PENSKE AUTOMOTIVE GROUP, INC. [PAG] Filings

10-Q 1 pag-20220930.htm 10-Q pag-20220930

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 September 30, 2022


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 incorporation or organization)			(I.R.S. Employer Identification No.)

2555 Telegraph Road
Bloomfield Hills, Michigan			48302-0954
(Address of principal executive offices)			(Zip Code)

Registrant’s telephone number, including area code:

(248) 648-2500

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Voting Common Stock, par value $0.0001 per share	PAG	New York Stock Exchange

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 October 25, 2022, there were 71,303,456 shares of voting common stock outstanding.

Table of Contents

TABLE OF CONTENTS


			Page

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2022, and December 31, 2021			3
Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2022 and 2021			4
Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021			5
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2022 and 2021			6
Consolidated Condensed Statement of Equity for the three and nine months ended September 30, 2022 and 2021			7
Notes to Consolidated Condensed Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative & Qualitative Disclosures About Market Risk			52
Item 4. Controls and Procedures			53
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			54
Item 1A. Risk Factors			54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			54
Item 6. Exhibits			56

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS


	September 30, 2022		December 31, 2021
	(Unaudited)
	(In millions, except share and per share amounts)
ASSETS
Cash and cash equivalents	$	92.3	$	100.7
Accounts receivable, net of allowance for doubtful accounts of $6.3 and $6.8	831.3		734.0
Inventories	3,146.9		3,129.0
Other current assets	139.8		111.7
Total current assets	4,210.3		4,075.4
Property and equipment, net	2,415.5		2,442.2
Operating lease right-of-use assets	2,386.9		2,451.4
Goodwill	2,112.9		2,124.1
Other indefinite-lived intangible assets	681.1		641.5
Equity method investments	1,733.8		1,688.1
Other long-term assets	47.6		41.9
Total assets	$	13,588.1	$	13,464.6
LIABILITIES AND EQUITY
Floor plan notes payable	$	1,383.3	$	1,144.8
Floor plan notes payable — non-trade	1,212.9		1,409.9
Accounts payable	828.0		767.1
Accrued expenses and other current liabilities	813.2		870.3
Current portion of long-term debt	76.0		82.0
Liabilities held for sale	—		0.5
Total current liabilities	4,313.4		4,274.6
Long-term debt	1,561.9		1,392.0
Long-term operating lease liabilities	2,310.1		2,373.6
Deferred tax liabilities	1,114.7		1,060.4
Other long-term liabilities	200.0		269.0
Total liabilities	9,500.1		9,369.6
Commitments and contingent liabilities (Note 10)
Equity
Penske Automotive Group stockholders’ equity:
Preferred Stock, $0.0001 par value; 100,000 shares authorized; none issued and outstanding	—		—
Common Stock, $0.0001 par value, 240,000,000 shares authorized; 72,202,858 shares issued and outstanding at September 30, 2022; 77,574,172 shares issued and outstanding at December 31, 2021	—		—
Non-voting Common Stock, $0.0001 par value; 7,125,000 shares authorized; none issued and outstanding	—		—
Class C Common Stock, $0.0001 par value; 20,000,000 shares authorized; none issued and outstanding	—		—
Additional paid-in capital	—		42.2
Retained earnings	4,504.5		4,196.6
Accumulated other comprehensive income (loss)	(441.0)		(168.8)
Total Penske Automotive Group stockholders’ equity	4,063.5		4,070.0
Non-controlling interest	24.5		25.0
Total equity	4,088.0		4,095.0
Total liabilities and equity	$	13,588.1	$	13,464.6

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Unaudited)
	(In millions, except per share amounts)
Revenue:
Retail automotive dealership	$	5,757.8	$	5,634.9	$	17,784.3	$	17,039.4
Retail commercial truck dealership	1,019.5		717.3		2,580.5		1,777.3
Commercial vehicle distribution and other	143.4		145.1		438.2		441.9
Total revenues	6,920.7		6,497.3		20,803.0		19,258.6
Cost of sales:
Retail automotive dealership	4,750.9		4,624.0		14,666.7		14,188.2
Retail commercial truck dealership	879.8		602.0		2,163.6		1,479.3
Commercial vehicle distribution and other	103.1		105.6		317.1		329.5
Total cost of sales	5,733.8		5,331.6		17,147.4		15,997.0
Gross profit	1,186.9		1,165.7		3,655.6		3,261.6
Selling, general and administrative expenses	792.7		757.7		2,408.2		2,171.8
Depreciation	31.5		30.2		95.1		89.7
Operating income	362.7		377.8		1,152.3		1,000.1
Floor plan interest expense	(13.8)		(6.0)		(30.3)		(23.4)
Other interest expense	(17.9)		(16.2)		(51.4)		(53.8)
Debt redemption costs	—		—		—		(17.0)
Equity in earnings of affiliates	136.2		120.5		393.8		281.5
Income from continuing operations before income taxes	467.2		476.1		1,464.4		1,187.4
Income taxes	(125.7)		(120.1)		(377.5)		(308.0)
Income from continuing operations	341.5		356.0		1,086.9		879.4
Income from discontinued operations, net of tax	—		0.3		—		0.4
Net income	341.5		356.3		1,086.9		879.8
Less: Income attributable to non-controlling interests	1.4		1.2		4.9		3.3
Net income attributable to Penske Automotive Group common stockholders	$	340.1	$	355.1	$	1,082.0	$	876.5
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations	$	4.61	$	4.46	$	14.32	$	10.91
Discontinued operations	—		—		—		—
Net income attributable to Penske Automotive Group common stockholders	$	4.61	$	4.47	$	14.32	$	10.92
Shares used in determining basic earnings per share	73.7		79.5		75.6		80.3
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations	$	4.61	$	4.46	$	14.31	$	10.91
Discontinued operations	—		—		—		—
Net income attributable to Penske Automotive Group common stockholders	$	4.61	$	4.47	$	14.31	$	10.92
Shares used in determining diluted earnings per share	73.8		79.5		75.6		80.3
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations	$	341.5	$	356.0	$	1,086.9	$	879.4
Less: Income attributable to non-controlling interests	1.4		1.2		4.9		3.3
Income from continuing operations, net of tax	340.1		354.8		1,082.0		876.1
Income from discontinued operations, net of tax	—		0.3		—		0.4
Net income attributable to Penske Automotive Group common stockholders	$	340.1	$	355.1	$	1,082.0	$	876.5
Cash dividends per share	$	0.53	$	0.45	$	1.50	$	1.32

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	(Unaudited)
	(In millions)
Net income	$	341.5	$	356.3	$	1,086.9	$	879.8
Other comprehensive income (loss):
Foreign currency translation adjustment	(132.4)		(42.6)		(281.2)		(40.7)
Unrealized gain on interest rate swaps:
Unrealized gain arising during the period, net of tax provision of $0.0, $0.0, $0.0, and $1.1, respectively	—		—		—		3.0
Reclassification adjustment for loss included in floor plan interest expense, net of tax benefit of $0.0, $0.1, $0.0, and $0.3, respectively	—		0.3		—		0.8
Unrealized gain on interest rate swaps, net of tax	—		0.3		—		3.8
Other adjustments to comprehensive income, net	2.4		(0.5)		6.9		6.6
Other comprehensive income (loss), net of tax	(130.0)		(42.8)		(274.3)		(30.3)
Comprehensive income	211.5		313.5		812.6		849.5
Less: Comprehensive income attributable to non-controlling interests	0.5		0.8		2.8		2.6
Comprehensive income attributable to Penske Automotive Group common stockholders	$	211.0	$	312.7	$	809.8	$	846.9

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


	Nine Months Ended September 30,
	2022		2021
	(Unaudited)
	(In millions)
Operating Activities:
Net income	$	1,086.9	$	879.8
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation	95.1		89.7
Earnings of equity method investments	(266.3)		(203.4)
Income from discontinued operations, net of tax	—		(0.4)
Deferred income taxes	113.7		126.3
Debt redemption costs	—		17.0
Changes in operating assets and liabilities:
Accounts receivable	(137.7)		69.4
Inventories	(196.9)		863.6
Floor plan notes payable	337.9		(818.3)
Accounts payable and accrued expenses	145.8		290.5
Other	29.7		16.2
Net cash provided by continuing operating activities	1,208.2		1,330.4
Investing Activities:
Purchases of property, equipment, and improvements	(195.7)		(157.5)
Proceeds from sale of dealerships	—		4.3
Proceeds from sale of property and equipment	12.3		54.9
Acquisitions net, including repayment of sellers’ floor plan notes payable of $51.3 and $24.3, respectively	(393.4)		(278.0)
Other	(7.5)		0.2
Net cash used in continuing investing activities	(584.3)		(376.1)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line	1,514.0		1,487.0
Repayments under U.S. credit agreement revolving credit line	(1,514.0)		(1,595.0)

Issuance of 3.75% senior subordinated notes	—		500.0

Repayment of 5.50% senior subordinated notes	—		(500.0)
Net borrowings (repayments) of other long-term debt	186.0		(152.5)
Net repayments of floor plan notes payable — non-trade	(85.5)		(288.9)

Repurchases of common stock	(584.8)		(206.9)
Dividends	(113.6)		(106.3)
Payment of debt issuance costs	(0.3)		(6.1)
Other	(17.1)		(12.8)
Net cash used in continuing financing activities	(615.3)		(881.5)
Discontinued operations:
Net cash provided by discontinued operating activities	—		0.4


Net cash provided by discontinued operations	—		0.4
Effect of exchange rate changes on cash and cash equivalents	(17.0)		(3.5)
Net change in cash and cash equivalents	(8.4)		69.7
Cash and cash equivalents, beginning of period	100.7		49.5
Cash and cash equivalents, end of period	$	92.3	$	119.2
Supplemental disclosures of cash flow information:
Cash paid (received) for:
Interest	$	76.8	$	79.8
Income taxes	253.8		44.5

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY


	Three Months Ended September 30, 2022
	Voting and Non-voting Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Penske Automotive Group Stockholders’ Equity		Non-controlling Interest		Total Equity
	Issued Shares	Amount
	(Unaudited)
	(Dollars in millions)
Balance, June 30, 2022	75,015,462	$	—	$	—	$	4,506.7	$	(311.9)	$	4,194.8	$	24.6	$	4,219.4

Equity compensation	(1,258)	—		6.3		—		—		6.3		—		6.3
Repurchases of common stock	(2,811,346)	—		(6.3)		(303.1)		—		(309.4)		—		(309.4)
Dividends	—	—		—		(39.2)		—		(39.2)		—		(39.2)

Distributions to non-controlling interest	—	—		—		—		—		—		(0.6)		(0.6)
Foreign currency translation	—	—		—		—		(131.5)		(131.5)		(0.9)		(132.4)
Other	—	—		—		—		2.4		2.4		—		2.4
Net income	—	—		—		340.1		—		340.1		1.4		341.5
Balance, September 30, 2022	72,202,858	$	—	$	—	$	4,504.5	$	(441.0)	$	4,063.5	$	24.5	$	4,088.0


	Three Months Ended September 30, 2021
	Voting and Non-voting Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Penske Automotive Group Stockholders’ Equity		Non-controlling Interest		Total Equity
	Issued Shares	Amount
	(Unaudited)
	(Dollars in millions)
Balance, June 30, 2021	80,330,836	$	—	$	284.0	$	3,602.5	$	(147.8)	$	3,738.7	$	24.0	$	3,762.7
Equity compensation	(7,192)	—		5.7		—		—		5.7		—		5.7
Repurchases of common stock	(2,029,631)	—		(178.9)		—		—		(178.9)		—		(178.9)
Dividends	—	—		—		(36.1)		—		(36.1)		—		(36.1)
Interest rate swaps	—	—		—		—		0.3		0.3		—		0.3
Distributions to non-controlling interest	—	—		—		—		—		—		(0.5)		(0.5)
Foreign currency translation	—	—		—		—		(42.2)		(42.2)		(0.4)		(42.6)
Other	—	—		—		—		(0.5)		(0.5)		—		(0.5)
Net income	—	—		—		355.1		—		355.1		1.2		356.3
Balance, September 30, 2021	78,294,013	$	—	$	110.8	$	3,921.5	$	(190.2)	$	3,842.1	$	24.3	$	3,866.4

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF EQUITY


	Nine Months Ended September 30, 2022
	Voting and Non-voting Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Penske Automotive Group Stockholders’ Equity		Non-controlling Interest		Total Equity
	Issued Shares	Amount
	(Unaudited)
	(Dollars in millions)
Balance, December 31, 2021	77,574,172	$	—	$	42.2	$	4,196.6	$	(168.8)	$	4,070.0	$	25.0	$	4,095.0
Penske Transportation Solutions Adoption of ASC 842	—	—		—		(121.6)		—		(121.6)		—		(121.6)
Equity compensation	306,588	—		20.9		—		—		20.9		—		20.9
Repurchases of common stock	(5,677,902)	—		(63.1)		(538.9)		—		(602.0)		—		(602.0)
Dividends	—	—		—		(113.6)		—		(113.6)		—		(113.6)

Distributions to non-controlling interest	—	—		—		—		—		—		(3.3)		(3.3)
Foreign currency translation	—	—		—		—		(279.1)		(279.1)		(2.1)		(281.2)
Other	—	—		—		—		6.9		6.9		—		6.9
Net income	—	—		—		1,082.0		—		1,082.0		4.9		1,086.9
Balance, September 30, 2022	72,202,858	$	—	$	—	$	4,504.5	$	(441.0)	$	4,063.5	$	24.5	$	4,088.0


	Nine Months Ended September 30, 2021
	Voting and Non-voting Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Penske Automotive Group Stockholders’ Equity		Non-controlling Interest		Total Equity
	Issued Shares	Amount
	(Unaudited)
	(Dollars in millions)
Balance, December 31, 2020	80,392,662	$	—	$	311.8	$	3,151.3	$	(160.6)	$	3,302.5	$	23.6	$	3,326.1
Equity compensation	426,289	—		18.8		—		—		18.8		—		18.8
Repurchases of common stock	(2,524,938)	—		(219.8)		—		—		(219.8)		—		(219.8)
Dividends	—	—		—		(106.3)		—		(106.3)		—		(106.3)
Interest rate swaps	—	—		—		—		3.8		3.8		—		3.8
Distributions to non-controlling interest	—	—		—		—		—		—		(1.9)		(1.9)
Foreign currency translation	—	—		—		—		(40.0)		(40.0)		(0.7)		(40.7)
Other	—	—		—		—		6.6		6.6		—		6.6
Net income	—	—		—		876.5		—		876.5		3.3		879.8
Balance, September 30, 2021	78,294,013	$	—	$	110.8	$	3,921.5	$	(190.2)	$	3,842.1	$	24.3	$	3,866.4

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(In millions, except share and per share amounts)

1. Interim Financial Statements

Unless the context otherwise requires, the use of the terms “PAG,” “we,” “us,” and “our” in these Notes to the Consolidated Condensed Financial Statements refers to Penske Automotive Group, Inc. and its consolidated subsidiaries.

Business Overview and Concentrations

We are a diversified international transportation services company and one of the world's premier automotive and commercial truck retailers. We operate dealerships principally in the United States, the United Kingdom, Canada, Germany, Italy, and Japan, and we are one of the largest retailers of commercial trucks in North America for Freightliner. We also distribute and retail commercial vehicles, diesel and gas engines, power systems, and related parts and services principally in Australia and New Zealand. Additionally, we own 28.9% of Penske Transportation Solutions, a business that manages a fleet of over 400,000 trucks, tractors, and trailers providing innovative transportation, supply chain, and technology solutions to North American fleets.

Retail Automotive. We are one of the largest global automotive retailers as measured by the $22.5 billion in total retail automotive dealership revenue we generated in 2021. As of September 30, 2022, we operated 340 retail automotive franchised dealerships, of which 152 are located in the U.S. and 188 are located outside of the U.S. The franchised dealerships outside the U.S. are located primarily in the U.K. We also operate 21 used vehicle dealerships in the U.S. and the U.K. which retail used vehicles under a one price, “no-haggle” methodology under the CarShop brand. Our CarShop operations consist of eight retail dealerships in the U.S. and 13 retail dealerships and a vehicle preparation center in the U.K. We retailed and wholesaled more than 410,000 vehicles in the nine months ended September 30, 2022. We are diversified geographically with 57% of our total retail automotive dealership revenues in the nine months ended September 30, 2022, generated in the U.S. and Puerto Rico and 43% generated outside the U.S. We offer over 35 vehicle brands with 70% of our retail automotive franchised dealership revenue generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz, and Porsche, in the nine months ended September 30, 2022.

Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services, the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry. In March 2022, we agreed to transition our U.K. Mercedes Benz dealerships to an agency model beginning in 2023. Under an agency model, our U.K. Mercedes Benz dealerships will receive a fee for facilitating the sale by the manufacturer of a new vehicle but will not hold the vehicle in inventory. We will continue to provide new vehicle customer service at our U.K. Mercedes Benz dealerships, and the agency model is not expected to structurally change our used vehicle sales operations or service and parts operations. See Part II, Item 1A. Risk Factors in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, for a discussion of agency.

During the nine months ended September 30, 2022, we acquired 19 retail automotive franchises, consisting of 15 franchises in the U.K. and four franchises in the U.S., and we opened two retail automotive franchises that we were awarded in the U.S. We also closed one retail automotive franchise in the U.K.

Retail Commercial Truck Dealership. We operate Premier Truck Group (“PTG”), a heavy- and medium-duty truck dealership group offering primarily Freightliner and Western Star trucks (both Daimler brands) with locations across nine U.S. states and Ontario, Canada. During February 2022, we acquired TEAM Truck Centres, a retailer of heavy- and medium-duty Freightliner and Western Star commercial trucks located in Ontario, Canada representing four full-service dealerships. As of September 30, 2022, PTG operated 39 locations, selling new and used trucks, parts and service, and offering collision repair services. We retailed and wholesaled 15,211 trucks in the nine months ended September 30, 2022.

Penske Australia. Penske Australia is the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler Truck brand), MAN heavy- and medium-duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. In most of these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing

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MTU (a Rolls-Royce solution), Detroit Diesel, Allison Transmission, and Bergen Engines. Penske Australia offers products across the on- and off-highway markets, including in the trucking, mining, power generation, defense, marine, rail, and construction sectors and supports full parts and aftersales service through a network of branches, field service locations, and dealers across the region.

Penske Transportation Solutions. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P. (“PTL”). PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments. Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental, and contract maintenance along with logistic services, such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services, and dry van truckload carrier services.

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of September 30, 2022 and for the three and nine months ended September 30, 2022 and 2021 is unaudited but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2021, which are included as part of our Annual Report on Form 10-K.

Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accounts requiring the use of significant estimates include accounts receivable, inventories, income taxes, intangible assets, leases, 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, 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 our debt is as follows:


	September 30, 2022		December 31, 2021
	Carrying Value	Fair Value	Carrying Value	Fair Value
3.50% senior subordinated notes due 2025	545.8	502.9	544.7	$	560.5
3.75% senior subordinated notes due 2029	494.9	397.7	494.3	490.7
Mortgage facilities (1)	530.1	499.6	353.8	359.8
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(1)In addition to fixed rate debt, our mortgage facilities also include a revolving mortgage facility through Toyota Motor Credit Corporation that bears interest at a variable rate based on LIBOR. The fair value equals the carrying value.

Disposals

The results of operations for disposals are included within continuing operations unless they meet the criteria to be classified as held for sale and treated as discontinued operations.

Income Taxes

Tax regulations may require items to be included in our tax return at different times than when those items are reflected in our financial statements. Some of the differences are permanent, such as expenses that are not deductible on our tax return, and some are temporary differences, such as the timing of depreciation expense. Temporary differences create deferred tax assets and liabilities. Deferred tax assets generally represent items that will be used as a tax deduction or credit in our tax return in future years which we have already recorded in our financial statements. Deferred tax liabilities generally represent deductions taken on our tax return that have not yet been recognized as an expense in our financial statements. We establish valuation allowances for our deferred tax assets if the amount of expected future taxable income is not more likely than not to allow for the use of the deduction or credit.

Penske Transportation Solutions Adoption of ASC 842

On January 1, 2022, Penske Transportation Solutions, our equity method investment of which we own 28.9%, adopted ASU No. 2016-02, “Leases (Topic 842).” The adoption resulted in a net, after-tax cumulative effect adjustment to our retained earnings of $121.6 million.

Recent Accounting Pronouncements

Reference Rate Reform

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. Additionally, entities can elect to continue applying hedge accounting for hedging relationships affected by reference rate reform if certain conditions are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope.” This ASU refines the scope of ASC 848 and clarifies some of its guidance as part of the Board’s monitoring of global reference rate reform activities. The ASU permits entities to elect certain optional expedients and exceptions when accounting for derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, for computing variation margin settlements, and for calculating price alignment interest in connection with reference rate reform activities. These new standards were effective upon issuance and generally can be applied to applicable contract modifications through December 31, 2022. While our credit facility in the U.S. and many of our floorplan arrangements utilize LIBOR as a benchmark for calculating the applicable interest rate, some of our floorplan arrangements and our U.K. credit agreement have already transitioned to utilizing an alternative benchmark rate. We are continuing to evaluate the impact of the transition from LIBOR to alternative reference interest rates. We cannot predict the effect of the potential changes to or elimination of LIBOR, the establishment and use of alternative rates or benchmarks,

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and the corresponding effects on our cost of capital but do not expect a significant impact on our consolidated financial position, results of operations, and cash flows.

2. Revenues

Automotive and commercial truck dealerships generate the majority of our revenues. New and used vehicle revenues typically include sales to retail customers, to fleet customers, and to leasing companies providing consumer leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties, and the sales of certain other products. Service and parts revenues include fees paid by customers for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories as well as warranty repairs that are reimbursed directly by various vehicle manufacturers. Revenues are recognized upon satisfaction of our performance obligations under contracts with our customers and are measured at the amount of consideration we expect to be entitled to in exchange for transferring goods or providing services. A discussion of revenue recognition by reportable segment is included below.

Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition

Dealership Vehicle Sales. We record revenue for vehicle sales at a point in time when vehicles are delivered, which is when the transfer of title, risks and rewards of ownership, and control are considered passed to the customer. The amount of consideration we receive for vehicle sales is stated within the executed contract with our customer and is reduced by any non-cash consideration representing the fair value of trade-in vehicles, if applicable. Payment is typically due and collected within 30 days subsequent to transfer of control of the vehicle.

Dealership Parts and Service Sales. We record revenue for vehicle service and collision work over time as work is completed and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment. The amount of consideration we receive for parts and service sales, including collision repair work, is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to the completion of services for the customer. We allow for customer returns of parts sales up to 30 days after the sale; however, parts returns are not material.

Dealership Finance and Insurance Sales. Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including voluntary vehicle protection insurance, vehicle theft protection, and extended service contracts. These commissions are recorded as revenue at a point in time when the customer enters into the contract. Payment is typically due and collected within 30 days subsequent to the execution of the contract with the customer.

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 $37.2 million and $33.7 million as of September 30, 2022, and December 31, 2021, respectively.

Commercial Vehicle Distribution and Other Revenue Recognition

Penske Australia. We record revenue from the distribution of vehicles and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership, and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of this revenue over time reflects the amount of

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consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.

The amount of consideration we receive for vehicle and product sales is stated within the executed contract with our customer. The amount of consideration we receive for parts and service sales is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.

We record revenue from the distribution of engines and other products at a point in time when delivered, which is when the transfer of title, risks and rewards of ownership, and control are considered passed to the customer. We record revenue for service or repair work over time as work is completed and when parts are delivered to our customers. For service and parts revenues recorded over time, we utilize a method that considers total costs incurred to date and the applicable margin in relation to total expected efforts to complete our performance obligation in order to determine the appropriate amount of revenue to recognize over time. Recognition of revenue over time reflects the amount of consideration we expect to be entitled to for the transfer of goods and services performed to date, representative of the amount for which we have a right to payment.

For our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones, which is considered an output method that requires judgment to determine our progress towards contract completion and the corresponding amount of revenue to recognize. Any revisions to estimates related to revenues or costs to complete contracts are recorded in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated.

The amount of consideration we receive for engine, product, and power generation sales is stated within the executed contract with our customer. The amount of consideration we receive for service sales is based upon labor hours expended and parts utilized to perform and complete the necessary services to our customers. Payment is typically due upon delivery, upon invoice, or within a period of time shortly thereafter. We receive payment from our customers upon transfer of control or within a period typically less than 30 days subsequent to transfer of control or invoice.

Service and parts revenue represented $62.7 million and $178.3 million for the three and nine months ended September 30, 2022, and $69.5 million and $210.7 million for the three and nine months ended September 30, 2021, respectively, for Penske Australia.

Retail Automotive Dealership

The following tables disaggregate our retail automotive segment revenue by product type and geographic location for the three and nine months ended September 30, 2022 and 2021:


	Three Months Ended September 30,				Nine Months Ended September 30,
Retail Automotive Dealership Revenue	2022		2021		2022		2021
New vehicle	$	2,395.2	$	2,275.2	$	7,286.7	$	7,507.9
Used vehicle	2,208.8		2,302.3		7,019.5		6,437.9
Finance and insurance, net	208.1		202.7		646.8		583.8
Service and parts	609.8		555.3		1,793.0		1,604.7
Fleet and wholesale	335.9		299.4		1,038.3		905.1
Total retail automotive dealership revenue	$	5,757.8	$	5,634.9	$	17,784.3	$	17,039.4


	Three Months Ended September 30,				Nine Months Ended September 30,
Retail Automotive Dealership Revenue	2022		2021		2022		2021
U.S.	$	3,400.8	$	3,271.2	$	10,188.3	$	9,890.5
U.K.	2,002.0		2,055.2