins and minimizing wholesaled vehicles.
Revenues
Used vehicle retail sales revenue increased $212.0 million, or 11.3%, from 2012 to 2013. The increase is due to a $160.8 million, or 8.6%, increase in same-store revenues, coupled with a $51.2 million increase from net dealership acquisitions. Same-store retail revenue increased 13.4% in the U.S. and 3.1% internationally. The overall same-store revenue increase is due to the 10.5% increase in same-store retail unit sales, which increased revenue by $191.8 million, somewhat offset by a $101, or 4.9%, decrease in comparative average selling prices per unit, which decreased revenue by $31.0 million.
Gross Profit
Retail gross profit from used vehicle sales increased $11.7 million, or 7.9%, from 2012 to 2013. The increase is due to a $7.5 million, or 5.1%, increase in same-store gross profit, coupled with a $4.2 million increase from net dealership acquisitions. The increase in same-store gross profit is due to the 10.5% increase in used retail unit sales, which increased gross profit by $14.7 million, somewhat offset by a $101, or 4.9%, decrease in average gross profit per used vehicle retailed, which decreased retail gross profit by $7.2 million.
Finance and Insurance Data
|
|
|
|
|
|
2013 vs. 2012 |
| |||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| |||
Finance and insurance revenue |
|
$ |
182.6 |
|
$ |
159.2 |
|
$ |
23.4 |
|
14.7 |
% |
Same store finance and insurance revenue |
|
$ |
178.4 |
|
$ |
157.9 |
|
$ |
20.5 |
|
13.0 |
% |
Finance and insurance revenue per unit |
|
$ |
1,016 |
|
$ |
993 |
|
$ |
23 |
|
2.3 |
% |
Same store finance and insurance revenue per unit |
|
$ |
1,029 |
|
$ |
996 |
|
$ |
33 |
|
3.3 |
% |
Finance and insurance revenue increased $23.4 million, or 14.7%, from 2012 to 2013. The increase is due to a $20.5 million, or 13.0%, increase in same-store revenue during the period, coupled with a $2.9 million increase from net dealership acquisitions. The same-store revenue increase is due to a 9.4% increase in same-store retail unit sales, which increased revenue by $15.3 million, coupled with a $33, or 3.3%, increase in comparative average finance and insurance revenue per unit, which increased revenue by $5.2 million. Finance and insurance revenue per unit was up 7.9% to $985 per unit in the U.S. and down 6.9% to $1,086 per unit internationally. We believe the increases in the U.S. are due to our efforts to increase finance and insurance revenue, which include
adding resources to drive additional training, product penetration and targeting underperforming locations. We believe the decreases in international are due to increased use of subvented rate customer financing by captive lenders in the U.K., which results in lower finance commissions.
Service and Parts Data
|
|
|
|
|
|
2013 vs. 2012 |
| ||||
Dollars in millions, except per unit amounts |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| ||
Service and parts revenue |
|
$ |
776.9 |
|
$ |
723.3 |
|
53.6 |
|
7.4 |
% |
Same-store service and parts revenue |
|
$ |
750.5 |
|
$ |
716.5 |
|
34.0 |
|
4.7 |
% |
Gross profit |
|
$ |
459.7 |
|
$ |
420.3 |
|
39.4 |
|
9.4 |
% |
Same-store gross profit |
|
$ |
444.6 |
|
$ |
417.0 |
|
27.6 |
|
6.6 |
% |
Gross margin |
|
59.2 |
% |
58.1 |
% |
1.1 |
% |
1.9 |
% | ||
Same-store gross margin |
|
59.2 |
% |
58.2 |
% |
1.0 |
% |
1.7 |
% |
Revenues
Service and parts revenue increased $53.6 million, or 7.4%, from 2012 to 2013 including a 10.5% increase in the U.S. and a 0.1% increase internationally. The increase is due to a $34.0 million, or 4.7%, increase in same-store revenues during the period, coupled with a $19.6 million increase from net dealership acquisitions. The increase in same-store revenue is due to a $15.6 million, or 10.6%, increase in warranty revenue, a $15.1 million, or 2.9%, increase in customer pay revenue, a $2.7 million, or 6.0%, increase in body shop revenue, and a $0.6 million, or 6.0%, increase in vehicle preparation revenue. We believe that our parts and service business is being positively impacted by increasing units in operation due to increasing new vehicle sales in recent years.
Gross Profit
Service and parts gross profit increased $39.4 million, or 9.4%, from 2012 to 2013 including a 12.1% increase in the U.S. and a 3.0% increase internationally. The increase is due to a $27.6 million, or 6.6%, increase in same-store gross profit during the period, coupled with a $11.8 million increase from net dealership acquisitions. The same-store gross profit increase is due to the $34.0 million, or 4.7%, increase in same-store revenues, which increased gross profit by $20.1 million, coupled with a 1.7% increase in gross margin, which increased gross profit by $7.5 million. The same-store gross profit increase is composed of a $10.6 million, or 14.2%, increase in warranty gross profit, an $8.6 million, or 13.5%, increase in vehicle preparation gross profit, a $6.5 million, or 2.6%, increase in customer pay gross profit, and a $1.9 million, or 7.1%, increase in body shop gross profit.
Selling, General and Administrative
|
|
|
|
|
|
2013 vs. 2012 |
| |||||
Dollars in millions |
|
2013 |
|
2012 |
|
Change |
|
% Change |
| |||
Personnel expense |
|
$ |
478.5 |
|
$ |
437.1 |
|
$ |
41.4 |
|
9.5 |
% |
Advertising expense |
|
$ |
40.4 |
|
$ |
41.7 |
|
$ |
(1.3 |
) |
(3.1 |
)% |
Rent & related expense |
|
$ |
126.8 |
|
$ |
122.6 |
|
$ |
4.2 |
|
3.4 |
% |
Other expense |
|
$ |
209.1 |
|
$ |
187.2 |
|
$ |
21.9 |
|
11.7 |
% |
Total SG&A expenses |
|
$ |
854.8 |
|
$ |
788.6 |
|
$ |
66.2 |
|
8.4 |
% |
Same-store SG&A expenses |
|
$ |
816.5 |
|
$ |
778.8 |
|
$ |
37.7 |
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
| |||
Personnel expense as % of gross profit |
|
43.4 |
% |
43.7 |
% |
(30 |
) bps |
(0.7 |
)% | |||
Advertising expense as % of gross profit |
|
3.7 |
% |
4.2 |
% |
(50 |
) bps |
(11.9 |
)% | |||
Rent & related expense as % of gross profit |
|
11.5 |
% |
12.3 |
% |
(80 |
) bps |
(6.5 |
)% | |||
Other expense as % of gross profit |
|
19.0 |
% |
18.7 |
% |
30 |
bps |
1.6 |
% | |||
Total SG&A expenses as % of gross profit |
|
77.5 |
% |
78.9 |
% |
(140 |
) bps |
(1.8 |
)% | |||
Same-store SG&A expenses as % of gross profit |
|
77.2 |
% |
78.6 |
% |
(140 |
) bps |
(1.8 |
)% |
Selling, general and administrative expenses (SG&A) increased $66.2 million, or 8.4%, from $788.6 million to $854.8 million. The aggregate increase is due to a $37.7 million, or 4.8%, increase in same-store SG&A, coupled with a $28.5 million increase from net dealership acquisitions. SG&A as a percentage of gross profit was 77.5%, an improvement of 140 basis points compared to 78.9% in the prior year. The increase in same-store SG&A is due primarily to a net increase in variable personnel expenses, as a result of a 6.4% increase in same-store retail gross profit versus the prior year.
Floor Plan Interest Expense
Floor plan interest expense, including the impact of swap transactions, increased $1.8 million, or 9.3%, from $19.4 million to $21.2 million. This increase is due primarily to a $1.5 million, or 7.9%, increase in same-store floor plan interest expense and a $0.3 million increase from net dealership acquisitions. The same-store increase is due primarily to increased amounts outstanding under floor plan arrangements.
Other Interest Expense
Other interest expense increased $0.2 million, or 0.9%, from $23.6 million to $23.8 million. The increase is primarily attributable to an increased level of borrowing in 2013 relating to the issuance of our $550.0 million 5.75% senior subordinated notes in August 2012. We used the proceeds of these notes to repurchase our $375.0 million 7.75% senior subordinated notes. The overall increase in other interest expense was offset in part by the 200 basis point reduction in the interest rate.
Equity in Earnings of Affiliates
Equity in earnings of affiliates decreased $1.4 million or 10.6%, from $12.6 million to $11.2 million. The decrease is primarily attributable to a decrease in equity in earnings from our investment in PTL.
Income Taxes
Income taxes increased $9.7 million, or 17.9%, from $53.9 million to $63.6 million. The increase is due primarily to an increase in our pre-tax income versus 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 potentially 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 retail automotive operations through organic growth and the acquisition of retail automotive dealerships. 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 operations and commitments for at least the next twelve months, including the acquisition of Western Star Trucks Australia. In the event we pursue significant other acquisitions, 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 June 30, 2013, we had $353.0 million and £110.0 million ($167.3 million) available for borrowing under our U.S. credit agreement and our U.K. credit 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 acquisitions and strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy.
During the six months ended June 30, 2013, we repurchased 410,000 shares of our outstanding common stock on the open market for a total of $12.7 million, or an average of $30.93 per share, under a program approved by our Board of Directors. We have $85.6 million in authorization under the existing securities repurchase program. During the second quarter of 2013, we acquired 97,561 shares of our common stock for $3.1 million, or an average of $32.11, from employees in connection with a net share settlement feature of employee restricted stock awards.
Dividends
We paid the following cash dividends on our common stock in 2012 and 2013:
Per Share Dividends
2012 |
|
|
| |
|
|
|
| |
First Quarter |
|
$ |
0.10 |
|
Second Quarter |
|
0.11 |
| |
Third Quarter |
|
0.12 |
| |
Fourth Quarter |
|
0.13 |
| |
|
|
|
| |
2013 |
|
|
| |
|
|
|
| |
First Quarter |
|
$ |
0.14 |
|
Second Quarter |
|
0.15 |
|
We also have announced a cash dividend of $0.16 per share payable on September 3, 2013 to shareholders of record on August 12, 2013. 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 our new and a portion of our used vehicle inventories under revolving floor plan arrangements with various lenders, including a majority through 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 our floor plan arrangements are payable on demand or have an original maturity of 90 days or less, and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.
The floor plan agreements typically grant a security interest in substantially all of the assets of our dealership subsidiaries, and in the U.S. are guaranteed by us. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined LIBOR, Finance House Base Rate, or Euro Interbank Offered 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.
U.S. Credit Agreement
We are party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the U.S. Credit Agreement), which provides for up to $375.0 million in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $98.0 million, and for an additional $10.0 million of availability for letters of credit, through September 2015. The revolving loans bear interest at a defined LIBOR plus 2.25%, subject to an incremental 1.25% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.25%, may be prepaid at any time, but then may not be re-borrowed.
The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries and contains a number of significant covenants that, among other things, restrict our ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. We are also required to comply with specified financial and other tests and ratios, each as defined in the U.S. Credit Agreement including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of June 30, 2013, we were in compliance with all covenants under the U.S. Credit Agreement, and we believe we will remain in compliance with such covenants for the next twelve months. In making such determination, we considered the current margin of compliance with the covenants and our expected future results of operations, working capital requirements, acquisitions, capital expenditures and investments. See Forward Looking Statements below.
The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of June 30, 2013, $22.0 million of revolver borrowings, $98.0 million of term loans and no letters of credit were outstanding under the U.S. Credit Agreement. We repaid $12.0 million under the term loan during the six months ended June 30, 2013.
U.K. Credit Agreement
Our subsidiaries in the U.K. (the U.K. subsidiaries) are party to a £100.0 million revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional £10.0 million demand overdraft line of credit with RBS (collectively, the U.K. credit agreement) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes through November 2015. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of June 30, 2013, no amounts were outstanding under the U.K. credit agreement.
The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by our U.K. subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of our U.K. subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, our U.K. subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (EBITAR) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of any amounts owed. As of June 30, 2013, our U.K. subsidiaries were in compliance with all covenants under the U.K. credit agreement, and we believe they will remain in compliance with such covenants for the next twelve months. In making such determination, we considered the current margin of compliance with the covenants and our expected future results of operations, acquisitions, capital expenditures and investments in the U.K. See Forward Looking Statements below.
The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries assets are subject to security interests granted to lenders under the U.K. credit agreement. In July 2013, we amended the U.K. credit agreement and U.K. term loan to provide the U.K. subsidiaries with covenant flexibility to fund the purchase of Western Star Trucks Australia (discussed above) and operate the subsidiaries to be acquired.
In January 2012, our U.K. subsidiaries entered into a separate agreement with RBS, as agent for National Westminster Bank plc, providing for a £30.0 million term loan which was used for working capital and an acquisition. The term loan is repayable in £1.5 million quarterly installments through 2015 with a final payment of £7.5 million due December 31, 2015. The term loan bears interest between 2.675% and 4.325%, depending on the U.K. subsidiaries ratio of net borrowings to earnings before interest, taxes, depreciation and amortization (as defined). As of June 30, 2013, the amount outstanding under the U.K. term loan was £21.0 million ($31.9 million).
5.75% Senior Subordinated Notes
In August 2012, we issued $550.0 million in aggregate principal amount of 5.75% Senior Subordinated Notes due 2022 (the 5.75% Notes).
Interest on the 5.75% Notes is payable semiannually on April 1 and October 1 of each year, beginning on April 1, 2013. The 5.75% Notes mature on October 1, 2022, unless earlier redeemed or purchased by us. The 5.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our existing 100% owned domestic subsidiaries. The 5.75% Notes also contain customary negative covenants and events of default. As of June 30, 2013, we were in compliance with all negative covenants, and there were no events of default.
On or after October 1, 2017, we may redeem the 5.75% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. We may also redeem up to 40% of the 5.75% Notes using the proceeds of specified equity offerings at any time prior to October 1, 2015 at a price specified in the indenture.
If we experience certain change of control events specified in the indenture, holders of the 5.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.
Rental Car Revolver
We are party to a credit agreement with Toyota Motor Credit Corporation that currently provides us with up to $150.0 million in revolving loans for the acquisition of rental vehicles. The revolving loans bear interest at three-month LIBOR plus 2.50%. This agreement provides the lender with a secured interest in the vehicles and our rental car operations other assets, requires us to make monthly curtailment payments and expires in October 2014. As of June 30, 2013 outstanding loans under the rental car revolver amounted to $105.3 million.
Mortgage Facilities
We are party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to our other material indebtedness, certain
change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of June 30, 2013, we owed $102.3 million of principal under our mortgage facilities.
Short-term Borrowings
We have three principal sources of short-term borrowings: the revolving portion of the U.S. credit agreement, the revolving portion of the U.K. credit agreement, and the floor plan agreements in place that we utilize to finance our vehicle inventories. Over time, we are 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 six months ended June 30, 2013, outstanding revolving commitments varied between $10.0 million and $124.0 million under the U.S. credit agreement and between £0 and £48.0 million ($73.0 million) under the U.K. credit agreements revolving credit line (excluding the overdraft facility), and 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.
Interest Rate Swaps
We periodically use interest rate swaps to manage interest rate risk associated with our variable rate floor plan debt. We are party to interest rate swap agreements through December 2014 pursuant to which the LIBOR portion of $300.0 million of our floating rate floor plan debt is fixed at 2.135% and $100.0 million of our floating rate floor plan debt is fixed at 1.55%. We may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements. During the three and six months ended June 30, 2013, the swaps increased the weighted average interest rate on our floor plan borrowing by 35 and 37 basis points, respectively.
PTL Dividends
We hold a 9.0% ownership interest in Penske Truck Leasing. During the six months ended June 30, 2013 and 2012, respectively, we received $3.3 million and $12.5 million of pro rata cash distributions relating to this investment. The decrease in dividends is due in part to PTLs change in policy to deliver quarterly in lieu of annual dividends. We currently expect to continue to receive future distributions from PTL quarterly, subject to its financial performance.
Operating Leases
We have historically structured our operations so as to minimize our ownership of real property. As a result, we lease or sublease a majority of our facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at our election. Pursuant to the leases for some of our larger facilities, we are required to comply with specified financial ratios, including a rent coverage ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require us to post collateral in the form of a letter of credit. A breach of our other lease covenants give rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of June 30, 2013, we were in compliance with all covenants under these leases, and we believe we will remain in compliance with such covenants for the next twelve months.
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 which vary from period to period.
Off-Balance Sheet Arrangements
We have sold a number of dealerships to third parties and, as a condition to certain of those sales, remain liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. We are also party to lease agreements on properties that we no longer use in our retail operations that we have sublet to third parties. We rely on subtenants to pay the rent and maintain the property at these locations. In the event a subtenant does not perform as expected, we may not be able to recover amounts owed to us and we could be required to fulfill these obligations. We believe we have made appropriate reserves relating to these locations.
We hold a 9.0% ownership interest in PTL. Historically General Electric Credit Corporation (GECC) has provided PTL with a majority of its financing. Since April 2012, PTL refinanced all of its GECC indebtedness. As part of that refinancing, we and the other PTL partners created a new company (Holdings), which, together with GECC, co-issued $700.0 million of 3.8% senior unsecured notes due 2019 (the Holdings Bonds). A wholly-owned subsidiary of Holdings contributed $700.0 million derived from the net proceeds from the offering of the Holdings Bonds and a portion of its cash on hand to PTL in exchange for a 21.5% limited partner interest in PTL. PTL used the $700.0 million of funds to reduce its outstanding debt owed to GECC. GECC agreed to be a co-obligor of the Holdings Bonds in order to achieve lower interest rates on the Holdings Bonds.
Additional capital contributions from the members may be required to fund interest and principal payments on the Holdings Bonds. In addition, we have agreed to indemnify GECC for 9.0% of any principal or interest that GECC is required to pay as co-obligor, and pay GECC an annual fee of approximately $0.95 million for acting as co-obligor. The maximum amount of our potential obligations to GECC under this agreement are 9.0% of the required principal repayment due in 2019 (which is expected to be $63.1 million) and 9.0% of interest payments under the Holdings Bonds, plus fees and default interest, if any. Although we do not currently expect to make material payments to GECC under this agreement, this outcome cannot be predicted with certainty.
In July 2013, we signed an agreement to acquire Western Star Trucks Australia, the exclusive importer and distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts for Australia and New Zealand. The purchase price of AU $218.9 million (approximately $200.0 million), which includes a targeted amount of AU $73.3 million (approximately $67.0 million) of working capital, is projected to be paid in the third quarter, subject to the completion of certain closing conditions. We expect to initially finance the acquisition using cash flow from operations and available cash resources, including revolving loan capacity under our U.S. and U.K. credit agreements. Subsequent to closing, we intend to employ floor plan financing in regards to the vehicle inventories to partially fund the cash needs of the business and repay a portion of the revolving acquisition financing.
Cash Flows
Cash and cash equivalents decreased by $17.2 million and increased by $9.0 million during the six months ended June 30, 2013 and 2012, respectively. The major components of these changes are discussed below.
Cash Flows from Continuing Operating Activities
Cash provided by continuing operating activities was $175.6 million and $202.0 million during the six months ended June 30, 2013 and 2012, 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 our new and a portion of our used vehicle inventories under revolving floor plan notes payable with various lenders. 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 and all floor plan notes payable relating to pre-owned vehicles 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:
|
|
Six Months Ended June 30, |
| ||||
Dollars in millions |
|
2013 |
|
2012 |
| ||
Net cash from continuing operating activities as reported |
|
$ |
175.6 |
|
$ |
193.8 |
|
Net borrowings (repayments) of floor plan notes payable non-trade as reported |
|
33.5 |
|
35.2 |
| ||
Net cash from continuing operating activities including all floor plan notes payable |
|
$ |
209.1 |
|
$ |
229.0 |
|
Cash Flows from Continuing Investing Activities
Cash used in continuing investing activities was $184.0 million and $172.5 million during the six months ended June 30, 2013 and 2012, 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 $143.6 million, including $76.5 million of capital expenditures relating to vehicle purchases for our Hertz rental car business, and $57.3 million during the six months ended June 30, 2013 and 2012, 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 vehicle purchases for our Hertz rental car business. We currently expect to finance our retail automotive segment capital expenditures with operating cash flows or borrowings under our U.S. or U.K. credit facilities and our rental car revolver for Hertz capital expenditures. Cash used in acquisitions and other investments, net of cash acquired, was $30.7 million and $111.5 million during the six months ended June 30, 2013 and 2012, respectively, and included cash used to repay sellers floor plan liabilities in such business acquisitions of $1.8 and $37.8 million, respectively. Additionally, cash used in other investing activities were $9.7 million and $3.7 million during the six months ended June 30, 2013 and 2012, respectively.
Cash Flows from Continuing Financing Activities
Cash used in continuing financing activities was $19.5 million and $37.7 million during the six months ended June 30, 2013 and 2012, respectively. Cash flows from continuing financing activities include net borrowings or repayments of long-term debt, issuance and repurchases of long-term debt, repurchases of common stock, net borrowings or repayments of floor plan notes payable non-trade, and dividends. We had net repayments of long-term debt of $11.2 million and $6.4 million during the six months ended June 30, 2013 and 2012, respectively. We had net borrowings of floor plan notes payable non-trade of $33.5 million and $35.2 million during the six months ended June 30, 2013 and 2012, respectively. We repurchased common stock for a total of $15.8 million and $9.8 million during the six months ended June 30, 2013 and 2012, respectively. We also paid cash dividends to our stockholders of $26.2 million and $18.9 million during the six months ended June 30, 2013 and 2012, 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 35% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, Mitsui) own approximately 17% 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. Richard J. Peters, one of our directors, is a managing director of Transportation Resource Partners and is a director of Penske Corporation. Robert H. Kurnick, Jr., our President and a director, is also the President and a director of Penske Corporation. Yoshimi Namba, one of our directors and officers, is also an employee of Mitsui & Co.
In June 2013, we acquired a 27% interest in Around-The Clock Freightliner (ATC), a retailer of Daimler branded medium, heavy and light-duty trucks in Texas and Oklahoma for $15.9 million. Transportation Resource Partners simultaneously acquired a controlling interest in this company on the same financial terms as our investment. We and several other investors, including Transportation Resource Partners, have entered into a limited liability company agreement relating to this investment which, among other things, provides us with specified management rights, including the right to appoint one of six directors, and rights to purchase additional shares, and restricts our ability to transfer shares. We are also entitled to a management fee with respect to our ongoing advisory services provided to ATC.
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 others behalf. These transactions are reviewed periodically by our Audit Committee and reflect the providers cost or an amount mutually agreed upon by both parties.
As discussed above, we hold a 9.0% ownership interest in PTL, a leading provider of transportation services and supply chain management. The general partner of PTL is Penske Truck Leasing Corporation, a wholly-owned subsidiary of Penske Corporation, which together with other wholly-owned subsidiaries of Penske Corporation, owns 41.1% of PTL. The remaining 49.9% of PTL is owned by GECC. Among other things, the relevant agreements provide us with specified distribution and governance rights and restrict our ability to transfer our interests.
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 June 30, 2013, our automotive retail joint venture relationships included:
Location |
|
Dealerships |
|
Ownership |
|
Fairfield, Connecticut |
|
Audi, Mercedes-Benz, Porsche, smart |
|
83.57 |
% (A) (B) |
Las Vegas, Nevada |
|
Ferrari, Maserati |
|
50.00 |
% (C) |
Frankfurt, Germany |
|
Lexus, Toyota |
|
50.00 |
% (C) |
Aachen, Germany |
|
Audi, Lexus, Skoda, Toyota, Volkswagen, Citroën |
|
50.00 |
% (C) |
Monza, Italy |
|
BMW, Mini |
|
35.00 |
% (C) (D) |
(A) An entity controlled by one of our directors, Lucio A. Noto (the Investor), owns a 16.43% interest in this joint venture which entitles the Investor to 20% of the joint ventures operating profits. In addition, the Investor has an option to purchase up to a total 20% interest in the joint venture for specified amounts. This joint venture is consolidated in our financial statements.
(B) Entity is consolidated in our financial statements.
(C) Entity is accounted for using the equity method of accounting.
(D) During the six months ended June 30, 2013, we sold 50% of our interest in the Italian joint venture. As a result of this sale, we deconsolidated the Italian joint venture.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, fluctuating with general economic cycles. During economic downturns, the automotive retailing industry tends to experience periods of decline and recession similar to those experienced by the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates and credit availability.
Seasonality
Our business is modestly seasonal overall. Our U.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends. 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.
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
This quarterly report on Form 10-Q contains forward-looking statements. Forward-looking statements generally can be identified by the use of terms such as may, will, should, expect, anticipate, believe, intend, plan, estimate, predict, potential, forecast, continue or variations of such terms, or the use of these terms in the negative. Forward-looking statements include statements regarding our current plans, forecasts, estimates, beliefs or expectations, including, without limitation, statements with respect to:
· our future financial and operating performance;
· future acquisitions and dispositions, including the planned acquisition of Western Star Trucks Australia;
· future potential capital expenditures and securities repurchases;
· our ability to realize cost savings and synergies;
· our ability to respond to economic cycles;
· trends in the automotive retail industry and in the general economy in the various countries in which we operate;
· our ability to access the remaining availability under our credit agreements;
· our liquidity;
· performance of joint ventures, including PTL;
· future foreign exchange rates;
· the outcome of various legal proceedings;
· results of self insurance plans;
· trends affecting our future financial condition or results of operations; and
· our business strategy.
Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including the factors identified in our 2012 annual report on Form 10-K filed February 28, 2013. Important factors that could cause actual results to differ materially from our expectations include the following:
· our business and the automotive retail industry in general are susceptible to adverse economic conditions, including changes in interest rates, foreign exchange rates, consumer demand, consumer confidence, fuel prices, unemployment rates and credit availability;
· the number of new and used vehicles sold in our markets;
· automobile manufacturers exercise significant control over our operations, and we depend on them and continuation of our franchise agreements in order to operate our business;
· we depend on the success, popularity and availability of the brands we sell, and adverse conditions affecting one or more automobile 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;
· a restructuring of any significant automotive manufacturers or automotive suppliers;
· our dealership operations may be affected by severe weather or other periodic business interruptions;
· we have substantial risk of loss not covered by insurance;
· we may not be able to satisfy our capital requirements for acquisitions, dealership renovation projects, financing the purchase of our inventory, or refinancing of our debt when it becomes due;
· with respect to the planned acquisition of Western Star Trucks Australia, all of the conditions to closing may not occur or we may otherwise terminate that agreement;
· 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;
· higher interest rates may significantly increase our variable rate interest costs and, because many customers finance their vehicle purchases, decrease vehicle sales;
· non-compliance with the financial ratios and other covenants under our credit agreements and operating leases;
· our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign currency valuations;
· import product restrictions and foreign trade risks that may impair our ability to sell foreign vehicles profitably;
· with respect to PTL, changes in the financial health of its customers, labor strikes or work stoppages by its employees, a reduction in PTLs asset utilization rates and industry competition which could impact distributions to us;
· we are dependent on continued availability of our information technology systems;
· if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional qualified personnel;
· new or enhanced regulations relating to automobile dealerships including those that may be issued by the Consumer Finance Protection Bureau restricting automotive financing;
· changes in tax, financial or regulatory rules or requirements;
· we are subject to numerous legal and administrative proceedings which, if the outcomes are adverse to us, could have a material adverse effect on our business;
· 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; and
· some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests.
In addition:
· the price of our common stock is subject to substantial fluctuation, which may be unrelated to our performance; and
· shares eligible for future sale, or issuable under the terms of our convertible notes, may cause the market price of our common stock to drop significantly, even if our business is doing well.
We urge you to carefully consider these risk factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by federal securities laws and the Securities and Exchange Commissions 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 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 June 30, 2013, a 100 basis point change in interest rates would result in an approximate $1.2 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. In 2011, we entered into forward-starting interest rate swap agreements beginning January 2012 and maturing December 2014 pursuant to which the LIBOR portion of $300 million of our floating rate floor plan debt is fixed at a rate of 2.135% and $100 million of our floating rate floor plan debt is fixed at a rate of 1.55%. Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements subject to variable interest payments during the trailing twelve months ended June 30, 2013, including consideration of the notional value of the swap agreements, a 100 basis point change in interest rates would result in an approximate $16.3 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:
· the maintenance of our overall debt portfolio with targeted fixed and variable rate components;
· the use of authorized derivative instruments;
· the prohibition of using derivatives for trading or other speculative purposes; and
· 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.
Interest rate fluctuations affect the fair market value of our fixed rate debt, including our swaps, 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 June 30, 2013, we had dealership operations in the U.K., Germany and Italy. In each of these markets, the local currency is the functional currency. We do not hedge against foreign currency fluctuations. In the event we change our intent with respect to the investment in any of our international operations, we would expect to implement strategies designed to manage those risks in an effort to mitigate the effect of foreign currency fluctuations on our earnings and cash flows. A ten percent change in average exchange rates versus the U.S. Dollar would have resulted in an approximate $252.2 million change to our revenues for the six months ended June 30, 2013.
In common with other automotive retailers, we purchase certain of our new vehicle and parts inventories from foreign manufacturers.
Although we purchase the majority of our inventories in the local functional currency, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility which may influence such manufacturers ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.
Item 4. Controls and Procedures
Under the supervision and with the participation of our management, including the principal executive and financial officers, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including our principal executive and financial officers, to allow timely discussions regarding required disclosure.
Based upon this evaluation, 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.
We are involved in litigation which may relate to claims brought by governmental authorities, customers, vendors, or employees, including class action claims and purported class action claims. We are not a party to any legal proceedings, including class action lawsuits, that individually or in the aggregate, are reasonably expected to have a material adverse effect on us. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2010, our Board of Directors authorized the repurchase of up to $150.0 million of our outstanding common stock, debt or convertible debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. The program has an indefinite duration. During the second quarter of 2013, we did not repurchase any common stock under this program. As of June 30, 2013, our remaining authorization under the program was $85.6 million.
During the second quarter of 2013, we acquired 97,561 shares of our common stock for $3.1 million from employees in connection with vesting of employee restricted stock awards.
Period |
|
Total Number of |
|
Average Price Paid |
|
Total Number of |
| |
April 1 to April 30, 2013 |
|
|
|
$ |
|
|
|
|
May 1 to May 31, 2013 |
|
|
|
$ |
|
|
|
|
June 1 to June 30, 2013 |
|
97,561 |
|
$ |
32.11 |
|
|
|
|
|
97,561 |
|
$ |
32.11 |
|
|
|
On July 30, 2013, our two largest stockholders renewed their existing stockholders agreement with certain changes. The revised stockholders agreement (the Revised Stockholders Agreement) between Penske Corporation and its wholly owned subsidiary, Penske Automotive Holdings Corp (together with Penske Corporation, Penske) and Mitsui & Co. Ltd. and Mitsui & Co. (USA), Inc. (collectively, Mitsui) has been extended an additional ten years.
The Revised Stockholders Agreement is substantially the same as the existing agreement except that it terminates on March 26, 2024 and requires that Penske vote all of the shares of our common stock beneficially owned by Penske in favor of (i) one representative of Mitsui for election as a director of PAG as long as Mitsui beneficially owns 10% or more (but less than 20%) of our common stock, and (ii) two representatives of Mitsui for
election as directors of PAG as long as Mitsui beneficially owns 20% or more of our common stock. The provisions requiring that Mitsui vote all of the shares of common stock they beneficially own in favor of up to 14 persons voted for by Penske for election as directors of PAG and that, in the event Penske desires to transfer equity securities in PAG to a third party during the term of the Revised Stockholders Agreement (other than one or more transfers not exceeding the 1,992,408 shares in the aggregate), Penske must permit Mitsui to participate in such transfer on a pro rata basis, each remain unchanged. See Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operation Related Party Transactions for additional information concerning our relationships with Penske and Mitsui.
4.1 |
|
Consent and Amendment Letter Amendment No. 2 dated July 26, 2013 to U.K. Credit Agreement (incorporated by reference to exhibit 4.1 to our July 29, 2013 Form 8-K). |
|
|
|
10.1 |
|
Amended and Restated Limited Liability Company Agreement of ATC Holdco, LLC dated June 10, 2013 by and among TRP III (ATC) I, LP, TRP (ATC) II, LP, PAG Investments, LLC, and other investors. |
|
|
|
10.2 |
|
Stockholders Agreement by and among Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc., Penske Corporation and Penske Automotive Holdings Corp. dated as of July 30, 2013 (incorporated by reference to exhibit 46 to Amendment No. 26 to Schedule 13D filed on July 30, 2013). |
|
|
|
12 |
|
Computation of Ratio of Earnings to Fixed Charges |
|
|
|
31.1 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
|
|
|
31.2 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
|
|
|
32 |
|
Section 1350 Certification. |
|
|
|
101.INS |
|
XBRL Instance Document. |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema. |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase. |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase. |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase. |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
PENSKE AUTOMOTIVE GROUP, INC. | |
|
|
|
|
By: |
/s/ Roger S. Penske |
|
|
Roger S. Penske |
Date: August 1, 2013 |
|
Chief Executive Officer |
|
|
|
|
By: |
/s/ David K. Jones |
|
|
David K. Jones |
Date: August 1, 2013 |
|
Chief Financial Officer |
EXHIBIT INDEX
Exhibit |
|
Description |
|
|
|
4.1 |
|
Consent and Amendment Letter Amendment No. 2 dated July 26, 2013 to U.K. Credit Agreement (incorporated by reference to exhibit 4.1 to our July 29, 2013 Form 8-K). |
|
|
|
10.1 |
|
Amended and Restated Limited Liability Company Agreement of ATC Holdco, LLC dated June 10, 2013 by and among TRP III (ATC) I, LP, TRP (ATC) II, LP, PAG Investments, LLC, and other investors. |
|
|
|
10.2 |
|
Stockholders Agreement by and among Mitsui & Co., Ltd., Mitsui & Co. (U.S.A.), Inc., Penske Corporation and Penske Automotive Holdings Corp. dated as of July 30, 2013 (incorporated by reference to exhibit 46 to Amendment No. 26 to Schedule 13D filed on July 30, 2013). |
|
|
|
12 |
|
Computation of Ratio of Earnings to Fixed Charges |
|
|
|
31.1 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
|
|
|
31.2 |
|
Rule 13(a)-14(a)/15(d)-14(a) Certification. |
|
|
|
32 |
|
Section 1350 Certification. |
|
|
|
101.INS |
|
XBRL Instance Document. |
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema. |
|
|
|
101.CAL |
|
XBRL Taxonomy Extension Calculation Linkbase. |
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase. |
|
|
|
101.LAB |
|
XBRL Taxonomy Extension Label Linkbase. |
|
|
|
101.PRE |
|
XBRL Taxonomy Extension Presentation Linkbase. |
Exhibit 10.1
AMENDED AND RESTATED
LIMITED LIABILITY COMPANY AGREEMENT
OF
ATC HOLDCO, LLC
This Amended and Restated Limited Liability Company Agreement of ATC HOLDCO, LLC, is adopted, executed and entered into as of June 10, 2013, by and among TRP III (ATC) I, LP, a Delaware limited partnership (TRP I), TRP III (ATC) II, LP, a Delaware limited partnership (TRP II), and the Persons identified on Annex A hereto. This Agreement, as it may be amended from time to time, shall be binding upon any Person who at any time is a Member, regardless of whether that Person has executed this Agreement or any amendment hereto.
WHEREAS, the Company was formed pursuant to the Delaware Limited Liability Company Act, 6 Del. C. §18-101, et seq., as amended from time to time (the Delaware Act), by the filing of the certificate of formation of the Company with the office of the Secretary of State of the State of Delaware on March 21, 2013;
WHEREAS, the initial Member previously entered into a Limited Liability Company Agreement, dated as of March 21, 2013 (the Initial Agreement) pursuant to the Delaware Act governing the affairs of the Company and the organization and conduct of its business; and
WHEREAS, the Members desire to amend and restate the Initial Agreement on the terms set forth below.
NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the Members agree as follows:
ARTICLE 1
DEFINED TERMS
1.1 Definitions. Unless the context otherwise requires, the terms defined in this Article I and in Annex B shall, for the purposes of this Agreement, have the meanings herein specified.
704(c) Value means, with respect to each Deemed Contributed Asset, a percentage of the Agreed Value of the applicable ATC Asset equal to the percentage of such ATC Asset deemed contributed to the Company pursuant to Code Section 721.
Additional Members has the meaning set forth in Section 14.1.
Adjusted EBITDA means earnings before non-floorplan interest, taxes, depreciation and amortization, calculated in accordance with generally accepted accounting principles in the United States, consistently applied. For the avoidance of doubt, in calculating Adjusted EBITDA, floorplan interest shall be deducted from earnings.
Affiliate means, with respect to any Person, (i) each Person that, directly or indirectly, owns or controls, whether beneficially, or as a trustee, guardian or other fiduciary, 50% or more of the securities of the Person having ordinary voting power in the election of directors of such Person, (ii) each Person that controls, is controlled by or is under common control with such Person or any Affiliate of such Person, and (iii) each of such Persons officers, directors, joint venturers, and partners. For the purpose of this definition, control of a Person shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies, whether through the ownership of voting securities, by contract or otherwise.
Agreed Value means, with respect to each of the ATC Assets and each of the ATC Realty Assets, the agreed gross fair market value of such asset as of the date of this Agreement.
Agreement means this Amended and Restated Limited Liability Company Agreement, including the annexes hereto, in each case as amended, modified, supplemented or restated from time to time.
ATC means The Around The Clock Freightliner Group, LLC, an Oklahoma limited liability company.
ATC Assets means the assets of ATC held at the time of the ATC Merger.
ATC Merger has the meaning given such term in the Merger Agreement.
ATC Realty means ATC Realty Investments, LLC, an Oklahoma limited liability company.
ATC Realty Assets means the assets treated as held by ATC Realty for federal income tax purposes at the time of the Realty Merger. Because Bowen Realty is a disregarded entity for federal income tax purposes, the term ATC Realty Assets includes the assets of Bowen Realty held at the time of the Realty Merger.
Board has the meaning set forth in Section 6.1(a).
Bowen Realty means Bowen Realty Investments, LLC, an Oklahoma limited liability company. Bowen Realty is disregarded as separate from ATC Realty for federal income tax purposes.
Buyer has the meaning set forth in Section 7.3(a).
Capital Account means the individual account maintained by the Company with respect to each Member as provided in Annex B.
Capital Contribution means, with respect to any Member, the aggregate amount of money and the Gross Asset Value of any property (other than money) contributed to the Company pursuant to Sections 4.1.
Certificate means the certificate of formation of the Company and any and all amendments thereto and restatements thereof filed on behalf of the Company with the office of the Secretary of State of the State of Delaware pursuant to the Delaware Act.
Capital Percentage means, for each Member, the fraction, expressed as a percentage, equal to the quotient of (A) the number of Units held by such Member, divided by (B) the aggregate number of Units held by all Members. The Capital Percentage of each Member is set forth on Annex A.
Capital Transactions shall mean sales of Company assets out of the ordinary course of business, but only to the extent that the net proceeds of such sales are to be distributed to the Members rather than reinvested by the Company.
Capital Transaction Proceeds shall mean the net proceeds from each Capital Transaction, after deduction for all costs incurred in connection with such Capital Transaction.
Charter Documents has the meaning set forth in Section 13.3(b).
Code has the meaning set forth in Section B.1 of Annex B.
Company means ATC Holdco, LLC, the limited liability company heretofore formed and hereby continued under and pursuant to the Delaware Act and this Agreement.
Convertible Note has the meaning given that term in the Merger Agreement.
Covered Person means (a) a Member in its capacity as a member of the Company, (b) an officer, Manager or director of the Company, (c) any director, officer or manager of a Member who is or was serving at the request of the Company for another entity or enterprise, and (d) any Affiliate of a Member.
Deemed Contributed Assets has the meaning set forth in Section 4.9.
Delaware Act has the meaning set forth in the recitals.
Equity Securities has the meaning set forth in Section 4.1(a).
Fiscal Year means (i) any twelve (12) month period commencing on January 1 and ending on December 31, or (ii) any portion of the period described in clause (i) of this sentence for which the Company is required to allocate items of Company income, gain, loss or deduction.
Gross Asset Value has the meaning set forth in Section B.1 of Annex B.
Indemnitees has the meaning given that term in the Merger Agreement.
Initial Agreement has the meaning set forth in the recitals.
IPO has the meaning set forth in Section 9.3(a).
Key Managers shall mean Chinta Hari, Mark Lamont, Drew Burk, John Pruitt and Adam Arrington.
Liquidator has the meaning set forth in Section 11.2(a).
Losses has the meaning set forth in Section B.l of Annex B.
M-B Holdings means Miciotto-Bowen Holdings, Inc., a Texas corporation.
Management Fee has the meaning set forth in Section 3.3(c).
Managers has the meaning set forth in Section 6.1(a).
Member means any Person listed on Annex A or any Person admitted as an Additional Member or a Substitute Member pursuant to the provisions of this Agreement, in such Persons capacity as a member of the Company; and Members means two or more of such Persons when acting in their capacities as members of the Company.
Merger Agreement means that certain Agreement and Plan and Merger dated as of March 29, 2013, as amended, by and among the Company, M-B Holdings, ATC, ATC Realty, ATC Merger Sub, LLC, Realty Merger Sub, LLC, John C. Miciotto, Jr., Darcie Bowen-Miciotto, Jeffrey W. Bowen and the Charles and Cassandra Bowen Charitable Foundation.
Observer means a person entitled to attend regular and special meetings of the Board (and committees and subcommittees thereof), as provided in Section 6.3(f).
Offering Member has the meaning set forth in Section 7.2.
Operating Cash Flow shall mean the gross receipts of the Company from all sources other than Capital Transactions, including borrowings and amounts released from reserves, less all expenditures of the Company, including repayments of debt and additions to reserves, other than costs incurred in connection with Capital Transactions.
Optionee has the meaning set forth in Section 7.2(c).
Other Members has the meaning set forth in Section 7.2(a).
Penske means Penske Automotive Group, Inc. or its Affiliate.
Permitted Transfer has the meaning set forth in Section 7.1(b).
Person means any individual, partnership, corporation, limited liability company, association, joint stock company, business, trust, joint venture, company, or other business entity or unincorporated organization.
Profits has the meaning set forth in Section B.l of Annex B.
Realty Merger has the meaning given such term in the Merger Agreement.
Reoffered ROFO Units has the meaning set forth in Section 7.2(b).
ROFO Units has the meaning set forth in Section 7.2(a).
Rollover Units means the Units issued to M-B Holdings on the date of this Agreement.
Sale Transaction has the meaning set forth in Section 7.4(a).
Substitute Member has the meaning set forth in Section 7.6.
Tax Distribution Amount means, for each Member and each year, the income tax applicable to such Members allocable share of the Companys net taxable income and gain for such year (including Code Section 704(c) items), calculated on the assumption that cumulative net losses, if any, allocable to such Member with respect to prior years are available to offset such income and gain, and on the assumption that the income and gain allocable to such Member is taxed at the maximum potential combined federal and state income tax rate applicable to a Member (or, in the case of a Member that is a pass-through entity, the direct or indirect person taxable on the income of the Company allocated to such Member) subject to the highest such combined rate, taking into account the deduction of state taxes for federal income tax purposes and the character of such income and gain. For the avoidance of doubt, the assumed combined federal and state income tax rate utilized for purposes of determining the Tax Distribution Amounts of the Members with respect to each year shall be the same for all Members.
Tax Matters Partner has the meaning set forth in Section 12.1(a).
Tag-Along Right has the meaning set forth in Section 7.3(a).
Total ATC Consideration has the meaning set forth in Section 4.9.
Transfer has the meaning set forth in Section 7.1(a).
Transfer Notice has the meaning set forth in Section 7.2(a).
Transfer Price has the meaning set forth in Section 7.2(a).
Transferor Member has the meaning set forth in Section 7.3(a).
Treasury Regulations and Treas. Reg. means the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).
TRP I has the meaning set forth in the recitals.
TRP II has the meaning set forth in the recitals.
TRP Party means TRP I, TRP II or any of their Affiliates, including Penske.
Unit means an ownership interest of a Member in the Company with a Capital Percentage. The Capital Percentage of each Unit shall equal 100% divided by the total number of Units outstanding.
ARTICLE 2
FORMATION AND TERM
2.1 Organization. The Members hereby organize and continue the Company heretofore formed as a limited liability company under and pursuant to the provisions of the Delaware Act without dissolution and agree that the rights, duties and liabilities of the Members shall be as provided in the Delaware Act, except as otherwise provided herein.
2.2 Name. The name of the Company shall be ATC Holdco, LLC. The business of the Company may be conducted, upon compliance with all applicable laws, under any other name designated by the Board. At any time the Board may change the name of the Company by causing an amendment to the Certificate to be filed with the office of the Secretary of State of Delaware pursuant to the Delaware Act.
2.3 Term. The term of the Company commenced on the date the Certificate was filed in the office of the Secretary of State of the State of Delaware and shall continue until the Company is dissolved and wound up in accordance with the provisions of this Agreement and the Certificate is cancelled in accordance with the Delaware Act.
2.4 Registered Agent and Office. The Companys registered agent and office in Delaware shall be the Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808. At any time, the Board may designate another registered agent and/or registered office by causing an amendment to the Certificate to be filed with the office of the Secretary of State of Delaware pursuant to the Delaware Act.
2.5 Principal Place of Business. The principal place of business of the Company shall be 2555 Telegraph Road, Bloomfield Hills, MI 48302, or at such location as may be determined from time to time by the Board, which need not be in the State of Delaware. The Company may have such other offices as the Board may designate from time to time.
2.6 Qualification in Other Jurisdictions. The Board and any authorized officers of the Company shall cause the Company to be qualified, formed or registered under foreign registration and qualification and assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company is required to be qualified, formed or registered under applicable law. Any officer, as an authorized person within the meaning of the Delaware Act, may execute, deliver and file any certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business.
2.7 No State Law Partnership. The Members have agreed to form and have formed a limited liability company and do not intend to form a partnership under the laws of the State of Delaware or any other laws; provided, however, that, to the extent permitted by United States or
other applicable law, the Company shall be treated as a partnership for United States federal, state and local income tax purposes.
ARTICLE 3
PURPOSE AND POWERS OF THE COMPANY
3.1 Purpose and Powers. The object and purpose of, and the nature of the business to be conducted and promoted by, the Company is engaging in any lawful business, act or activity for which limited liability companies may be formed under the Delaware Act. The Company shall have the power and authority to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of such object and purpose.
3.2 Limitation on Liability. Except as otherwise required by the Delaware Act or applicable law or as expressly agreed in writing, no director, manager, officer, shareholder, partner, member, employee or agent of any Member shall be personally liable for the payment of any sums owing by such Member to the Company or any other Member under the terms of this Agreement or for the performance of any other covenant or agreement of such Member contained herein.
3.3 Conflicts of Interest; Related Party Transactions; Management Fee.
(a) Any Member and any Affiliate of any Member and any of their respective directors, officers, members, partners, stockholders, employees, or controlling persons may engage in or possess an interest in any business or activity whatsoever, whether presently existing or hereafter created, without any accountability to the Company or any Member, and without obligation to offer any business opportunity to the Company or any other Member even if the opportunity is one that the Company might reasonably be deemed to have pursued or desired to pursue if granted the opportunity to do so, and no such Person shall be liable to the Company or any Member for breach of any fiduciary or other duty, as a Member, director or otherwise, by reason of the fact that such Person acquires or pursues such opportunity or directs such opportunity to another Person or fails to present such opportunity to the Company, except for any Member that agrees otherwise pursuant to a separate agreement with the Company or any other direct or indirect subsidiaries of the Company; provided, however, that nothing in this Section 3.3 or in such separate agreement shall be construed to relieve or excuse any Person from his, her or its obligations under any employment, non-use, non-disclosure, non-solicitation, covenant-not-to-compete or similar covenant in this Agreement or any other agreement between such Person and the Company or any of its subsidiaries, or any of their respective Affiliates.
(b) Nothing in this Agreement other than Section 6.6(b) shall impede the Companys ability to enter into contractual arrangements with any Member or Manager or any Affiliate of any Member or Manager, except that without first obtaining the approval of the independent Managers with respect thereto and a majority of the outstanding Units held by Members other than the interested Member(s), in each case which approval shall not be unreasonably withheld, conditioned or delayed, neither the Company nor any of its subsidiaries shall enter into any transaction or series of related transactions with any Member or Manager or any Affiliate of any Member or Manager unless such transaction or series of related transactions
is on terms that are no less favorable to the Company or its subsidiary, as applicable, than would be available in a comparable transaction in arms-length dealings with an unrelated third party.
(c) Notwithstanding anything contained in this Agreement, the Members acknowledge and agree that ATC will pay a management fee to Transportation Resource Advisors III, LLC or its designee equal to the greater of (i) two percent (2%) of ATCs Adjusted EBITDA or (ii) $300,000 per year (the Management Fee). The Management Fee shall be payable quarterly in advance based on the budgeted ATC Adjusted EBITDA, which amount shall be adjusted annually within fifteen (15) days following the Boards approval of the audited financial statements for the Company and its subsidiaries. If the Management Fee paid by ATC is overpaid for any year, then the overpayment shall be offset against the Management Fee owed by ATC during the next quarter or, if the Management Fee is underpaid, then ATC shall pay such shortfall within ten days following the Boards approval of the audited financial statements..
ARTICLE 4
CONTRIBUTION OF CAPITAL, ISSUANCE OF UNITS
AND CAPITAL ACCOUNTS
4.1 Authorization and Initial Issuance of Units; Capitalization.
(a) Authorized Units. The aggregate membership interest in the Company shall be divided into such number of Units as may be issued and outstanding from time to time. Without limiting the power and authority of the Board set forth in this Agreement, subject to Section 4.2, the Board may, at any time and from time to time, without any consent, vote or approval of any of the Members, solicit and accept additional Capital Contributions from any Person and/or cause the Company to issue additional Units, rights, options, or warrants exercisable for or convertible into Units, or other securities or instruments of any type or class whatsoever, including, without limitation, warrants exercisable for Units (collectively, Equity Securities); provided, however, that for so long as M-B Holdings and its Affiliates collectively own at least ten percent (10%) of the issued and outstanding Units, the aggregate number of Equity Securities issued to employees, consultants or other service providers shall not exceed 6,510,000 Units without the consent of M-B Holdings and provided further that so long as Penske collectively owns at least ten percent (10%) of the issued and outstanding Units, the aggregate number of Equity Securities issued to employees, consultants or other service providers shall not exceed 6,510,000 Units without the consent of Penske. Any such Equity Securities may be issued for cash, property, services, satisfaction of existing obligations or such other type, form, and amount of consideration (including notes, other evidences of indebtedness or obligations of the Person acquiring the interest, instrument or security, as the case may be) as the Board may determine to be appropriate. Any such issuance may be made by the Company by setting forth either in an amendment or an addendum to this Agreement, the relative rights, obligations, duties, and preferences of each new class or series of interests created and reflecting all necessary adjustments to Capital Percentages. A copy of this Agreement as so amended, or the addendum as so adopted, as the case may be, shall be provided to each Member. All filings necessary to be made under the Delaware Act or applicable law in connection with the creation of such interests shall be made by an Officer acting on behalf of the Board and the Company.
(b) Initial Issuance. On the date hereof, each Member has made, or shall be deemed for Federal income tax purposes as having made (in accordance with Section 4.9), the Capital Contributions set forth next to his, her or its name on Annex A, and has received in exchange for such Capital Contribution the number of Units set forth next to his, her or its name on Annex A. The name and Capital Percentage of each Member are also set forth on Annex A. The address for each Member is on file with the Company.
4.2 Preemptive Rights.
(a) Grant of Preemptive Rights. If the Company hereafter proposes to issue or sell any Equity Securities, the Company shall first offer to each Member a portion of the number or amount of such Equity Securities proposed to be so sold equal to the product of (x) the number or amount of Units proposed to be so issued and sold (on an as converted basis, if applicable) multiplied by (y) a fraction, the numerator of which is the number of issued and outstanding Units then owned by such Member prior to such issuance plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible, and the denominator of which is the total number of Units then issued and outstanding and held by all Members plus the number of Units into which the Convertible Note is convertible, for the same price and upon the same terms and conditions as the Equity Securities being offered in such transaction. Notwithstanding the foregoing, no Member shall have any purchase right pursuant to this Section 4.2(a) or otherwise with respect to any issuance of Equity Securities in connection with: a distribution payable solely and ratably in Units on its outstanding Units; an acquisition, sale-leaseback or loan in a bona fide arms length transaction; or pursuant to an option plan or agreement approved by the Managers. The Company shall not cause or permit any of its subsidiaries to issue or sell any equity securities (including options, rights or securities convertible into equity securities) of such subsidiary to any Person other than the Company or another subsidiary of the Company without providing purchase rights to the Members that are equivalent to those set forth in this Section 4.2.
(b) Procedures.
(i) If, in accordance with this Section 4.2, the Company determines to issue additional Equity Securities, it shall give each Member having purchase rights under this Section 4.2 notice, specifying in reasonable detail the nature and type of securities being offered and the price and other terms and conditions on which they are being offered, at least 20 days before issuing any such securities.
(ii) Any Member desiring to exercise its purchase rights under this Section 4.2 must give to the Company written notice of its election to purchase up to a specified amount of the securities proposed to be offered by the close of business on the tenth day after receipt of the notice required by Section 4.2(b)(i). Such response shall set forth the Members acceptance of the offer and designate an amount of securities to be purchased by such Member (setting forth the maximum number desired if other Members elect not to purchase), which amount may be fewer than, equal to, or more than the amount of securities that such Member has a right to purchase under Section 4.2(a). If any Member does not elect to purchase all of the offered Equity Securities that it has the right to purchase under Section 4.2(a), the Equity Securities remaining shall be allocated to each other electing Member in one or more successive
allocations, up to the amount of Equity Securities specified in the election, pro rata, in the same proportion as the total number of Units held by that electing Member (plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible) bears to the total number of issued and outstanding Units held by all electing Members electing to purchase more than the maximum amount of Equity Securities that they are entitled to purchase under Section 4.2(a) (plus the number of Units into which the Convertible Note is convertible if M-B Holdings is such an electing Member).
(iii) Not later than 10 days after the date on which this offer expires, the Company shall notify each electing Member of the time and place of closing (which may be contingent on the closing of the sale of Equity Securities referred to in Section 4.2(b)(iv)), the number or amount of Equity Securities allotted to it, and the purchase price therefore, whereupon each such electing Member shall become legally obligated to purchase such Equity Securities at the price and on the terms offered.
(iv) Following the expiration of the offer and the giving of the notice required by Section 4.2(b)(i), the Company may thereafter offer and sell any of the Equity Securities not purchased by the Members for a period of 180 days on the terms and conditions set forth in the original notice to the Members. Any of the Equity Securities not sold during that period may not thereafter be sold without first complying with the requirements of this Section 4.2.
4.3 Contributions of Capital and Loans.
(a) In General. Except as otherwise expressly provided herein or in a written agreement between a Member and the Company, or to the extent that a Member agrees to make a Capital Contribution to, or to purchase Equity Securities or other interests from, the Company: (i) no Member shall be required to contribute any capital to the Company; (ii) no Member shall be required to make any loan to the Company; (iii) loans by a Member to the Company shall not be considered a contribution of capital, shall not increase the Capital Account of the lending Member or its ownership interest of the Company and the repayment of such loans by the Company shall not decrease, or result in any adjustment to, the Capital Account of the Member making the loans; (iv) no interest shall be paid on any capital contributed to the Company by any Member; and (v) under any circumstances requiring a return of all or any portion of a Capital Contribution, no Member shall have the right to receive property other than cash except in the sole discretion of the Board.
(b) Advances. If at any time the Company does not have sufficient cash to pay its obligations, none of the Members shall be required to make additional Capital Contributions to the Company. However, any of the Members that may agree to do so with the consent of the Board may loan all or part of the needed funds to or on behalf of the Company, subject to the requirements of this Section 4.3(b). If a Member agrees to make a loan to the Company, the Company shall first offer each other Member the right to make a pro rata portion of such loan (as determined below in this Section 4.3(b)). Each Member that elects to make a portion of such loan (including the Member that initially agreed to make the loan) shall make a portion of the loan equal to the product of (x) the aggregate amount of the loan, multiplied by (y) a fraction, the numerator of which is the number of issued and outstanding Units then owned
by such Member plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible, and the denominator of which is the total number of issued and outstanding Units held by all such Members plus, if M-B Holdings is making a portion of the loan, the number of Units into which the Convertible Note is convertible. Any loan made pursuant to this Section 4.3(b) shall bear interest at the prevailing rate for similar debt on the date of such advance, as reasonably determined by the Board, from the date of the advance until the date of payment and shall be on such other terms and conditions as approved by the Board. The Board, upon determining that a loan from Members is in the best interest of the Company, shall give each Member notice of the amount and terms of the loan in reasonable detail and any Member desiring to participate in the loan, as provided herein, must give written of its election to participate pursuant to this Section 4.3 by the close of business on the tenth day after receipt of the notice from the Company. If any Member elects not to participate in the loan up to such Members allowable portion thereof, such portion shall be allocated to each other participating Member, pro rata, in the same proportion of the total number of Units held by that participating Member (plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible) bears to the total number of issued and outstanding Units held by all Members electing to participate in the loan. Notwithstanding the foregoing, if due to time constraints, the Board determines that it is in the best interest of the Company to borrow funds from a Member before other Members have an opportunity to elect to participate in the loan as provided herein, the Company may borrow the funds on an interim basis from a Member or Members while the offer to participate in the loan is made to and being considered by all Members.
4.4 No Return of Contributions. A Member is not entitled to the return of any part of the Members Capital Contribution. An unrepaid Capital Contribution is not a liability of the Company or of any Member. For the avoidance of doubt, no Member is required to contribute or to lend any cash or property to the Company to enable the Company to return another Members Capital Contribution.
4.5 Capital Accounts. A Capital Account shall be established and maintained for each Member as provided in Annex B. Upon the transfer of a Unit, the transferee shall succeed to the corresponding portion of the Capital Account of the transferor as provided in Section B.2(b) of Annex B.
4.6 Profits and Losses. Profits and Losses shall be allocated to the Members in accordance with Annex B.
4.7 Evidence of Units. The Units will not be evidenced by certificates, but will be as reflected on the books and records of the Company.
4.8 Record Holders of Units. The Company shall be entitled to treat the Person in whose name any Units of the Company stand on the books and records of the Company as the absolute owner thereof, and as a Member holding the membership interest evidenced by those Units. The Company shall not be bound to recognize any equitable or other claim to, or interest in, such Units on the part of any other Person, whether or not the Company has express or other notice of any such claim.
4.9 Tax Treatment of the Transactions Under the Merger Agreement. On the date of this Agreement and in connection with the execution of this Agreement, the Company acquired all of the membership interests of ATC pursuant to the ATC Merger, and the Company acquired all of the membership interests of ATC Realty pursuant to the Realty Merger. For federal income tax purposes, the ATC Merger and the Realty Merger shall be treated as provided in Section 6.8(i) of the Merger Agreement. With regard to the ATC Merger, M-B Holdings shall be treated as conveying the ATC Assets to the Company in return for the Rollover Units, the assumption of liabilities of ATC, except to the extent M-B Holdings is required to indemnify the Company for such liabilities, and other consideration set forth in the Merger Agreement with respect to the ATC Merger (the Total ATC Consideration). Pursuant to Treasury Regulation Section 1.707-3, the deemed conveyance of the ATC Assets to the Company in return for the Total ATC Consideration shall be treated (i) as a contribution by M-B Holdings to the Company of a fractional share of each of the ATC Assets to which Code Section 721 applies to the extent permitted by Treasury Regulation Section 1.707-3 (such fractional shares, the Deemed Contributed Assets), and (ii) as a taxable sale by M-B Holdings with respect to the remaining fractional share of each of the ATC Assets. In determining the portion of the ATC Assets that constitute Deemed Contributed Assets, the cash portion of the Total ATC Consideration shall be treated as a distribution of debt proceeds pursuant to Treasury Regulation Section 1.707-5(b) to the maximum extent permitted thereunder. The cash portion of the Total ATC Consideration not treated as a distribution of debt proceeds pursuant to the preceding sentence shall be treated as a reimbursement of capital expenditures pursuant to Treasury Regulation Section 1.707-4(d) to the maximum extent permitted thereunder. No party to this Agreement (or any of its Affiliates) shall take any position (whether in a tax return, an audit, or otherwise) that is inconsistent with the treatment set forth in this Section 4.9, unless required to do so by applicable law.
4.10 Units Held by a Key Manager. The Company is entering into a subscription agreement with each Key Manager on the date of this Agreement. Each subscription agreement sets forth various rights and obligations with respect to the Units held by each Key Manager.
ARTICLE 5
MEMBERS
5.1 Powers of Members.
(a) The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement.
(b) No Member, acting in his, her or its capacity as a Member, shall: (i) have the power to sign for or to bind the Company; (ii) take any part in the management of the business of, or transact any business for, the Company or its subsidiaries; or (iii) except as required by the Delaware Act and specifically provided in this Agreement, have any right to vote on or consent to any matter.
5.2 Voting Rights of Members. Each Unit shall entitle the holder thereof to one vote on each action to be voted on by the Members.
5.3 Action by Members. Except as otherwise provided in the Delaware Act, the Certificate, or this Agreement, whenever any action is to be taken by vote of the Members, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all Members entitled to vote thereon.
5.4 Meetings of Members.
(a) Quorum. A meeting of the Members shall not be organized for the transaction of business unless a quorum is present. The presence of Members entitled to cast at least a majority of the votes that all Members are entitled to cast on a particular matter to be acted upon at the meeting shall constitute a quorum for the purposes of consideration and action on the matter. The Members present at a duly organized meeting can continue to do business until adjournment notwithstanding the withdrawal of enough Members to leave less than a quorum. If a meeting cannot be organized because a quorum has not attended, the Members present may adjourn the meeting to such time and place as they may determine.
(b) Location. All meetings of the Members shall be held at the principal place of business of the Company or at such other place within or outside the State of Delaware as shall be specified or fixed in the notice thereof.
(c) Adjournment. The chairman of the meeting or individual designated by the Board and present at the meeting or the Members present and entitled to vote shall have the power to adjourn a meeting from time to time, without any notice other than announcement at the meeting of the time and place at which the adjourned meeting will be held.
(d) Call of Meeting. A meeting of the Members for any proper purpose or purposes may be called at any time by the Board. Only business within the purpose or purposes described in the notice of the meeting may be conducted at a meeting of the Members. The notice shall specify the time and location of the meeting.
(e) Notices. Notice of a meeting of Members shall be given to the Members at least 10 days but not more than 60 days before the date of such meeting.
(f) Waiver of Notice. A waiver of notice of a meeting signed by the Member entitled to the notice, whether before or after the meeting, shall be deemed equivalent to the giving of the notice. Attendance of a Member at a meeting constitutes a waiver of notice of the meeting, except where a Member attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
(g) Conduct of Meetings. All meetings of the Members shall be presided over by the Board, an individual designated by the Board or, in the absence of the Board or an individual designated by the Board, an individual chosen by the Members present. The Person presiding at the meeting shall determine the order of business and the procedure at the meeting, including such regulations of the manner of voting and the conduct of discussion at such meeting.
5.5 Action by Consent or Remote Participation.
(a) Action by Consent. Any action required or permitted to be taken at a meeting of Members may be taken without a meeting and without a vote, upon the consent of the Members who would have been entitled to cast the minimum number of votes that would be necessary to authorize the action at a meeting at which all Members entitled to vote thereon were present and voting. The consents shall be in writing or in electronic form and shall be filed with the Board. The Company shall provide any non-consenting Members with prompt written notice of any such action.
(b) Remote Participation. The presence or participation, including voting and taking other action, at a meeting of Members, by conference telephone or other electronic means, including, without limitation, the Internet, shall constitute the presence of, or vote or action by, the Member.
5.6 Waiver of Partition. No Member shall, either directly or indirectly, take any action to require partition or appraisement of the Company or of any of its assets or properties or cause the sale of any Company assets or property, and notwithstanding any provisions of applicable law to the contrary, each Member (and its successors or assigns) hereby irrevocably waives any and all right to maintain any action for partition or to compel any sale with respect to its Units, or with respect to any assets or properties of the Company, except as expressly provided in this Agreement.
5.7 Resignation. Subject to Article 7 with respect to Permitted Transfers, a Member may not at any time withdraw, resign or retire as a Member from the Company. The Company may recover damages for breach of this Section 5.7 if any Member violates this Section 5.7 and may offset the Companys damages against any amount payable as a distribution to a Member purporting to withdraw, resign or retire from the Company.
ARTICLE 6
MANAGEMENT
6.1 Management by Board.
(a) Exclusive Responsibility. The business and affairs of the Company shall be managed by or under the direction of a Board of the Company (the Board) consisting of natural persons designated as managers of the Company as provided below (Managers). Except as otherwise provided herein (including, without limitation, Section 6.6), the Board shall have full, exclusive and complete discretion to manage and control the business and affairs of the Company, to make all decisions affecting the business and affairs of the Company and to take all actions as it deems necessary or appropriate to accomplish the purpose of the Company as set forth herein. A Member, as such, shall not take part in, or interfere in any manner with, the management, conduct or control of the business and affairs of the Company, and shall not have any right or authority to act for or bind the Company.
(b) Authority. Only those Managers and officers who are authorized from time to time by a majority of the Managers (subject to Section 6.6) or otherwise authorized
pursuant to a written employment agreement shall have the right and authority to act for or bind the Company.
(c) Composition of Board; Voting Agreement. Subject to the terms of this Agreement, the Board shall have six members. The Board shall be constituted as follows:
(i) Three persons shall be designated collectively by TRP I and TRP II;
(ii) One person shall be designated by Penske; and
(iii) For so long as M-B Holdings and its Affiliates collectively own at least ten percent (10%) of the issued and outstanding Units, two persons shall be designated by M-B Holdings.
The right of M-B Holdings to designate two Managers pursuant to this Section 6.1(c) may be modified as follows: (Y) if M-B Holdings and its Affiliates collectively own less than ten percent (10%) of the issued and outstanding Units, but owns greater than or equal to five percent (5%) of the issued and outstanding Units, then M-B Holdings shall only have the right to appoint one person to the Board and TRP shall appoint the other Manager; and (Z) if M-B Holdings and its Affiliates collectively own less than five percent (5%) of the issued and outstanding Units, then M-B Holdings shall no longer be entitled to appoint any Managers to the Board and all Board seats formerly designated for Managers appointed by M-B Holdings shall be designated for Managers appointed by TRP with the prior approval of Penske, whose approval shall not be unreasonably withheld.
(d) Transferability. The rights of M-B Holdings to designate or serve as a Manager (or appoint an observer) under Section 6.1(c) are non-transferable. The rights of any TRP Party to designate a Manager under Section 6.1(c) may be transferred only in connection with a Transfer of all of the Units then held by such TRP Party.
(e) Removal of Managers. A Manager designated (or observers appointed) pursuant to Section 6.1(c) may be removed with or without cause by, and only by, the Member then entitled to designate the seat held by such Manager.
6.2 Officers; Delegation and Duties. The Company shall have such officers, other employees and agents as shall be necessary or desirable to conduct its business. The Board may elect a Member, Manager or other Person to serve as an officer of the Company. The Board may assign titles to the officers it elects. Unless the Board decides otherwise, if the title is one commonly used for officers of a business corporation, the assignment of that title shall constitute the delegation of the authority and duties that are normally associated with that office, subject to any specific delegation of authority and duties made by the Board. Any number of offices may be held by the same Person. The salaries or other compensation, if any, of the officers, other employees and agents of the Company shall be fixed from time to time by the Board or such other Persons as have been delegated that authority.
6.3 Meetings of the Board.
(a) Quorum; Manner of Acting. Unless otherwise provided in the Certificate or this Agreement, a majority of the Board in office shall constitute a quorum for the transaction of business by the Board, and the act of a majority of the Managers present at a meeting at which a quorum is present shall be the act of the Board. A Manager who is present at a meeting of the Board at which action on any matter is taken shall be presumed to have assented to the action unless his dissent is entered in the minutes of the meeting or unless he files his written dissent to the action with the secretary of the meeting before the adjournment thereof or delivers the dissent to the Company immediately after the adjournment of the meeting. The right to dissent shall not apply to a Manager who voted in favor of the action. Each Manager shall have one vote on the Board.
(b) Location. Meetings of the Board may be held at such place or places as shall be determined from time to time by the Board.
(c) Waiver of Notice. A waiver of notice of a meeting signed by the Manager entitled to the notice, whether before or after the meeting, shall be deemed equivalent to the giving of the notice. Attendance of a Manager at a meeting constitutes a waiver of notice of the meeting, except where a Manager attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
(d) Regular Meetings. Regular meetings of the Board shall be held at such times and places as shall be designated from time to time by the Board.
(e) Special Meetings. Special meetings of the Board may be called by any Manager on not less than twenty four (24) hours notice to each other Manager either personally, by telephone, by mail or facsimile. A notice shall specify the time and place of the meeting, but need not specify the purpose of the meeting.
(f) Observers. For so long as M-B Holdings is entitled to appoint one or more Managers to the Board, Darcie Miciotto and Jeff Bowen shall be appointed as Observers. If M-B Holdings right to designate a Manager terminates, then it shall have the right to appoint one Observer to all Board meetings as long as it holds of record five percent (5%) of the issued and outstanding Units, after which the right to appoint an Observer shall cease (and shall not be restored by any subsequent acquisition of Units). Each of TRP and Penske shall have the right to appoint one Observer. Observers shall be provided with copies of notices, minutes, consents and other material provided to the Managers. Observers shall have no participation or voting rights of any kind. The Company (or its subsidiaries) shall reimburse Observers for reasonable out of pocket expenses actually incurred by them as a result of attending the meetings of the Board, including any committees and subcommittees thereof.
6.4 Action by Consent or Remote Conference.
(a) Action by Consent. Any action required or permitted to be taken at a meeting of the Board may be taken without a meeting if, prior or subsequent to the action, all of the Managers consent thereto in writing, and the writing is filed with the minutes of the
proceedings of the Board. Any such action by written consent shall have the same force and effect as a majority vote of the Managers.
(b) Remote Participation. Managers may participate in Board meetings by conference telephone or other communications equipment by which all participating Managers may hear each other and such participation in a meeting shall constitute presence in person at the meeting.
6.5 Compensation of Managers. Managers shall not receive compensation for their services as Managers. However, Managers shall be entitled to be reimbursed for out-of-pocket costs and expenses incurred in the course of their service as Managers.
6.6 Limitations of the Authority of the Board. Notwithstanding Section 6.1(a) or any other provision of this Agreement, the Board may not cause the Company (or any subsidiary) to do any of the following without the written approval of M-B Holdings so long as M-B Holdings and its Affiliates, collectively, own at least ten percent (10%) of the issued and outstanding Units, or without the consent of Penske so long as it owns at least ten percent (10%) of the issued and outstanding Units; provided, however, that such consent shall not be unreasonably withheld, conditioned or delayed:
(a) borrow money or otherwise create, refinance or assume indebtedness (excluding capital leases) in excess of the greater of: (i) the product of 3.5 multiplied by ATCs EBITDA for the trailing 12 months ending on the last day of the prior calendar month; or (ii) $75,000,000, excluding indebtedness related to real estate, floorplan financing and the sale/leaseback of any assets;
(b) enter into or amend any agreement with TRP or its Affiliates, except as otherwise provided in this Agreement;
(c) create one or more encumbrances on all or any part of the assets of the Company, other than in the ordinary course of business or to secure indebtedness that does not otherwise require the consent of M-B Holdings and Penske;
(d) make distributions of Operating Cash Flow or Capital Transaction Proceeds other than pursuant to this Agreement, including any distributions other than as provided in Article 9;
(e) redeem, purchase or otherwise acquire any Units for a purchase price in excess of $5,000,000 in the aggregate in a single transaction or series of related transactions;
(f) cause or permit any subsidiary of the Company to issue any securities to any Person other than the Company;
(g) make any decisions to settle or compromise any matter raised by the Internal Revenue Service (including by TRP in its capacity as Tax Matters Partner pursuant to Section 12.1(a)) that would disproportionately affect M-B Holdings or its shareholders (for which Penskes consent shall not be required) or that would disproportionately affect Penske (for which M-B Holdings consent shall not be required);
(h) do any act in contravention of this Agreement;
(i) do any other act for which this Agreement requires the approval of M-B Holdings or Penske, as the case may be;
(j) give any consent or approval under any contract or agreement if the subject of such consent or approval would require the approval of M-B Holdings or Penske under this Section 6.6 were it to be undertaken directly by the Company; or
(k) cause or permit any subsidiary of the Company to take any action that would require the approval of a M-B Holdings or Penske under this Section 6.6 if such action were undertaken directly by the Company.
6.7 Refinance or Prepayment of the Acquisition Indebtedness. The Board shall notify M-B Holdings at least five (5) days prior to refinancing or prepaying all or any portion of the indebtedness that was utilized to finance the payment of the cash portion of the Total ATC Consideration. The preceding sentence shall not be construed as requiring the consent or approval of M-B Holdings to refinance or prepay all or any portion of such indebtedness.
ARTICLE 7
TRANSFERS
7.1 General Transfer Provisions and Restrictions.
(a) In addition to any other restriction under applicable federal or state securities laws, no Member shall (or shall agree to) transfer, give, donate, sell, convey, assign, pledge, hypothecate or otherwise encumber or dispose of (Transfer) to any Person, whether voluntarily or by operation of law (subject to Article 8) all or any portion of, or right in or to, its Units, except for Permitted Transfers (as defined below) or sales made in accordance with terms and conditions hereafter set forth in this Agreement.
(b) Notwithstanding Section 7.1(a), and subject to the provisions of this Article 7 relevant to the Transfer (including, without limitation, Sections 7.2 and 7.3, if applicable), Units may be Transferred as follows (each a Permitted Transfer): (i) any Member may Transfer Units held by it to an Affiliate or to the Company; (ii) any TRP Party may Transfer any or all of the Units then held by it in one transaction or a series of transactions at such price, and on such other terms and conditions as it may determine to be appropriate; (iii) any Member that is a natural person may Transfer any of the Units then held by such Member to such Members lineal descendants, such Members parents, spouse, siblings, and lineal descendants thereof, and any family limited partnership, limited liability company, trust or other fiduciary or other entity either controlled by or solely for the benefit of (A) such Member, (B) such Members lineal descendants, or (C) such Members parents, spouse, siblings, or lineal descendants of any thereof; or to an organization qualified under Section 501(C)(3) of the Code; (iv) any Member may Transfer Units in compliance with Section 7.2; and (v) any Member may Transfer Units in a transaction approved by all members of the Board of Managers or in a transaction effected pursuant to Section 7.3.
7.2 Right of First Offer. If at any time during the term of this Agreement any Member (an Offering Member) proposes to offer to Transfer any Units to any Person (other than pursuant to a Permitted Transfer described in clause (i) or (iii) of Section 7.1(b)), then prior to effecting such Transfer:
(a) Such Offering Member shall give the Company and the other Members (the Other Members) written notice of the Offering Members intention, specifying the number of Units proposed to be Transferred (the ROFO Units), the proposed price therefor (the Transfer Price), and the other material terms upon which such Transfer is proposed to be made, including such other terms and information as the Company or the Other Members may reasonably request (collectively, the Transfer Notice).
(b) The Company shall have the right, exercisable by written notice given to such Offering Member and the Other Members within ten (10) business days after delivery of the Transfer Notice, to purchase all (but not less than all) of the ROFO Units at the Transfer Price. If the Company does not exercise its option, each of the Other Members shall have the option, exercisable by written notice given by such Other Members to the Offering Member within ten (10) days following the expiration of the Companys option, to purchase such Other Members pro rata share of the ROFO Units. For this purpose, an Other Members pro rata share equals the product of (x) the number of ROFO Units multiplied by (y) a fraction, the numerator of which is the number of issued and outstanding Units then owned by such Other Member plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible, and the denominator of which is the total number of Units then issued and outstanding and held by all Other Members (plus the number of Units into which the Convertible Note is convertible if M-B Holdings is an Other Member). If one or more Other Members exercise their rights of first offer pursuant to this Section 7.2 and, after the expiration of the ten (10) business day period during which the Other Members may so exercise their rights, no exercise was made with respect to a portion of the ROFO Units to be Transferred by the Offering Member (collectively, the Reoffered ROFO Units), such Reoffered ROFO Units shall be re-offered by the Offering Member to the exercising Other Members by written notice thereof. Each such exercising Other Member shall have an additional ten (10) business days following the receipt of such notice to notify the Offering Member in writing of his, her or its intent to purchase any Reoffered ROFO Units and shall be entitled to purchase his, her or its pro rata share of such Reoffered ROFO Units (determined under the principles set forth above in this Section 7.2(b) applied to the exercising Other Members), or otherwise in such proportions as the exercising Other Members mutually agree. The procedure set forth above shall continue until rights to purchase all (but not less than all) of the Offering Members ROFO Units have been exercised by the Company and/or Other Members in a timely manner. If all ROFO Units identified in the Transfer Notice are not purchased by the Company and/or the Other Members, then the Offering Member shall have no obligation to sell any of the ROFO Units to the Company and/or the Other Members and shall have the option, exercisable by written notice to the Company and all other Members, to (i) rescind its offer to Transfer the ROFO Units and retain all of the ROFO Units, or (ii) Transfer the ROFO Units pursuant to Section 7.2(d) below.
(c) If the Company or the Other Member(s) (each an Optionee) exercises a right of first offer hereunder, a single closing for the purchase of the ROFO Units (including any Reoffered ROFO Units) with respect to which such right(s) were exercised shall take place
within thirty (30) business days after the expiration of all applicable notice periods, which period of time shall be extended if necessary to comply with applicable securities laws, other federal law applicable to such transaction or similar state or local laws. The exercise of an Optionees right of first offer under this Section 7.2 shall legally obligate such Optionee and the Offering Member to consummate the purchase of the ROFO Units (including any Reoffered ROFO Units) contemplated thereby, and each such Optionee and the Offering Member shall use all reasonable efforts to secure any approvals required in connection with such purchase and to consummate such transaction.
(d) If none of the Company or any of the Other Members exercises its respective rights of first offer under this Section 7.2 within the time allowed under this Agreement for such exercise, or fails to purchase the entire ROFO Units (including any Reoffered ROFO Units) pursuant to any such exercise or exercises in accordance with this Section, the Offering Member, subject to Section 7.3 (if applicable), shall be free, during the period of the later of (i) one hundred eighty (180) days following the expiration of such time for exercise or such failure to purchase pursuant to any exercise, whichever occurs later and (ii) the Offering Members compliance with Section 7.3 (if applicable) to sell the ROFO Units (including any Reoffered ROFO Units) (or such remaining ROFO Units, as the case may be) specified in such Transfer Notice to any Person at a price that is not less than an amount equal to ninety percent (90%) of the Transfer Price set forth in such Transfer Notice and on other terms which, in the aggregate, are not materially more favorable to such Offering Member than the terms specified in such Transfer Notice, and any proposed Transfer during such period that involves a Transfer Price lower than ninety percent (90%) of the Transfer Price set forth in such Transfer Notice on terms, which in the aggregate, are materially more favorable to such Offering Member than the terms specified in such Transfer Notice, then the Offering Member shall be required to reoffer the ROFO Units to the Company and the Other Members at the lower Transfer Price and on the more favorable terms, in accordance with this Article 7. Thereafter, any proposed Transfer by such Offering Member shall be subject to Section 7.1 and require a new Transfer Notice.
(e) The purchase price for Units purchased under this Section 7.2 by either the Company or the Other Members shall be the Transfer Price. The purchase and sale shall otherwise be on the applicable terms and conditions set forth in the Transfer Notice. The full amount of the purchase price for Units purchased pursuant to this Section 7.2 shall be paid in full in cash at the closing described in Section 7.2(c) hereof; provided that, if the Transfer Notice provided for payment for any of the ROFO Units, in whole or in part, by means of any consideration other than cash, the Company or the Other Members, as the case may be, may purchase the Units for such consideration, or for its cash equivalent. A competent independent appraiser mutually selected by the Company (if applicable), the exercising Other Members (if applicable), and the Offering Member shall fix the cash equivalent of such consideration. In the event that the Company (if applicable), the exercising Other Members (if applicable), and the Offering Member cannot select a mutually acceptable appraiser, each shall select a competent, independent appraiser, which appraisers shall then select a third or fourth, as the case may be, competent, independent appraiser, whose determination as to value shall be conclusive and binding on the parties. Costs of such appraisals shall be borne 50% by the Offering Member and 50% by the Company, if the Company is purchasing the Units, or the exercising Other Members
(on a pro rata basis based upon the number of Units being purchased by each of the exercising Other Members).
7.3 Tag-Along Rights.
(a) Subject to first complying with Section 7.2, if at any time any Member proposes to sell to any Person (the Buyer) for value, in one or a series of transactions, other than pursuant to a Permitted Transfer under Section 7.1(b)(i) or (iii), all or any portion of the aggregate Units then owned by such Member (the Party proposing to sell its Units pursuant to this Section 7.3 is hereinafter referred to as the Transferor Member(s)), then each of the other Members shall have the right (Tag-Along Right) to cause the Transferor Member(s) to condition its sale to the Buyer of any Units owned by it on the purchase by the Buyer, at the same price and on the same terms and conditions as are applicable to the Units being sold by the Transferor Member(s), of that number of Units owned by such other Member as shall be determined by multiplying X and Y, where:
X = the total number of Units proposed to be sold by the Transferor Member(s), and
Y = a fraction, the numerator of which is the number of Units owned by such other Member plus, in the case of M-B Holdings, the number of Units into which the Convertible Note is convertible, and the denominator of which is the number of Units owned by all other Members (other than the Transferor Member(s)) who wish to participate in the sale of Units pursuant to this Section 7.3 (plus the number of Units into which the Convertible Note is convertible if M-B Holdings wishes to participate) plus the aggregate number of Units owned by Transferor Member(s).
(b) In connection with a sale under this Section 7.3, the Transferor Member shall deliver a written notice to each other Member (i) setting forth the terms of any proposed sales to which this Section 7.3 applies, (ii) offering such other Member the Tag-Along Right, and (iii) specifying the number of Units to which such other Member shall have the right to sell to the Buyer pursuant to this Section 7.3, together with such other documents required to be executed by such other Member with respect to such sale. Any other Member who desires to exercise its Tag-Along Right shall notify the Transferor Member in writing before the thirty (30) day period commencing on the date of the Transferor Members notice, and shall deliver to the Transferor Member within such thirty (30) day period all documents previously furnished to such other Member for execution in connection with the sale of its Units. Delivery by such other Member of such notice and such other documents shall constitute an irrevocable exercise by the other Member of its Tag-Along Right with respect to the sale in question.
(c) The Transferor Member may, within 180 days from the date of the Transferor Members notice referred to in Section 7.3(b) consummate any sale and, promptly after such consummation, shall notify each other Member to that effect and shall furnish evidence of such sale and of the terms thereof as the other Members may reasonably request. No
later than the fifth business day following such sale, the Transferor Member shall cause to be remitted (subject to any holdbacks or escrows in connection with such sale and net of such other Members pro rata portion of all costs and expenses incurred in connection therewith) to each other Member who exercised its Tag-Along Right the proceeds of such sale attributable to the sale of such other Members Units. If any such sale is not consummated within such 180 day period, the Transferor Member may not consummate a sale pursuant to this Section 7.3 unless it again provides the Tag-Along Rights contemplated above to each other Member and shall return to each other Member all documents that such other Member previously delivered in connection with such sale.
(d) Notwithstanding anything in this Section 7.3 to the contrary, there shall be no liability on the part of the Transferor Member or any of its Affiliates to any Member if any sale of Units pursuant to this Section 7.3 is not consummated for whatever reason. It is understood that the Transferor Member, in its sole discretion, shall determine whether to effect a sale of Units to any Person pursuant to this Section 7.3.
(e) The rights granted under this Section 7.3 shall not apply to (i) Transfers among or between TRP Parties, or (ii) any transaction or series of transactions involving the Transfer by TRP Parties to another Member or Members.
7.4 Take-Along Rights.
(a) Notwithstanding Section 7.1, if at any time, the TRP Parties desire to effect a sale of the entire Company to an unrelated Person or entity in one transaction or a series of similar transactions (a Sale Transaction), the TRP Parties may, in their sole discretion, require each other Member to sell all (but not less than all) of the Units then held by it to such purchaser in accordance with this Section 7.4 provided that such other Members shall only be required to sell its Units at the same price per Unit and upon substantially the same terms as the TRP Parties.
(b) If the TRP Parties elect to exercise their take-along rights in connection with a Sale Transaction, they shall deliver a notice to each other Member and to the Company, setting forth the terms of the Sale Transaction (including the proposed closing date for its consummation, which shall not be fewer than 30 days after the date of such notice) and all documents required to be executed by each other Member to consummate the Sale Transaction. Each other Member shall deliver to the TRP Parties, at least seven days before the proposed closing date, all documents previously furnished to such other Member for execution in connection with the Sale Transaction. If any other Member fails to deliver these documents and the transaction is subsequently consummated, the Company shall cause its books and records to show that the Units represented by the defaulting Member are bound by the provisions of this section and that Units held by it shall be Transferred only to the third party who purchased the Units in the Sale Transaction.
(c) Any TRP Party may, within 180 days from the date of its notice referred to above, consummate any Sale Transaction and, promptly after such consummation, shall notify the Company and each other Member to that effect and furnish such evidence of the sale and of the terms thereof as any other Member may reasonably request. The TRP Parties shall also
cause to be remitted to each other Member that has complied with its obligations hereunder the proceeds of the sale attributable to the sale of such Members Units not later than the third business day following the sale (subject to any agreed holdbacks or escrows in connection with such sale, and net of such Members pro rata portion of all costs and expenses incurred in connection therewith). If a Sale Transaction is not consummated within such one hundred eighty (180) day period, the TRP Parties may not thereafter consummate the proposed Sale Transaction without again complying with this Section 7.4 and shall return to each other Member all documents previously delivered to the TRP Parties in connection with the Sale Transaction.
(d) Notwithstanding anything in this Section 7.4 to the contrary, there shall be no liability on the part of any TRP Party to any Member if any sale of Units pursuant to this Section 7.4 is not consummated for whatever reason, it is understood that the TRP Parties, in its sole discretion, shall determine whether to effect a sale of Units to any person pursuant to this Section 7.4.
(e) The rights granted to the TRP Parties under this Section 7.4 shall not apply to Transfers among or between TRP Parties.
7.5 Cooperation. The Company and the Members (other than the TRP Parties) shall use their respective commercially reasonable efforts to aid the TRP Parties in the consummation of any Sale Transaction pursuant to Section 7.4. Any Member participating in a sale of Units pursuant to Section 7.3 or Section 7.4 shall cooperate in consummating the sale of Units as contemplated hereby and shall take all actions necessary, proper or advisable in connection therewith as are reasonably requested by the TRP Parties, including casting its vote or providing its written consent in favor thereof if required by applicable law or requested by the TRP Parties. As part of such cooperation in any sale of Units pursuant to Section 7.3 or Section 7.4, each such Member shall execute and deliver a purchase agreement pursuant to which each Member will severally (but not jointly) make representations and warranties relating to its ownership of and title to the Units being sold and other customary fundamental matters; provided that such Member shall have provided indemnification on a pro rata basis in respect of such representations or warranties of the Company and as to the business; provided further that the sole source for payment of any such indemnity by such Member (whether such indemnity is payable to the purchaser, the sellers representative or otherwise) will be funds from the net proceeds otherwise distributed to such Member; and provided further, that no such Member will be required to execute a letter or transmittal or similar document that provides for additional representations and warranties or more extensive indemnification. All Members will bear their respective share of the costs and expenses of any actual or proposed Sale Transaction to the extent such costs are incurred for the benefit of all Members and not otherwise paid by the Company or the acquiring party. Costs incurred by Members for their own behalf will not be considered costs of the Sale Transaction; provided, that in any event, the Company will pay the reasonable attorneys fees of one counsel chosen by the Members to represent their interests. In connection with any Sale Transaction, each Member will execute and deliver a contribution agreement among the Members apportioning (on a pro rata basis) their indemnity and reimbursement obligations on customary terms and conditions, and subject to the limitations on these obligations set forth above. In any Sale Transaction, one of the TRP Parties shall be designated the sellers representative on customary terms and conditions (but subject to the
limitations set forth in this Section 7.5) and with customary indemnifications against liabilities, other than liabilities arising from actions taken or not taken in bad faith.
7.6 Obligations Upon Transfer. No Transfer of any Units shall relieve the transferor from any of its obligations to the Company under this Agreement except to the extent that such obligations are assumed by the transferee in a legally valid and binding agreement and such transferee has complied with all provisions of this Section 7.6. All Transfers shall be by instrument in form and substance satisfactory to the Board and shall include (a) an executed counterpart of this Agreement accepting and adopting all of the terms and provisions of this Agreement, as the same may have been amended, (b) appropriate representations of the transferee, including a representation by the transferee that such Transfer was made in accordance with all applicable laws and regulations covering such other matters as the board may reasonably require and (c) all such other agreements and instruments of assignment and assumption as the Board may reasonably deem to be necessary or desirable to effectuate such Transfer. The transferee shall be admitted as a substitute Member (a Substitute Member) when the conditions set forth in this Section 7.6(c) have been satisfied, and the Company shall list Substitute Members as Members on Annex A. Any Transfer in violation of this Agreement shall be null and void and shall not operate to vest any rights in any transferee. In any case of an attempted Transfer not permitted hereby, the parties attempting to engage in such Transfer shall indemnify and hold harmless (and hereby agree to indemnify and hold harmless) the Company and the other Members from all costs, liabilities, and damages that any of such indemnified Persons may incur (including, without limitation, incremental tax liability and reasonable attorneys fees and expenses) as a result of such attempted Transfer and efforts to enforce the indemnity granted hereby.
7.7 Expenses. All expenses of the Company and of the Members occasioned by a Transfer of a Members Units permitted under Section 7.1 shall be borne by the Member effecting such Transfer.
7.8 No Appraisal Rights. No Member shall be entitled to any appraisal rights with respect to such Members Units, whether individually or as part of any class or group of Members, in the event of a merger, consolidation or other transaction involving the Company or its securities unless such rights are expressly provided by the agreement of merger, agreement of consolidation or other document effectuating such transaction. Notwithstanding the foregoing, in the event that any TRP Party desires to sell the Company to any TRP Party or to any Affiliate of a TRP Party, the Company shall first obtain a fairness opinion from an independent, nationally recognized investment banking firm to ensure that the purchase price to be payable reflects the market value of the Company.
7.9 Allocations with Respect to Assignors Interest. Upon the Transfer pursuant to this section of all or any part of a Members Units, each item of Profits and Losses allocable to such Units shall be prorated (as to the transferred Units) between the transferor and transferee on the basis of the number of days in the taxable year of the Company preceding (and including) and succeeding, respectively, the date as of which the assignment or other instrument evidencing the Transfer is executed, or, in the case of a Transfer occurring by operation of law upon the death of a Member, the date of death, except that Profits and Losses from the sale or other
taxable disposition of a Company capital asset shall be allocated to the Persons who were Members at the time such gain or loss was recognized by the Company.
ARTICLE 8
RIGHTS TO PURCHASE
8.1 Rights To Purchase. The Company and each Member shall have the rights set forth below to purchase all, but not less than all, of the Units held by any Member (which for the purposes of this Article 8 shall include any Units acquired by the Member or his or her personal representative before the closing of a purchase of Units by the Company or the other Members and after the date of the event giving rise to the rights to purchase) in accordance with the provisions of this Article 8.
(a) If Units owned by any Member become subject to Transfer by reason of (i) bankruptcy or insolvency proceedings, whether voluntary or involuntary, (ii) attachment or garnishment, (iii) divorce, or (iv) distraint, levy, execution or other involuntary transfer (other than in accordance with the laws of descent and distribution), then such Member or his or her personal representative shall give the Company written notice thereof promptly upon the occurrence of such event, stating the terms of such proposed Transfer, the identity of the proposed transferee, the price or consideration, if any, for which the Units are proposed to be transferred, and the number of Units and type and number of other interest to be Transferred. Upon receipt of such notice, or, failing such receipt, when the Company otherwise obtains actual knowledge of such Transfer, the Company and each other Member shall have the right (but not the obligation) to purchase from the Member, his or her personal representative, and the transferee (as appropriate), and, upon exercise of this option, the Member, his or her personal representative, and the transferee (as appropriate) shall be obligated to sell, all of the Units owned by such Persons and acquired from the Member immediately prior to the occurrence of such event (or subsequently acquired as provided above), as shall be specified in the notice of exercise, for a purchase price equal to the fair market value of such Units, as determined in accordance with Section 8.2, and upon such other terms as are set forth in this Article 8. Notwithstanding the foregoing, at the request of the transferor and upon approval of the Board, the Company may purchase only those Units proposed to be Transferred in the case of an event occurring under clause (ii), (iii), or (iv).
(b) If any Units held by a Member or his or her personal representative are Transferred by operation of law (e.g., in the event of the bankruptcy or death of a Member or the attachment or garnishment of Units), the transferee shall receive such Units subject to the provisions of this Agreement, including, but not limited to, the rights granted to the Company and the other Members to acquire such Units.
8.2 Fair Market Value. Fair market value for purposes of this Article 8 shall be based on the fair market value of all outstanding Units (and without any discount for the lack of liquidity for such Units or the minority nature of their interest in the Company). Fair market value shall initially be determined in good faith by the Board and communicated to the Members, after consultation with the affected Member during which such Member shall have the right to provide information to the Board, and the Board shall provide to such Member copies of all valuations obtained by the Board. Following such determination, if the Member whose Units are
purchasable for fair market value believes that the value determined by the Board is less than the actual fair market value of the Units, such Member may request a valuation by an appraiser or investment banker reasonably acceptable to both such Member and the Board. If the fair market value as determined by that appraiser or investment banker (applying the definition set forth above) equals or exceed 105% of the fair market value as determined by the Board, such determination shall be final and binding on the parties as the fair market value for the Units; in all other cases the determination by the Board shall control. Any request for such an evaluation must be made within 10 days after notice of the Boards determination of fair market value has been delivered to the selling Member, and any valuation shall be made within 30 days of the date on which it is requested, promptly communicated to the Company and to all Members. Within 10 business days after the completion of any such valuation requested, the Company and any Member shall have the right to revoke any exercise of its right to purchase such Units (if made previously) by delivering written notice of revocation to the selling Member and all other Members and the Company. The fees and expenses of any valuation requested pursuant to the preceding section shall be paid by the selling Member requesting it, unless the appraisal indicates that the fair market value of the Units is greater than 120% of the initial fair market value established by the Board, in which case the Company shall pay the cost of the appraisal.
8.3 Exercise; Timing. The purchase option arising pursuant to Section 8.1(a) above must be exercised by the Company by giving written notice to the affected Member within 180 days after the right to purchase has accrued under Section 8.1(a). The Company shall immediately notify each Member when it has become aware that any right to purchase Units has arisen pursuant to Section 8.1(a) and shall keep the other Members apprised of any decision that it may make to exercise or not exercise its right to purchase Units. If the Company does not exercise its right to purchase all Units that it is entitled to purchase pursuant to Section 8.1(a), the Members shall have the right to purchase any such Units not purchased by the Company in a manner and proportion calculated consistently with Section 4.2.
8.4 Closing; Consideration To Be Paid.
(a) The closing of any sale pursuant to this Article 8 shall be held as promptly as practicable (but in any event within 60 days) after the applicable preconditions to such Transfer have been satisfied, at the Companys principal offices at 10:00 a.m. local time, or at such other time and place as may be reasonably acceptable to the Company. At the closing of any sale pursuant to this Article 8, the selling Member shall deliver all documents necessary to effect such Transfer. In consideration therefor, the Company shall pay the purchase price.
(b) The Company may pay the purchase price for the Units pursuant to this Article 8, in the sole discretion of the Board, in cash or through a promissory note with a maturity date of three (3) years from the date of issuance bearing interest at a rate equal to the prime rate (as quoted by The Wall Street Journal on the Closing Date), calculated from the Closing Date to the date such payment is made. The note will be subordinated to all amounts payable by the Company to its principal lender on terms and conditions acceptable to that lender.
(c) If at the closing the selling Member has any outstanding monetary obligation to the Company, any of its subsidiaries or to another purchaser, the Company and any such purchaser shall have the right to set-off any such obligations against the purchase price to
be paid to the seller by it, and that purchase price shall be reduced accordingly. The calculation of such setoff and the identification and amount of the obligation shall be given to the seller in a notice not less than five days before such closing.
ARTICLE 9
DISTRIBUTIONS
9.1 Distributions of Tax Distribution Amount. Except with respect to the year in which the Company is liquidated in accordance with Section 11.2, the Company shall distribute to each Member with respect to each year an amount of Operating Cash Flow, to the extent available, equal to such Members Tax Distribution Amount for such year. Such distributions shall be made on a quarterly or other basis in a manner reasonably determined by the Board to enable the Members to satisfy both estimated and final tax payment requirements with respect to the applicable year. If the aggregate, cumulative Tax Distribution Amount distributed to a Member pursuant to this Section 9.1 is greater than or less than the amount that such Member would have received if the aggregate, cumulative amount of such distributions to all Members had been made based upon each Members Capital Percentage, then such excess or deficiency shall be referred to as such Members Tax Distribution Excess or Tax Distribution Deficiency.
For the sake of clarity, each Members accumulated Tax Distribution Excess or Deficiency shall be calculated as the net deficiency or excess to the date of determination taking into account all Tax Distribution Deficiencies and Tax Distribution Excesses to that date for such Member, and each Tax Distribution Excess or Deficiency shall be increased each year by an interest factor that equals the amount of interest that would accrue on such amount if it were a Federal income tax deficiency.
9.2 Other Distributions. Except as otherwise provided in this Article 9 or Section 11.3, Operating Cash Flow and Capital Transaction Proceeds shall be distributed to the Members in the following manner:
(a) first, to the Members with Tax Distribution Deficiencies in proportion to such Tax Distribution Deficiencies until all of those deficiencies have been eliminated and such Members have also received aggregate additional distributions under this Section 9.2(a) equal to the aggregate Tax Distribution Excesses;
(b) second, to each Member in proportion to their Capital Percentages until each Member has received an aggregate, cumulative amount pursuant to this Section 9.2(b) that, taken together with any aggregate, cumulative amount distributed to such Member pursuant to Section 9.2(a), equals (i) in the case of a Member that had a Tax Distribution Excess as a result of the distributions made under Section 9.1, an amount equal to such Members Capital Contribution minus such Tax Distribution Excess, (ii) in the case of a Member that had a Tax Distribution Deficiency as a result of the distributions made under Section 9.1, an amount equal to such Members Capital Contribution plus such Tax Distribution Deficiency, and (iii) in the case of a Member that had no Tax Distribution Excess or Tax Distribution Deficiency as a result of the distributions made under Section 9.1, an amount equal to such Members Capital Contribution; and
(c) third, to each Member in proportion to their Capital Percentages.
The timing of all distributions other than Tax Distribution Amounts shall be in the discretion of the Board; provided, however, that notwithstanding the foregoing or anything contained in this Agreement to the contrary, for so long as the Convertible Note is outstanding, the Company shall not make any distributions other than Tax Distribution Amounts without the written consent of M-B Holdings (which consent M-B Holdings may withhold in its sole and absolute discretion).
9.3 Conversion to Corporation in Connection with IPO.
(a) In connection with an initial public offering (an IPO) of equity interests in the Company (which, for the purposes of this Section 9.3, shall be deemed to include any successor to the Companys business), the Board shall have the discretion to convert the Company into a corporation in such fashion as the Board considers appropriate, provided that (i) the transaction will be treated as an exchange under Code Section 351, which is nontaxable to the Members (except as otherwise provided under Code Section 357) or otherwise will not generate any material tax liabilities for any Member, and (ii) the Company shall use commercially reasonable efforts to structure such conversion in a manner that permits the Companys stockholders to include their holding periods (for purposes of Rule 144 under the Securities Act of 1933) in respect of interests in the Company in calculating their respective holding periods in respect of shares of common stock received in the transaction. Notwithstanding the foregoing, the Company shall not be required to structure a transaction in the manner contemplated hereby if the Board determines in good faith that it would not be permissible under applicable securities laws, detrimental to the Company and its Members or unduly burdensome or expensive, or reasonably likely to delay significantly the IPO. In the event of such a conversion of the Company into a corporation, all interests of the Members in the Company shall be converted into shares of common stock of such corporation, with each Member receiving the amount of shares that corresponds to such Members positive Capital Account balance after such Capital Accounts have been adjusted to reflect the Gross Asset Value of such shares of common stock (on the assumption that such Gross Asset Value equals the offering price under the IPO).
(b) In the event of an IPO, the Company and its stockholders shall in good faith negotiate and, prior to such IPO (if practicable), enter into a registration rights agreement containing provisions customary in such agreements, including provisions related to the representations of the parties, permitted cutbacks (based on pro rata ownership of the series and class of the Companys Equity Securities being sold pursuant to such offering) and exclusions of certain registration statements from such registration rights, and indemnity, standstill and blackout provisions. In addition to such customary provisions, such registration rights agreement shall provide that (i) the Companys stockholders shall collectively be entitled on not more than one occasion to require the Company to register their Equity Securities on certain registration statements filed under Securities Act of 1933 with respect to the sale of Equity Securities for an aggregate offering price of at least $50 million, and (ii) piggyback registration rights. The Companys stockholders shall be entitled to participate in an IPO only if, and to the extent that (based upon pro rata ownership of the series and class of the Companys Equity Securities being sold pursuant to such offering), the TRP Parties participate in the IPO. Notwithstanding the foregoing, in the event of the IPO, no Company stockholder shall sell or otherwise transfer or
dispose of any Company securities held by stockholder (other than those included in the registration relating to such offering) for a period specified by the representative of the underwriters of the common stock being sold in such offering, which period shall not exceed 180 days (or, in the case of any stockholder who is not an officer or director, such shorter period as may be applicable to any TRP Party) following the effective date of the registration statement of the Company filed under the Securities Act of 1933, as amended, relating to such offering.
9.4 Limitation on Distributions. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a distribution to any Member on account of its membership interest in the Company if such distribution would violate Section 18-607 of the Delaware Act or other applicable law or cause a default or event of default under any indebtedness for borrowed money.
ARTICLE 10
BOOKS AND RECORDS
10.1 Books, Records and Financial Statements. At all times during the continuance of the Company, the Company shall maintain, at its principal place of business, separate books of account for the Company that shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received and all income derived in connection with the operation of the Companys business in accordance with United States generally accepted accounting principles consistently applied, and, to the extent inconsistent therewith, in accordance with this Agreement. Such books of account, together with a certified copy of this Agreement and of the Certificate, shall at all times be maintained at the principal place of business of the Company.
10.2 Accounting Method. For both financial and tax reporting purposes, the books and records of the Company shall be kept on the accrual method of accounting applied in a consistent manner and shall reflect all Company transactions and be appropriate and adequate for the Companys business.
10.3 Information Rights.
(a) Periodic Reporting. The Company shall furnish the following reports to each Member:
(i) Within 120 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its subsidiaries, as at the end of such fiscal year, and consolidated statements of income and cash flows of the Company and its subsidiaries for such year, in each case, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the previous fiscal year, all in reasonable detail and audited by independent public accountants of recognized standing selected by the Company.
(ii) Within 45 days after the end of each fiscal year of the Company, an unaudited consolidated balance sheet of the Company and its subsidiaries, for such year, and consolidated statements of income and cash flows of the Company and its subsidiaries for such
year, in each case, prepared in accordance with generally accepted accounting principles consistently applied.
(iii) Within 30 days after the end of the first, second, and third quarterly accounting periods in each fiscal year of the Company, an unaudited consolidated balance sheet of the Company and its subsidiaries, as of the end of each such quarterly period, and consolidated statements of income and cash flows of the Company and its subsidiaries for such period and for the current fiscal year to date, in each case, prepared in accordance with generally accepted accounting principles consistently applied and setting forth in comparative form the figures for the corresponding periods of the previous fiscal year, subject to changes resulting from normal year-end audit adjustments.
(b) Board Meeting Information. Promptly after the occurrence of any meeting of the Board or any committee thereof or any written consent in lieu of any such meeting, the Company shall report to each Member holding more than 5% of the outstanding Units that requests such report with respect to any material actions by the Board or such committee at such meeting or by such consent.
(c) Information Rights Under Law. The provisions of Sections 10.3(a) and (b) shall not limit any other rights which any Member may have under applicable law with respect to the books and records of the Company and its subsidiaries, or to inspect their respective properties or discuss with their officers, directors or agents their affairs, finances and accounts.
10.4 Financial Accounts. The Company shall establish and maintain one or more separate bank and investment accounts with financial institutions and firms that the Board determines. The Companys funds shall not be commingled with the funds of any Member; provided, however, that Company funds may be invested in a manner which is the same as or similar to the Members investment of their own funds or investments by their Affiliates.
ARTICLE 11
DISSOLUTION, LIQUIDATION AND TERMINATION
11.1 Dissolution.
(a) The Company shall dissolve and its affairs shall be wound up on the first to occur of the following:
(i) entry of a decree of judicial dissolution of the Company under Section 18-802 of the Delaware Act; or
(ii) the consummation of any sale, lease, exchange or other transfer in one transaction or a series of related transactions of all or substantially all of the Companys assets.
(b) The death, dissolution, retirement, resignation, expulsion or bankruptcy of a Member or the occurrence of any other event that terminates the continued membership of a Member shall not cause a dissolution of the Company.
11.2 Liquidation and Termination.
(a) On dissolution of the Company, the Members shall appoint one or more Persons (which may be a Member) as liquidator (the Liquidator). The Liquidator shall proceed diligently to wind up the affairs of the Company and make final distributions as provided herein and in the Delaware Act. The costs of liquidation shall be borne as a Company expense. Until final distribution, the Liquidator shall continue to operate the Company properties with all of the power and authority of a duly authorized Manager. The steps to be accomplished by the Liquidator are as follows:
(i) as promptly as possible after dissolution and again after final liquidation, the Liquidator shall cause a proper accounting to be made by a recognized firm of independent certified public accountants of the Companys assets, liabilities, and operations through the last day of the calendar month in which the dissolution occurs or the final liquidation is completed, as applicable;
(ii) the Liquidator shall first pay, satisfy or discharge from Company funds all of the debts, liabilities and obligations of the Company to its creditors (including, without limitation, all expenses incurred in liquidation) or otherwise make adequate provision for payment and discharge thereof (including, without limitation, the establishment of a cash escrow fund for contingent liabilities in such amount and for such term as the Liquidator may reasonably determine), all in accordance with the provisions of the Delaware Act as may be applicable; and
(iii) after all of the debts, liabilities and obligations of the Company to its creditors have been paid, satisfied or discharged or adequate provision for payment and discharge thereof has been made as required by paragraph (ii) above, the Liquidator shall pay the Members as follows:
(1) the Liquidator may sell any or all Company property, including to Members, and any resulting gain or loss from each sale shall be computed and allocated to the Capital Accounts of the Members;
(2) with respect to all Company property that has not been sold, the Gross Asset Value of that property shall be determined and the Capital Accounts of the Members shall be adjusted to reflect the manner in which the unrealized income, gain, loss, and deduction inherent in property that has not been reflected in the Capital Accounts previously would be allocated among the Members if there were a taxable disposition of that property for the fair market value of that property on the date of distribution; and
(3) after completion of the steps in subparagraphs (1) and (2), the remaining assets shall be distributed to the Members in accordance with Section 9.2 (which, is expected to correspond with the Members Capital Accounts).
(b) All distributions in kind to the Members shall be made subject to the liability of each distributee for costs, expenses, and liabilities relating to the assets distributed in kind theretofore incurred or for which the Company has committed prior to the date of termination and those costs, expenses, and liabilities shall be allocated to the distributees
pursuant to this Section 11.2. The distribution of cash and/or property to a Member in accordance with the provisions of this Section 11.2 constitutes a complete return to the Member of its Capital Contribution and a complete distribution to the Member of its membership interest in the Company and all of the Companys property.
(c) Distributions pursuant to this Section 11.2 shall be made no later than such time as is required under Treas. Reg. Section 1.704-1(b)(2)(ii)(b)(2).
11.3 Deficit Capital Accounts. Notwithstanding anything to the contrary contained in this Agreement, and notwithstanding any custom or rule of law to the contrary, to the extent that a Member has a deficit Capital Account balance, upon dissolution of the Company such deficit shall not be an asset of the Company and such Members shall not be obligated to contribute such amount to the Company to bring the balance of such Members Capital Account to zero.
11.4 Certificate of Cancellation. On completion of the distribution of Company assets as provided herein, the Company shall be terminated, and the Liquidator (or such other Person or Persons as the Delaware Act may require or permit) shall file a certificate of cancellation with the office of the Secretary of State of the State of Delaware and take such other actions as may be necessary to terminate the existence of the Company.
ARTICLE 12
TAX MATTERS
12.1 Tax Matters Partner.
(a) TRP I is hereby designated as Tax Matters Partner of the Company for purposes of Code Section 6231(a)(7) and shall have the power to manage and control, on behalf of the Company, any administrative proceeding at the Company level with the Internal Revenue Service relating to the determination of any item of Company income, gain, loss, deduction or credit for federal income tax purposes. At any time, the Board may remove the Tax Matters Partner and appoint another Member to act as the Tax Matters Partner.
(b) Each Member shall report for federal, state and local income tax purposes consistently with the relevant Schedules K-1 and corresponding state or local tax information provided to such Member by the Company, except to the extent such Member has knowledge that such information is not correct (in which case, such Member shall have the right to file a Form 8082 with the Internal Revenue Service). Company tax returns shall be filed, and Schedules K-1 and other tax information provided to the Members, in accordance with Section B.8 of Annex B.
(c) The Tax Matters Partner shall, within 20 days of the receipt of any notice from the Internal Revenue Service in any administrative proceeding at the Company level relating to the determination of any Company item of income, gain, loss, deduction or credit, mail a copy of such notice to each Member.
ARTICLE 13
LIABILITY, EXCULPATION AND INDEMNIFICATION
13.1 Liability. Except as otherwise provided by the Delaware Act, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person.
13.2 Exculpation.
(a) No Covered Person shall be liable to the Company or to any other Covered Person for any loss, damage or claim incurred by reason of any act or omission performed or omitted in good faith by such Covered Person by or on behalf of the Company and in the reasonable belief that such act or omission was in or not opposed to the best interests of the Company, except that a Covered Person shall be liable for any such loss, damage or claim incurred by reason of such Covered Persons fraud, gross negligence or willful misconduct or by reason of such Covered Persons negligent or willful breach of this Agreement.
(b) A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Persons professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, Profits or Losses or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.
13.3 Indemnification.
(a) To the fullest extent permitted by applicable law: (a) the Company shall indemnify each Covered Person for any loss, damage or claim incurred by such Covered Person by reason of the fact that he, she or it is a Covered Person, except that no Covered Person shall be entitled to be indemnified to the extent of any loss, damage or claim incurred by such Covered Person by reason of the fraud, gross negligence or willful misconduct of such Covered Person or by reason of such Covered Persons negligent or willful breach of this Agreement; provided, however, that such indemnity shall be provided out of and to the extent of Company assets only, and no Member shall have any personal liability on account thereof; and (b) each Covered Person shall indemnify the Company and each other Covered Person for any loss, damage, or claim incurred by the Company or such indemnified Covered Person by reason of the fraud, gross negligence or willful misconduct of such indemnifying Covered Person.
(b) The Company, from and after the date of this Agreement, shall cause the articles of formation and operating agreement (Charter Documents) of ATC and ATC Realty to contain provisions no less favorable to the Indemnitees with respect to limitation of certain liabilities of managers, officers, employees and agents and indemnification than were set forth as of the date of the Merger Agreement in the Charter Documents of the Members of the Company
Group (as defined in the Merger Agreement) which provisions in each case shall not be amended, repealed or otherwise modified in a manner that would adversely affect the rights thereunder of any Indemnitee without the consent of such Indemnitee (it being expressly agreed that the Indemnitees to whom this Section 13.3(b) applies shall be third party beneficiaries of this Section 13.3(b)).
13.4 Expenses. To the fullest extent permitted by applicable law, expenses (including reasonable legal fees) incurred by a Covered Person in defending any claim, demand, action, suit or proceeding (relating to any matter for which indemnification may be available pursuant to Section 13.3) shall, from time to time, be advanced by the Company prior to the final disposition of such claim, demand, action, suit or proceeding upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 13.3.
13.5 Insurance. The Company shall purchase and maintain insurance for the Company to the extent and in such amounts as the Board, in its sole discretion, shall deem reasonable, on behalf of Covered Persons and such other Persons as the Managers shall determine, against any liability that may be asserted against or expenses that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such liability under the provisions of this Agreement. The Company may enter into indemnity contracts with Covered Persons and such other Persons as the Managers shall determine and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 13.4 and containing such other procedures regarding indemnification as are appropriate.
ARTICLE 14
ADDITIONAL MEMBERS
14.1 Admission. Upon authorization and issuance of Units to a Person who is not a Member and upon satisfaction of such other conditions may be required by the Board and this Agreement, such Person shall automatically be admitted as a Member of the Company (each such Person, an Additional Member and collectively, the Additional Members (which term does not include Persons admitted as Substitute Members in accordance with Article 7)). Each such Person so admitted as an Additional Member shall execute this Agreement or a counterpart of this Agreement and the Company shall list such Person as a Member in Annex A and shall adjust the Capital Percentage of each other Member accordingly as set forth in Annex A.
ARTICLE 15
MISCELLANEOUS
15.1 Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be delivered or mailed by registered or certified mail, as follows:
(a) if given to the Company, at the address of its principal place of business set forth in Section 2.5; or
(b) if given to any Member, at the address set forth opposite his, her or its name on Annex A, or at such other address as such Member may hereafter designate by written notice to the Company.
All such notices shall be deemed to have been given when received.
15.2 Headings. The headings and subheadings in this Agreement are included for convenience and identification only and are in no way intended to describe, interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof.
15.3 Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.
15.4 Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Such rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise.
15.5 Assignment; Binding Effect. This Agreement may not be assigned, in whole or in part, by any Member. Any purported assignment in violation of this Section 15.5 shall be null and void. This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors and assigns.
15.6 Amendment. Except as otherwise provided in this Agreement (including, without limitation, Section 13.3(b)), an amendment to this Agreement shall be adopted and be effective as an amendment hereto if it is in writing and is approved by a vote or consent of a majority of the outstanding Units and, for so long as M-B Holdings or Penske owns any Units or the Convertible Note remains outstanding, M-B Holdings and Penske; provided, however, that this Agreement may not be amended in a manner that adversely affects a Member disproportionately to other Members without the consent of the affected Member. An amendment to Annex A to reflect the admission of an Additional Member, a Transfer, an issuance of Equity Securities, or other transaction affecting the Companys capitalization, in each case in accordance with this Agreement, shall not be considered an amendment requiring a vote.
15.7 Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.
15.8 Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument.
15.9 Integration. This Agreement, along with the subscription agreements relating to the purchase of Units by the Members, constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.
15.10 Governing Law; Consent To Jurisdiction. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the State of Delaware, and all rights and remedies shall be governed by such laws without regard to principles thereof with respect to the conflict of laws. Each Member (a) irrevocably submits to the exclusive jurisdiction of the United States District Court for the Northern District of Texas, for the purposes of any suit, action or other proceeding arising out of this Agreement or any transaction contemplated hereby, (b) agrees that service of any process, summons, notice or document by U.S. certified or registered mail to such Members respective address set forth on Annex A hereto shall be effective service of process in any action, suit or proceeding in the United States District Court for the Northern District of Texas, with respect to any matters to which it has submitted to jurisdiction as set forth above in the immediately preceding sentence, and (c) irrevocably and unconditionally waives any objection to the laying of venue of any action, suit or proceeding arising out of this Agreement or the transactions contemplated hereby brought in United States District Court for the Northern District of Texas, and hereby irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in such court has been brought in an inconvenient forum.
15.11 Attorneys, Fees. Except as otherwise provided herein, in any action, suit or proceeding brought to enforce the provisions of this Agreement, the parties shall bear their own costs and expenses (including attorneys fees), except that the party determined by the applicable court of competent jurisdiction to be the prevailing party in such action, suit or proceeding shall be entitled to recover its cost and expenses (including attorneys fees).
[Signature page follows]
IN WITNESS WHEREOF, the Members have executed this Agreement as of the date first above stated.
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TRP III (ATC) I, LP | |
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By: |
Transportation Resource Management III, LLC, its General Partner |
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By: |
/s/ James A. Hislop |
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Name: James A. Hislop |
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Title: Managing Member |
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TRP III (ATC) II, LP | |
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By: |
Transportation Resource Management III, LLC, its General Partner |
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By: |
/s/ James A. Hislop |
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Name: James A. Hislop |
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Title: Managing Member |
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PAG Investments, LLC | |
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By: |
/s/ David K. Jones |
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Name: David K. Jones |
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Title: Treasurer |
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Miciotto-Bowen Holdings, Inc. | |
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By: |
/s/ John C. Miciotto, Jr. |
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Name: John C. Miciotto, Jr. |
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Title: Officer |
[Signature Page No. 1 to ATC Holdco, LLC Limited Liability Company Agreement]
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/s/ Adam Arrington |
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Adam Arrington |
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/s/ Drew Burk |
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Drew Burk |
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/s/ Mark Lamont |
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Mark Lamont |
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/s/ John Pruitt |
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John Pruitt |
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/s/ Chinta Hari |
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Chinta Hari |
[Signature Page No. 2 to ATC Holdco, LLC Limited Liability Company Agreement]
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Brochick Investment Co., LLC | |
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By: |
/s/ George W. Brochick |
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Name: George W. Brochick |
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Title: Member |
[Signature Page No. 3 to ATC Holdco, LLC Limited Liability Company Agreement]
ANNEX A
CAPITAL CONTRIBUTIONS
BY MEMBERS
Name |
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Initial Capital |
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Common |
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Capital Percentage |
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TRP III (ATC) I, LP |
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$ |
22,194,112 |
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22,194,112 |
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37.3 |
% |
TRP III (ATC) II, LP |
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$ |
7,805,888 |
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7,805,888 |
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13.1 |
% |
PAG Investments, LLC |
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$ |
15,900,000 |
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15,900,000 |
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27.0 |
% |
Miciotto-Bowen Holdings, Inc. |
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$ |
11,900,000 |
* |
11,900,000 |
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20.0 |
% |
Adam Arrington |
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$ |
100,000 |
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100,000 |
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0.17 |
% |
Drew Burk |
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$ |
200,000 |
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200,000 |
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0.34 |
% |
Mark Lamont |
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$ |
250,000 |
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250,000 |
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0.42 |
% |
John Pruitt |
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$ |
50,000 |
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50,000 |
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0.08 |
% |
Chinta Hari |
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$ |
600,000 |
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600,000 |
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1.01 |
% |
Brochick Investment Co., LLC |
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$ |
500,000 |
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500,000 |
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0.84 |
% |
Total |
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$ |
59,500,000 |
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59,500,000 |
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100.0 |
% |
* M-B Holdings is not required to make an initial cash Capital Contribution to the Company in respect of its Units (i.e., the Rollover Units). Rather, pursuant to Section 4.9, it will be deemed to have contributed the Deemed Contributed Assets to the Company. The amount shown in this chart is the agreed fair market value (net of liabilities) of the Deemed Contributed Assets.
ANNEX B
FINANCIAL AND TAX MATTERS
B.1. Definitions. In addition to the terms defined in other provisions of this Agreement, including without limitation Section 1.1, the following terms shall have the meanings set forth below:
Adjusted Capital Account Deficit shall mean with respect to any Member, the deficit balance, if any, in the Members Capital Account as of the end of the relevant Fiscal Year, after giving effect to the following adjustments (i) increasing the Capital Account by any amounts that the Member is obligated to restore or is deemed to be obligated to restore pursuant to Treas. Reg. Sections 1.704-1(b)(2)(ii)(c), 1.704-2(g)(l) and 1.704-2(i)(5); and (ii) reducing the Capital Account by the items described in Treas. Reg. Sections l.704-1(b)(2)(ii)(d)(4), (5) and (6). The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Treas. Reg. Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
Code means the Internal Revenue Code of 1986 and any successor statute, as amended from time to time.
Company Minimum Gain has the same meaning as partnership minimum gain set forth in Treas. Reg. Sections 1.704-2(b)(2) and 1.704-2(d).
Depreciation shall mean for each Fiscal Year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; except that if the federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Board, and if the Company uses the remedial allocation method under Treas. Reg. Section 1.704-3(d) with respect to any asset, Depreciation for that asset shall be computed in accordance with Treas. Reg. Section 1.704-3(d)(2).
Gross Asset Value with respect to any asset shall mean the assets adjusted basis for federal income tax purposes, except as follows:
(1) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of the asset, as reasonably determined by the contributing Member and the Board.
(2) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Board, as of the following times:
(i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis contribution of money, other property or services;
(ii) the distribution by the Company to a Member of more than a de minimis amount of money or other property as consideration for an interest in the Company; or
(iii) the liquidation of the Company for federal income tax purposes within the meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(g); except that the adjustments pursuant to clauses (i) and (ii) above shall be made only if the Board reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company.
(3) The Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value of such asset on the date of distribution.
(4) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of those assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that the adjustments are taken into account in determining Capital Accounts pursuant to Treas. Reg. Section 1.704-l(b)(2)(iv)(m) and Section B.2, except that Gross Asset Values shall not be adjusted pursuant to this paragraph (4) to the extent the Board determines that an adjustment pursuant to paragraph (2) is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph (4).
(5) If the Gross Asset Value of an asset has been determined pursuant to paragraphs (1), (2), or (4), that Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to that asset for purposes of computing Profits and Losses.
Notwithstanding the foregoing provisions of this definition, the initial Gross Asset Value of the ATC Assets and the ATC Realty Assets shall be the Agreed Value of the ATC Assets and the Agreed Value of the ATC Realty Assets, respectively.
Member Nonrecourse Debt has the same meaning as partner nonrecourse debt set forth in Treas. Reg. Sections 1.704-2(b)(4) and 1.704-2(i).
Member Nonrecourse Debt Minimum Gain shall have the same meaning as partner nonrecourse debt minimum gain set forth in Treas. Reg. Section 1.704-2(i) and shall be determined in accordance with the principles of that Section.
Member Nonrecourse Deductions shall mean partner nonrecourse deductions set forth in Treas. Reg. Sections 1.704-2(i)(1) and 1.704-2(i)(2) and any other deductions attributable to a liability of the Company for which one or more, but not all, the Members bear the economic risk of loss.
Nonrecourse Deductions are deductions having the meaning set forth in Treas. Reg. Sections 1.704-2(b)(l) and 1.704-2(c).
Profits and Losses shall mean for each Fiscal Year or other period, an amount equal to the Companys taxable income or loss for that year or period, determined in accordance with Code Section 703(a) (for these purposes, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments:
(1) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to the foregoing shall be added to such taxable income or loss.
(2) Any expenditures of the Company described in Code Section 705(a)(2)(B) or that are treated as Code Section 705(a)(2)(B) expenditures pursuant to Treas. Reg. Section 1.704-1(b)(2)(iv)(i) and not otherwise taken into account in computing Profits or Losses pursuant to the foregoing shall be subtracted from such taxable income or loss.
(3) In the event the Gross Asset Value of any Company asset is adjusted pursuant to paragraph (2), (3) or (4) of the definition of Gross Asset Value, the amount of the adjustment shall be taken into account as gain or loss from the disposition of the asset for purposes of computing Profits or Losses.
(4) Gain or loss resulting from any disposition of Company property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of the property differs from its Gross Asset Value.
(5) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for the fiscal year or other period, computed in accordance with the definition of Depreciation under this Agreement.
(6) Notwithstanding the above, any items that are specially allocated pursuant to Sections B.4 shall not be taken into account in computing Profits and Losses.
B.2. Preparation and Maintenance of Capital Accounts.
(a) The Capital Account for each Member shall:
(1) be increased by (i) the amount of money contributed by that Member to the Company, (ii) the Gross Asset Value of property contributed by that Member to the Company (net of liabilities secured by the contributed property that the Company is
considered to assume or take subject to under Section 752 of the Code), and (iii) allocations to that Member of Profits and any other Company income and gain (or items thereof), and
(2) be decreased by (i) the amount of money distributed to that Member by the Company, (ii) the Gross Asset Value of property distributed to that Member by the Company (net of liabilities secured by the distributed property that the Member is considered to assume or take subject to under Section 752 of the Code), and (iii) allocations of Losses and any other Company loss and deduction (or items thereof), including loss and deduction described in Treas. Reg. Section 1.704-1(b)(2)(iv)(g).
The initial Capital Account of M-B Holdings (i.e., attributable to the Rollover Units) shall be $11,775,000. The initial Capital Account of each other Member shall equal the amount of cash contributed by such Member pursuant to Section 4.1(b).
(b) The Members Capital Accounts also shall be maintained and adjusted as permitted by the provisions of Treas. Reg. Section 1.704-1(b)(2)(iv)(f) and as required by the other provisions of Treas. Reg. Section 1.704-1(b)(2)(iv) and Section 1.704-1(b)(4), including adjustments to reflect the allocations to the Members of depreciation, depletion, amortization, and gain or loss as computed for book purposes rather than the allocation of the corresponding items as computed for tax purposes, as required by Treas. Reg. Section 1.704-1(b)(2)(iv)(g). On the transfer of all or part of a Unit, the Capital Account of the transferor that is attributable to such transferred membership interest or part thereof shall carry over to the transferee Member in accordance with the provisions of Treas. Reg. Section 1.704-1(b)(2)(iv)(l).
(c) The Capital Accounts of the Members as of the date hereof, based upon the cash and agreed-upon fair market value of all property, net of liabilities, being contributed to the Company by the Members on this day, are set forth on Annex A in the column labeled Initial Capital Contribution.
B.3. Profits and Losses. Profits, Losses and, to the extent necessary, individual items of income, gain, loss or deduction of the Company for a Fiscal Year shall be allocated among the Persons who were Members during such Fiscal Year in a manner such that the Capital Account of each Member, immediately after making such allocation, is, as nearly as possible, equal to:
(a) the amount of the hypothetical distribution (if any) that such Member would receive if, on the last day of the Fiscal Year, (1) the Company were dissolved, its affairs wound up and its assets, including cash, were sold for cash equal to their Gross Asset Values, taking into account any adjustments thereto for such Fiscal Year, (2) all Company liabilities were satisfied in cash according to their terms (limited, with respect to each nonrecourse liability, to the Gross Asset Values of the assets securing such liability), and (3) the net proceeds thereof (after satisfaction of such liabilities) were distributed in full pursuant to Section 9.2 hereof over
(b) the sum of (1) the amount, if any, without duplication, that such Member would be obligated to contribute to the capital of the Company, (2) such Members share of Company Minimum Gain determined pursuant to Treasury Regulations Section 1.704-2(g), and (3) such Members share of Member Nonrecourse Debt Minimum Gain determined pursuant to
Treasury Regulations Section 1.704-2(i)(5), all computed as of the hypothetical sale described in Section B.3(a) of this Annex B.
B.4. Special Allocations. The following special allocations shall be made in the following order:
(a) Minimum Gain Chargeback. Notwithstanding any other provision of this Annex B, if there is a net decrease in Company Minimum Gain during any Company taxable year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in accordance with Treas. Reg. Section 1.704-2(f). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. This Section B.4(a) is intended to comply with the minimum gain chargeback requirement in such Section of the Treasury Regulations and shall be interpreted consistently therewith.
(b) Member Minimum Gain Chargeback. Notwithstanding any other provision of this Agreement except Section B.4(a), if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to a Member Nonrecourse Debt during any Company fiscal year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Treas. Reg. Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in accordance with Treas. Reg. Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Treas. Reg. Section 1.704-2(i)(4). This Section B.4(b) is intended to comply with the minimum gain chargeback requirement in that Section of the Treasury Regulations and shall be interpreted consistently therewith.
(c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Treas. Reg. Section 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) that would create an Adjusted Capital Account Deficit for such Member, items of Company income and gain shall be specially allocated to each such Member in an amount and manner sufficient to eliminate, to the extent required by the Treasury Regulations, the Adjusted Capital Account Deficit of such Member as quickly as possible, provided that an allocation pursuant to this Section B.4(c) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Agreement have been tentatively made as if this Section B.4(c) were not in this Agreement.
(d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Company fiscal year, that is in excess of the amounts described in clause (i) of the definition of Adjusted Capital Account Deficit above, each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible, provided that an allocation pursuant to this Section B.4(d) shall be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Agreement have been tentatively made as if Section B.4(c) and this Section B.4(d) were not in this Agreement.
(e) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal year or other period shall be allocated among the Members in proportion to their respective Capital Percentages.
(f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any fiscal year or other period shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Treas. Reg. Section 1.704-2(i).
B.5. Tax Allocations: Code Section 704(c).
(a) In accordance with Code Section 704(c) and the Treasury Regulations thereunder, income, gain, loss and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value.
(b) In the event the Gross Asset Value of any Company asset is adjusted pursuant to paragraph (2) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Treasury Regulations thereunder.
(c) The difference between the adjusted basis of the Deemed Contributed Assets and the 704(c) Value of the Deemed Contributed Assets at the time of the deemed contribution of the Deemed Contributed Assets to the Company shall be taken into account pursuant to the traditional method set forth in Treasury Regulations Section 1.704-3(b)(1). Any other elections or other decisions relating to allocations pursuant to this Section B.5 shall be made by the Board in any manner that is provided in the Treasury Regulations under Code Section 704(c), reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section B.5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Members Capital Account or share of Profits, Losses, other items or distributions pursuant to any provision of this Agreement.
B.6. Miscellaneous Allocation Provisions.
(a) For purposes of determining Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Board using any permissible method under Code Section 706 and the Treasury Regulations promulgated thereunder.
(b) Except as otherwise provided in this Agreement, all items of Company income gain, loss, deduction, and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits or Losses, as the case may be, including, for this purpose, items allocated pursuant to Sections B.4, for the year.
(c) For the purpose of determining each Members share of excess nonrecourse liabilities pursuant to Treas. Reg. Section 1.752-3(a)(3), and solely for such purpose, each Members interest in profits is hereby specified to be such Members Capital Percentage.
B.7. Establishment of Reserves. The Board shall have the right and obligation to establish reasonable reserves for maintenance, improvements, acquisitions, capital expenditures and other contingencies, such reserves to be funded with such portion of the operating revenues of the Company for any fiscal year as the Board may deem necessary or appropriate for that purpose.
B.8. Tax Returns. The Board shall cause to be prepared and filed all necessary federal and state income tax returns for the Company, including making the elections described in Section B.9, and shall cause Schedules K-1, and corresponding forms for state and local tax purposes, to be provided to the Members within 135 days after the end of each taxable year. The Board shall cause the Company to promptly provide to each Member such additional information reasonably requested by such Member for the preparation of such Members federal, state and local income tax returns (including, without limitation, if so requested, full apportionment information and copies of the Companys Federal Form 1065). Each Member shall furnish to the Board all pertinent information in its possession relating to Company operations that is necessary to enable the Companys income tax returns to be prepared and filed.
B.9. Election of Liquidation Value Safe Harbor. Each Member, by executing this Agreement, hereby agrees to the following:
(a) The Company is authorized and directed to elect the safe harbor, in accordance with proposed Treas. Reg. Section 1.83-3(1) and the proposed revenue procedure thereunder (once such regulations and revenue procedure become effective), under which the fair market value of each interest in the Company that is transferred in connection with the performance of services shall be treated as being equal to the liquidation value of that interest (the Safe Harbor Election);
(b) The Company and each Member (including any person to whom an interest in the Company is transferred in connection with the performance of services) agree to comply with all requirements of the Safe Harbor Election with respect to all interests in the Company transferred in connection with the performance of services while the Safe Harbor Election remains effective, including the requirement that all relevant Federal income tax items be reported consistently with the Safe Harbor Election;
(c) The effective date of the Safe Harbor Election shall be the earliest permitted such date under the applicable regulations and revenue procedure, once those become effective, and the Safe Harbor Election shall continue to apply until such time (if ever) as all Members affected by the Safe Harbor Election shall agree to terminate it and the Company shall affirmatively terminate it under applicable procedures;
(d) The Tax Matters Partner shall file, with the Companys Federal income tax return for the taxable year in which the Safe Harbor Election becomes effective, a document,
executed by the Tax Matters Partner, stating that the Company is electing, on behalf of the Company and the Members, to have the Safe Harbor Election apply irrevocably with respect to all interests in the Company transferred in connection with the performance of services while the Safe Harbor Election is in effect; and
(e) The Company shall comply with applicable recordkeeping requirements for the Safe Harbor Election, and the Company and the Members shall take all other actions, if any, required to comply with the requirements of such Safe Harbor Election as ultimately promulgated, to the extent practicable.
Exhibit 12
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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Year Ended December 31, |
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2013 |
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2012 |
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2013 |
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2012 |
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2012 |
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2011 |
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2010 |
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2009 |
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2008 |
| |
Income from continuing operations before undistributed earnings of equity method investments, amortization of capitalized interest, and taxes |
|
$ |
99.6 |
|
77.9 |
|
185.2 |
|
154.6 |
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288.4 |
|
247.9 |
|
185.4 |
|
119.5 |
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(553.1 |
) |
Less undistributed earnings of equity method investments |
|
$ |
(8.9 |
) |
(8.2 |
) |
(11.2 |
) |
(12.6 |
) |
(27.6 |
) |
(25.5 |
) |
(20.6 |
) |
(13.8 |
) |
(16.5 |
) |
Plus distributed earnings of equity method investments |
|
$ |
3.8 |
|
2.1 |
|
4.1 |
|
13.0 |
|
23.6 |
|
9.2 |
|
9.9 |
|
21.3 |
|
3.5 |
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Plus amortization of capitalized interest |
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$ |
0.2 |
|
0.2 |
|
0.4 |
|
0.4 |
|
0.8 |
|
0.8 |
|
0.8 |
|
0.8 |
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
$ |
94.7 |
|
72.0 |
|
178.5 |
|
155.4 |
|
285.2 |
|
232.4 |
|
175.5 |
|
127.8 |
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(565.3 |
) |
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|
|
|
|
|
|
|
|
|
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|
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| |
Plus: |
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|
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|
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|
|
|
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| |
Fixed charges: |
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|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other interest expense (includes amortization of deferred financing costs) |
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$ |
12.1 |
|
11.5 |
|
23.8 |
|
23.6 |
|
46.8 |
|
44.1 |
|
48.4 |
|
54.6 |
|
53.3 |
|
Debt discount amortization |
|
$ |
|
|
|
|
|
|
|
|
|
|
1.7 |
|
8.6 |
|
13.0 |
|
14.0 |
|
Floor plan interest expense |
|
$ |
10.9 |
|
9.8 |
|
21.2 |
|
19.4 |
|
38.9 |
|
27.3 |
|
33.0 |
|
33.5 |
|
60.2 |
|
Capitalized interest |
|
$ |
0.1 |
|
0.2 |
|
0.3 |
|
0.4 |
|
0.6 |
|
0.7 |
|
0.5 |
|
0.9 |
|
4.8 |
|
Interest factor in rental expense |
|
$ |
14.8 |
|
14.3 |
|
29.5 |
|
28.4 |
|
57.2 |
|
54.6 |
|
52.1 |
|
50.4 |
|
49.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total fixed charges |
|
$ |
37.9 |
|
35.8 |
|
74.8 |
|
71.8 |
|
143.5 |
|
128.4 |
|
142.6 |
|
152.4 |
|
181.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Capitalized interest |
|
$ |
0.1 |
|
0.2 |
|
0.3 |
|
0.4 |
|
0.6 |
|
0.7 |
|
0.5 |
|
0.9 |
|
4.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Earnings |
|
$ |
132.5 |
|
107.6 |
|
253.0 |
|
226.8 |
|
428.1 |
|
360.1 |
|
317.6 |
|
279.3 |
|
(388.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Ratio of earnings to fixed charges (a) |
|
3.5 |
|
3.0 |
|
3.4 |
|
3.2 |
|
3.0 |
|
2.8 |
|
2.2 |
|
1.8 |
|
|
|
(a) In the year ended December 31, 2008, earnings were insufficient to cover fixed charges by $570.1 million due to a non-cash impairment charge of $643.5 million.
Exhibit 31.1
CERTIFICATION
I, Roger S. Penske, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penske Automotive Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
|
|
|
/s/ Roger S. Penske |
|
Roger S. Penske |
|
Chief Executive Officer |
August 1, 2013 |
|
Exhibit 31.2
CERTIFICATION
I, David K. Jones, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Penske Automotive Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
|
/s/ David K. Jones |
|
David K. Jones |
|
Chief Financial Officer |
August 1, 2013 |
|
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Penske Automotive Group, Inc. (the Company) on Form 10-Q for the quarter ended June 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Roger S. Penske and David K. Jones, Principal Executive Officer and Principal Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
|
/s/ Roger S. Penske |
|
Roger S. Penske |
|
Chief Executive Officer |
|
|
August 1, 2013 |
|
|
|
|
|
|
/s/ David K. Jones |
|
David K. Jones |
|
Chief Financial Officer |
|
|
August 1, 2013 |
|
A signed original of this written statement required by Section 906 has been provided to Penske Automotive Group, Inc. and will be retained by Penske Automotive Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
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