Form 10-Q PENSKE AUTOMOTIVE GROUP, For: Sep 30

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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Form�10-Q

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x����� QUARTERLY REPORT PURSUANT TO SECTION�13 OR 15(d)�OF THE SECURITIES EXCHANGE ACT OF 1934

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For the quarterly period ended September�30, 2014

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or

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o�������� TRANSITION REPORT PURSUANT TO SECTION�13 OR 15(d)�OF THE SECURITIES EXCHANGE ACT OF 1934

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For the transition period from����� to�����

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Commission file number 1-12297

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Penske Automotive Group,�Inc.

(Exact name of registrant as specified in its charter)

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Registrant�s telephone number, including area code:
(248)�648-2500

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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

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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

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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 the definitions of �accelerated filer,� �large accelerated filer,� �accelerated filer� and �smaller reporting company� in Rule�12b-2 of the Exchange Act (Check one):

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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

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As of October�23, 2014, there were 90,227,323 shares of voting common stock outstanding.

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PENSKE AUTOMOTIVE GROUP,�INC.

CONSOLIDATED CONDENSED BALANCE SHEETS

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See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP,�INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

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See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP,�INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

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See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP,�INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

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See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP,�INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

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See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP,�INC.

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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)
(In millions, except per share amounts)

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1.�Interim Financial Statements

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Business Overview

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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.

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We are an international transportation services company that operates automotive dealerships principally in the United States and Western Europe, and distributes commercial vehicles, engines, power systems and related parts and services principally in Australia and New Zealand. We employ approximately 20,000 people worldwide.

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Automotive Dealership. We are the second largest automotive retailer headquartered in the U.S. as measured by the $14.7 billion in total revenue we generated in 2013. As of September�30, 2014, we operated 324 automotive retail franchises, of which 177 franchises are located in the U.S. and 147 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the nine months ended September�30, 2014, we retailed and wholesaled more than 363,000 vehicles. We are diversified geographically, with 61% of our total automotive dealership revenues in the nine months ended September�30, 2014 generated in the U.S. and Puerto Rico and 39% generated outside the U.S. We offer over 35 vehicle brands, with 71% of our automotive dealership revenue in the nine months ended September�30, 2014 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 higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products. We operate these dealerships under franchise agreements with a number of automotive manufacturers and distributors which are subject to certain rights and restrictions typical of the industry.

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During the nine months ended September�30, 2014, we acquired one U.S. franchise, BMW of Greenwich (CT), one U.K. franchise, Skipton VW, were awarded four franchises and disposed of seven franchises including four in Bremen, Germany which were consolidated with our Hamburg operations.� During the three months ended September�30, 2014, we invested $16.6 million for a 50% ownership interest in a group of BMW and MINI dealerships operating eight franchises in Barcelona, Spain.

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Commercial Vehicle, Engine, Power Systems, and Parts Distribution. On August�30, 2013, we acquired Western Star Trucks Australia, the exclusive importer and distributor of Western Star heavy duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts across Australia, New Zealand and portions of Southeast Asia. The business distributes vehicles and parts to a network of more than 70 dealership locations including three company-owned retail commercial vehicle dealerships. In October�2014, we acquired MTU Detroit Diesel Australia Pty Ltd., a distributor of diesel and gas engines and power systems, operating across the on-and off-highway markets in Australia, New Zealand and the Pacific. The on-highway portion of this business complements our existing Western Star truck distribution business.

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Car Rental. We are the Hertz car rental franchisee in the Memphis, Tennessee market and certain Indiana markets. We currently manage more than fifty on- and off-airport Hertz car rental locations with approximately 6,400 vehicles in the fleet. Our car rental business complements our existing U.S. automotive dealership operations.

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Penske Truck Leasing. We hold a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (��PTL��), a leading provider of transportation services and supply chain management.

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Basis of Presentation

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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 September�30, 2014 and December�31, 2013 and for the three and nine month periods ended September�30, 2014 and 2013 is unaudited, but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for the prior periods have been revised for entities that have been treated as discontinued operations through September�30, 2014, and 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, 2013, which are included as part of our Annual Report on Form�10-K.

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Recent Accounting Pronouncements

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In March�2013, the FASB issued ASU No.�2013-05, �Foreign Currency Matters (Topic 830) � Parent�s 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, Consolidation � Overall, or Subtopic 830-30, Foreign Currency Matters � Translation 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 was effective prospectively for us for the annual period beginning January�1, 2014. The adoption of ASU No.�2013-05 has had no effect on our consolidated financial position, results of operations, or cash flows.

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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 was effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July�17, 2013. The adoption of ASU No.�2013-10 has had no effect on our consolidated financial position, results of operations, or cash flows.

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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 was effective for us for the annual period beginning January�1, 2014. The adoption of ASU No.�2013-11 has had no effect on our consolidated financial position, results of operations, or cash flows.

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In April�2014, the FASB issued ASU No.�2014-8, �Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) � Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.� ASU No.�2014-8 changes the requirements for reporting discontinued operations to only allow presentation of a disposal of an entity or component of an entity as a discontinued operation if it represents a strategic shift that has (or will have) a major effect on an entity�s operations or financial results. This ASU is effective for us for the annual period beginning January�1, 2015. We anticipate the adoption of ASU No.�2014-8 to result in fewer of our disposals qualifying for discontinued operations treatment.

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In May�2014, the FASB issued ASU No.�2014-9, �Revenue from Contracts with Customers (Topic 606).� This ASU supersedes the revenue recognition requirements in Accounting Standards Codification (�ASC�) 605, Revenue Recognition. ASU No.�2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of the contracts. This ASU is effective for us beginning after January�1, 2017 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.� We are currently assessing the impact the adoption of this update will have on our consolidated financial position, results of operations, and cash flows.

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In August�2014, the FASB issued ASU No.�2014-15, �Presentation of Financial Statements � Going Concern (Subtopic 205-40) � Disclosure of Uncertainties about an Entity�s Ability to Continue as a Going Concern.� ASU 2014-15 will require management to assess an entity�s ability to continue as a going concern for each annual and interim reporting period, and to provide related footnote disclosure in circumstances in which substantial doubt exists. This ASU is effective for us for the annual period ending December�31, 2016, and we will continue to assess the impact on our consolidated financial statements.

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Discontinued Operations

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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.

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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 franchise being disposed. 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.

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Combined financial information regarding entities accounted for as discontinued operations follows:

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Estimates

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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.

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Fair Value of Financial Instruments

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Accounting standards define fair value as the price that would be received from selling an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Accounting standards establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and also establishes the following three levels of inputs that may be used to measure fair value:

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Level 1�������������������������� Quoted prices in active markets for identical assets or liabilities

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Level 2�������������������������� Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted market prices in markets that are not active; or model-derived valuations or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

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Level 3�������������������������� Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

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Our financial instruments consist of cash and cash equivalents, debt, floor plan notes payable, forward exchange contracts and interest rate swaps used to hedge future cash flows. Other than our fixed rate debt, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting.

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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:

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2.�Inventories

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Inventories consisted of the following:

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We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $10.9 million and $8.8 million during the three months ended September�30, 2014 and 2013, respectively, and $30.6 million and $25.2 million during the nine months ended September�30, 2014 and 2013, respectively.

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3. Business Combinations

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We acquired two automotive retail franchises during the nine months ended September�30, 2014.� We acquired Penske Commercial Vehicles as discussed in Note 1, one Hertz car rental franchise market area and one automotive retail franchise during the nine months ended September�30, 2013. During the nine months ended September�30, 2014 we also made an additional investment in an entity previously accounted under the equity method.� Our financial statements include the results of operations of the acquired entities 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 nine months ended September�30, 2014 and 2013 follows:

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The following unaudited consolidated pro forma results of operations of PAG for the three and nine months ended September�30, 2014 and 2013 give effect to acquisitions consummated during 2014 and 2013 as if they had occurred effective at the beginning of the period:

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4. Intangible Assets

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Following is a summary of the changes in the carrying amount of goodwill and franchise value during the nine months ended September�30, 2014:

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All additions were within our Retail reportable segment. As of September�30, 2014, the goodwill balance within our Retail and Other reportable segments was $1,066.4 million and $121.3 million, respectively.

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5. Vehicle Financing

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We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale and a portion of our used vehicle inventories for retail sale under revolving floor plan arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. In the U.S., the floor plan arrangements are due on demand; however, we have not historically been required to repay floor plan advances prior to the sale of the vehicles that have been financed. We typically make monthly interest payments on the amount financed. Outside of the U.S., substantially all of the floor plan arrangements are payable on demand or have an original maturity of 90 days or less, and we are generally required to repay floor plan advances at the earlier of the sale of the vehicles that have been financed or the stated maturity.

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The floor plan agreements typically grant a security interest in substantially all of the assets of our dealership and distribution subsidiaries, and in the U.S., Australia and New Zealand are guaranteed 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, the Euro Interbank Offered Rate or Australian or New Zealand Bank Bill Swap Rate (��BBSW��). The weighted average interest rate on floor plan borrowings, including the effect of the interest rate swap discussed in Note 8, was 1.8% and 1.9% for the nine months ended September�30, 2014 and 2013, respectively. 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 balance sheets and classify related cash flows as a financing activity on our consolidated statements of cash flows.

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6. Earnings Per Share

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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 equity 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 nine months ended September�30, 2014 and 2013 follows:

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