PENSKE AUTOMOTIVE GROUP, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)
This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those discussed in
the forward-looking statements as a result of various factors, including those
discussed in "Item 1A. Risk Factors" and "Forward-Looking Statements." We have
acquired and initiated a number of businesses during the periods presented and
addressed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations. Our financial statements include the results of
operations of those businesses from the date acquired or when they commenced
operations. Our period-to-period results of operations may vary depending on the
dates of acquisitions or disposals.
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Overview
We are a diversified international transportation services company and one of the world's premier automotive and commercial truck retailers. We operate dealerships inthe United States , theUnited Kingdom ,Canada ,Germany ,Italy , andJapan , and we are one of the largest retailers of commercial trucks inNorth America for Freightliner. We also distribute and retail commercial vehicles, diesel and gas engines, power systems, and related parts and services principally inAustralia and New Zealand . We employ over 26,500 people worldwide. Additionally, we own 28.9% of Penske Transportation Solutions, a business that employs over 41,500 people worldwide, manages one of the largest, most comprehensive and modern trucking fleets inNorth America with over 414,500 trucks, tractors, and trailers under lease, rental, and/or maintenance contracts, and provides innovative transportation, supply chain, and technology solutions to its customers. Business Overview In 2022, our business generated$27.8 billion in total revenue, which is comprised of approximately$23.7 billion from retail automotive dealerships,$3.5 billion from retail commercial truck dealerships, and$578.8 million from commercial vehicle distribution and other operations. We generated$4.8 billion in gross profit, which is comprised of$4.1 billion from retail automotive dealerships,$555.1 million from retail commercial truck dealerships, and$157.3 million from commercial vehicle distribution and other operations.Retail Automotive . We are one of the largest global automotive retailers as measured by the$23.7 billion in total retail automotive dealership revenue we generated in 2022. We are diversified geographically with 58% of our total retail automotive dealership revenues in 2022 generated in theU.S. andPuerto Rico and 42% generated outside of theU.S. We offer over 35 vehicle brands with 71% of our retail automotive franchised dealership revenue in 2022 generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz, and Porsche. As ofDecember 31, 2022 , we operated 338 retail automotive franchised dealerships, of which 151 are located in theU.S. and 187 are located outside of theU.S. The franchised dealerships outside of theU.S. are located primarily in theU.K. As ofDecember 31, 2022 , we also operated 21 used vehicle dealerships, with eight dealerships in theU.S. and 13 dealerships in theU.K. , which retailed used vehicles under a one price, "no-haggle" methodology under the CarShop brand. We retailed and wholesaled more than 539,000 vehicles in 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, replacement and aftermarket automotive products, and at certain of our locations, collision repair services. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry. Beginning in 2023, we transitioned ourMercedes-Benz U.K . dealerships to an agency model. Under an agency model, ourMercedes-Benz U.K . dealerships receive a fee for facilitating the sale by the manufacturer of a new vehicle but do not hold the vehicle in inventory. We continue to provide new vehicle customer service at ourMercedes-Benz U.K . dealerships, and the Mercedes-BenzU.K. agency model is not expected to structurally change our used vehicle sales operations or service and parts operations, although the impact of the agency model at these dealerships as well as other agency models proposed by our manufacturer partners is uncertain. See Part I, Item 1A. Risk Factors for a discussion of agency. During 2022, we acquired 19 retail automotive franchises, consisting of 15 franchises in theU.K. and four franchises in theU.S. , and we opened two retail automotive franchises that we were awarded in theU.S. We sold one retail automotive franchise in theU.S. , and we closed four locations in theU.K. , consisting of two retail automotive franchises and two CarShop satellite locations. Retail automotive dealerships represented 85.2% of our total revenues and 85.3% of our total gross profit in 2022. Retail Commercial Truck Dealership. We operatePremier Truck Group ("PTG"), a heavy- and medium-duty truck dealership group offering primarilyFreightliner and Western Star trucks (bothDaimler brands), with locations across nineU.S. states andOntario, Canada . DuringFebruary 2022 , we acquired four full-service dealerships inOntario, Canada . As ofDecember 31, 2022 , PTG operated 39 locations selling new and used trucks, parts and service, and offering collision repair services. We retailed and wholesaled 21,002 new and used trucks in 2022. This business represented 12.7% of our total revenues and 11.5% of our total gross profit in 2022. Penske Australia. Penske Australia is the exclusive importer and distributor ofWestern Star heavy-duty trucks (aDaimler brand), MAN heavy- and medium-duty trucks and buses (aVW Group brand), andDennis Eagle refuse collection 31
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vehicles, together with associated parts, acrossAustralia ,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 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. These businesses represented 2.1% of our total revenues and 3.2% of our total gross profit in 2022. Penske Transportation Solutions. We hold a 28.9% ownership interest inPenske Truck Leasing Co., L.P. ("PTL"). PTL is owned 41.1% byPenske 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. We recorded$490.0 million and$365.8 million in equity earnings from this investment in 2022 and 2021, respectively.
Outlook
Please see “Outlook” in Part I, Item 1 for a discussion of our outlook in our
markets.
Operating Overview Automotive and commercial truck dealerships represent over 95% and 70% of our revenue and our earnings before taxes, respectively. Income from our PTS investment represents over 25% of our earnings before taxes. New and used vehicle revenues typically include sales to retail customers, fleet customers, and 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. 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.
The results of our commercial vehicle distribution and other business in
products and vehicles ordered by our customers.
Aggregate revenue and gross profit increased
As exchange rates fluctuate, our revenue and results of operations as reported inU.S. Dollars fluctuate. For example, if the British Pound were to weaken against theU.S. Dollar, ourU.K. results of operations would translate into lessU.S. Dollar reported results. Foreign currency average rate fluctuations decreased revenue and gross profit by$1.0 billion and$146.1 million , respectively, in 2022. Foreign currency average rate fluctuations decreased earnings per share from continuing operations by approximately$0.40 per share in 2022. Excluding the impact of foreign currency average rate fluctuations, revenue and gross profit increased 12.8% and 12.3%, respectively, in 2022. 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 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. 32
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Equity in earnings of affiliates principally represents our share of the
earnings from PTS, along with our investments in joint ventures and other
non-consolidated investments.
Floor plan interest expense relates to financing incurred in connection with the
acquisition of new and used vehicle inventories that are secured by those
vehicles. Other interest expense consists of interest charges on all of our
interest-bearing debt, other than interest relating to floor plan financing, and
includes interest relating to our retail commercial truck dealership and
commercial vehicle distribution and other operations. The cost of our variable
rate indebtedness is based on the prime rate, the London Interbank Offered Rate
("LIBOR"), the Sterling Overnight Index Average ("SONIA"), the Bank of England
Base Rate , the Finance House Base Rate, the Euro Interbank Offered Rate, the
Canadian Prime Rate, the Tokyo Interbank Offered Rate, the Australian Bank Bill
Swap Rate , and the New Zealand Bank Bill Benchmark Rate.
Regulatory authorities in the U.S. have announced their intention to stop
compelling banks to submit rates for the calculation of LIBOR, ending after June
30, 2023 , for the LIBOR tenors that are relevant to our business. Our senior
secured revolving credit facility in the U.S. and many of our floorplan
arrangements utilize LIBOR as a benchmark for calculating the applicable
interest rate, although some of our floorplan arrangements and our U.K. credit
agreement have already transitioned to utilizing an alternative benchmark rate.
We cannot predict the effect of the potential changes to or elimination of LIBOR
or the establishment and use of alternative rates or benchmarks and the
corresponding effects on our cost of capital.
The future success of our business is dependent upon, among other things,
macro-economic, geo-political, and industry conditions and events, including
their impact on new and used vehicle sales, the availability of consumer credit,
changes in consumer demand, consumer confidence levels, fuel prices, personal
discretionary spending levels, interest rates, and unemployment rates; our
ability to obtain vehicles and parts from our manufacturers, especially in light
of supply chain disruptions due to natural disasters, the shortage of microchips
or other components, the COVID-19 pandemic, the war in Ukraine , challenges in
sourcing labor, or other disruptions; changes in the retail model either from
direct sales by manufacturers, a transition to an agency model of sales, sales
by online competitors, or from the expansion of electric vehicles; the continued
effect of COVID-19 on the global economy, including our ability to react
effectively to changing business conditions in light of the COVID-19 pandemic;
the rate of inflation, including its impact on vehicle affordability; changes in
interest rates and foreign currency exchange rates; our ability to consummate
and integrate acquisitions; with respect to PTS, changes in the financial health
of its customers, labor strikes, or work stoppages by its employees, a reduction
in PTS' asset utilization rates, continued availability from truck manufacturers
and suppliers of vehicles and parts for its fleet, changes in values of used
trucks which affects PTS' profitability on truck sales and regulatory risks and
related compliance costs; our ability to realize returns on our significant
capital investment in new and upgraded dealership facilities; our ability to
navigate a rapidly changing automotive and truck landscape; our ability to
respond to new or enhanced regulations in both our domestic and international
markets relating to automotive dealerships and vehicles sales, including those
related to emissions standards, as well as changes in consumer sentiment
relating to commercial truck sales that may hinder our or PTS' ability to
maintain, acquire, sell, or operate trucks; the success of our distribution of
commercial vehicles, engines, and power systems; natural disasters; recall
initiatives or other disruptions that interrupt the supply of vehicles or parts
to us; the outcome of legal and administrative matters, and other factors over
which management has limited control. See Part I, Item 1A. Risk Factors above
and "Forward-Looking Statements" below.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues, and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.
The following are the accounting policies applied in the preparation of our
financial statements that management believes are most dependent upon the use of
estimates and assumptions.
Revenue Recognition
Dealership Vehicle, Parts, and Service Sales. We record revenue 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. We record revenue for vehicle service and collision work over time
as 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
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time of sale. Rebates and other incentives offered directly to us by manufacturers are recognized as a reduction of cost of sales. Reimbursements of qualified advertising expenses are treated as a reduction of selling, general, and administrative expenses. The amounts received under certain manufacturer rebate and incentive programs are based on the attainment of program objectives, and such earnings are recognized either upon the sale of the vehicle for which the award was received or upon attainment of the particular program goals if not associated with individual vehicles. Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). During 2022, 2021, and 2020, we earned$571.1 million ,$635.7 million , and$588.7 million , respectively, of rebates, incentives, and reimbursements from manufacturers, of which$554.6 million ,$620.3 million , and$575.4 million , respectively, was recorded as a reduction of cost of sales. The remaining$16.5 million ,$15.4 million , and$13.3 million was recorded as a reduction of selling, general, and administrative expenses during 2022, 2021, and 2020, respectively. Dealership Finance and Insurance Sales. Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non-recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including guaranteed vehicle protection insurance, vehicle theft protection, and extended service contracts. These commissions are recorded as revenue at 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$38.4 million and$33.7 million as ofDecember 31, 2022 , andDecember 31, 2021 , respectively. Commercial Vehicle Distribution and Other. We record revenue from the distribution of vehicles, 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 our long-term power generation contracts, we record revenue over time as services are provided in accordance with contract milestones.
Refer to the disclosures provided in Part II, Item 8, Note 2 of the Notes to our
Consolidated Financial Statements for additional detail on revenue recognition.
Impairment Testing
Other indefinite-lived intangible assets are assessed for impairment annually onOctober 1 and upon the occurrence of an indicator of impairment through a comparison of its carrying amount and estimated fair value. These indefinite-lived intangible assets relate to franchise agreements with vehicle manufacturers and distributors, which represent the estimated value of franchises acquired in business combinations, and distribution agreements with commercial vehicle manufacturers and other manufacturers, which represent the estimated value for distribution rights acquired in business combinations. An indicator of impairment exists if the carrying value exceeds its estimated fair value, and an impairment loss may be recognized up to that excess. The fair value is determined using a discounted cash flow approach, which includes assumptions about revenue and profitability growth, profit margins, and the cost of capital. We also evaluate in connection with the annual impairment testing whether events and circumstances continue to support our assessment that the other indefinite-lived intangible assets continue to have an indefinite life.Goodwill impairment is assessed at the reporting unit level annually onOctober 1 and upon the occurrence of an indicator of impairment. Our operations are organized by management into operating segments by line of business and geography. We have determined that we have four reportable segments as defined in generally accepted accounting principles for segment reporting: (i)Retail Automotive , consisting of our retail automotive dealership operations; (ii) Retail Commercial Truck, consisting of our retail commercial truck dealership operations in theU.S. andCanada ; (iii) Other, consisting of our commercial vehicle and power systems distribution operations; and (iv) Non-Automotive Investments, consisting of our equity method investments in non-automotive operations which includes our investment in PTS and other various investments. We have determined that the dealerships in each of our operating segments within theRetail Automotive reportable segment are components that are aggregated into six reporting units for the purpose of goodwill impairment testing as they (A) have similar economic characteristics (all are automotive dealerships having similar 34
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margins), (B) offer similar products and services (all sell new and/or used vehicles, service, parts, and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals), and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). The reporting units are Eastern, Central, andWestern United States , Used Vehicle Dealerships United States, International, andUsed Vehicle Dealerships International . Our Retail Commercial Truck reportable segment has been determined to represent one operating segment and reporting unit. The goodwill included in our Other reportable segment relates primarily to our commercial vehicle distribution operating segment. There is no goodwill recorded in our Non-Automotive Investments reportable segment. For the year endedDecember 31, 2022 , for ourRetail Automotive , Retail Commercial Truck, and Other reporting units, we prepared a qualitative assessment of the carrying value of goodwill using the criteria in ASC 350-20-35-3 to determine whether it is more likely than not that a reporting unit's fair value is less than its carrying value. We concluded that for each of our reporting units, except for certain reporting units within ourRetail Automotive reportable segment, that their fair values were more likely than not greater than their carrying values. For certain reporting units within ourRetail Automotive reportable segment, we performed an impairment test by comparing the estimated fair value of each reporting unit with its carrying value. For the impairment test we estimated the fair value of theseRetail Automotive reporting units using an "income" valuation approach. The "income" valuation approach estimates our enterprise value using a net present value model, which discounts projected free cash flows of our business using the weighted average cost of capital as the discount rate. We also validated the fair value for each reporting unit using the income approach by calculating a cash earnings multiple and determining whether the multiple was reasonable compared to recent market transactions completed by the Company or in the industry.
Investments
We account for each of our investments under the equity method, pursuant to which we record our proportionate share of the investee's income each period. The net book value of our investments was$1,636.9 million and$1,688.1 million as ofDecember 31, 2022 , and 2021, respectively, including$1,590.9 million and$1,643.1 million relating to PTS as ofDecember 31, 2022 , and 2021, respectively. We currently hold a 28.9% ownership interest in PTS. 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, residual values, and our cost of capital. Declines in investment values that are deemed to be other than temporary may result in an impairment charge reducing the investments' carrying value to fair value. 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. Refer to the disclosures provided in Part II, Item 8, Note 16 of the Notes to our Consolidated Financial Statements for additional detail on our accounting for income taxes, including additional discussion on the enactment of the Act and the resulting impact on our financial statements.
Leases
We determine if an arrangement is a lease at inception. Our operating leases
primarily consist of land and facilities, including certain dealerships and
office space. We also have equipment leases that primarily relate to office and
computer equipment, service and shop equipment, company vehicles, and other
miscellaneous items. We do not have any material leases, individually or in the
aggregate, classified as a finance leasing arrangement.
Operating leases are included in "operating lease right-of-use assets," "accrued
expenses and other current liabilities," and "long-term operating lease
liabilities" on our Consolidated Balance Sheet. Operating lease right-of-use
assets and liabilities are recognized at commencement date based on the present
value of lease payments over the lease term. Our
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property leases are generally for an initial period between 5 and 20 years and are typically structured to include renewal options at our election. We include renewal options that we are reasonably certain to exercise in the measurement our lease liabilities and right-of-use assets. As the rate implicit in the lease is generally not readily determinable for our operating leases, the discount rates used to determine the present value of our lease liability are based on our incremental borrowing rate at the lease commencement date and commensurate with the remaining lease term. Our incremental borrowing rate for a lease is the rate of interest we would have to pay to borrow on a collateralized basis over a similar term for an amount equal to the lease payments in a similar economic environment. Lease expense is recognized on a straight-line basis over the lease term.
Refer to the disclosures provided in Part II, Item 8, Note 3 and Note 11 of the
Notes to our Consolidated Financial Statements for a description of our
operating leases.
Recent Accounting Pronouncements
Please see the disclosures provided under "Recent Accounting Pronouncements" in Part II, Item 8, Note 1 of the Notes to our Consolidated Financial Statements set forth below which are incorporated by reference herein.
Results of Operations
The following tables present comparative financial data relating to our operating performance in the aggregate and on a "same-store" basis. Dealership results are included in same-store comparisons when we have consolidated the acquired entity during the entirety of both periods being compared. As an example, if a dealership were acquired onJanuary 15, 2020 , the results of the acquired entity would be included in annual same-store comparisons beginning with the year endedDecember 31, 2022 , and in quarterly same-store comparisons beginning with the quarter endedJune 30, 2021 . The results for 2021 include a tax expense of$10.8 million , or$0.13 per share, related to revaluation of ourU.K. deferred tax assets and liabilities due to an increase in theU.K. corporate tax rate from 19% currently to 25%, beginning onApril 1, 2023 . We also incurred a$17.0 million expense in connection with the redemption of our 5.50% senior subordinated notes due in 2026 during the second quarter of 2021, consisting of a$13.8 million redemption premium and the write-off of$3.2 million of unamortized debt issuance costs, resulting in an after-tax charge of$12.6 million , or$0.16 per share. In addition, we had a loss on investment for the revaluation of theNicole Group of$9.1 million , or$0.11 per share. For the discussion and analysis comparing the results of operations for 2020 to 2021, we refer you to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the 2021 Form 10-K filed onFebruary 18, 2022 . 36
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Retail Automotive Dealership New Vehicle Data
(In millions, except unit and per unit amounts)
2022 vs. 2021 2021 vs. 2020
New Vehicle Data 2022 2021 Change % Change 2021 2020
Change % Change New retail unit sales 185,831 195,384 (9,553) (4.9) % 195,384 178,437 16,947 9.5 % Same-store new retail unit sales 173,936 192,711 (18,775) (9.7) % 193,946 175,873 18,073 10.3 % New retail sales revenue$ 10,050.5 $ 9,843.2 $ 207.3 2.1 %$ 9,843.2 $ 8,080.5 $ 1,762.7 21.8 % Same-store new retail sales revenue$ 9,399.0 $ 9,678.2 $ (279.2) (2.9) %$ 9,724.8 $ 7,994.5 $ 1,730.3 21.6 % New retail sales revenue per unit$ 54,084 $ 50,379 $ 3,705 7.4 %$ 50,379 $ 45,285 $ 5,094 11.2 % Same-store new retail sales revenue per unit$ 54,037 $ 50,221 $ 3,816 7.6 %$ 50,142 $ 45,456 $ 4,686 10.3 % Gross profit - new$ 1,246.1 $ 1,045.5 $ 200.6 19.2 %$ 1,045.5 $ 652.8 $ 392.7 60.2 % Same-store gross profit - new$ 1,164.2 $ 1,023.2 $ 141.0 13.8 %$ 1,026.4 $ 648.0 $ 378.4 58.4 % Average gross profit per new vehicle retailed$ 6,705 $ 5,351 $ 1,354 25.3 %$ 5,351 $ 3,659 $ 1,692 46.2 % Same-store average gross profit per new vehicle retailed$ 6,693 $ 5,309 $ 1,384 26.1 %$ 5,292 $ 3,684 $ 1,608 43.6 % Gross margin % - new 12.4 % 10.6 % 1.8 % 17.0 % 10.6 % 8.1 % 2.5 % 30.9 % Same-store gross margin % - new 12.4 % 10.6 % 1.8 % 17.0 % 10.6 % 8.1 % 2.5 % 30.9 % Units Retail unit sales of new vehicles decreased from 2021 to 2022 due to an 18,775 unit, or 9.7%, decrease in same-store new retail unit sales, partially offset by a 9,222 unit increase from net dealership acquisitions. Same-store units decreased 13.4% in theU.S. and decreased 2.1% internationally. Overall, new unit sales decreased 9.7% in theU.S. and increased 5.2% internationally. We believe the decrease in same-store unit sales is due to the prolonged low supply of new vehicles available for sale caused by supply chain issues discussed above, coupled with higher interest rates and inflation, impacting the overall affordability of new vehicles for customers.
Revenues
New vehicle retail sales revenue increased from 2021 to 2022 due to a$486.5 million increase from net dealership acquisitions, partially offset by a$279.2 million , or 2.9%, decrease in same-store revenues. Excluding$376.6 million of unfavorable foreign currency fluctuations, same-store new retail revenue increased 1.0%. The decrease in same-store revenue is due to the decrease in same-store new retail unit sales, which decreased revenue by$942.9 million , partially offset by a$3,816 per unit increase in same-store comparative average selling price (notwithstanding a$2,165 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased revenue by$663.7 million . We believe the increase in same-store comparative average selling price is due to the prolonged low supply of new vehicles available for sale, which has been caused by supply chain issues discussed above.
Gross Profit
Retail gross profit from new vehicle sales increased from 2021 to 2022 due to a$141.0 million , or 13.8%, increase in same-store gross profit, coupled with a$59.6 million increase from net dealership acquisitions. Excluding$44.1 million of unfavorable foreign currency fluctuations, same-store gross profit increased 18.1%. The increase in same-store gross profit is due to a$1,384 per unit increase in same-store comparative average gross profit (notwithstanding a$254 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased gross profit by$240.7 million , partially 37
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offset by the decrease in same-store new retail unit sales, which decreased gross profit by$99.7 million . We believe the increase in same-store comparative average gross profit per unit is due to the prolonged low supply of new vehicles available for sale, which has been caused by supply chain issues discussed above. Retail Automotive Dealership Used Vehicle Data (In millions, except unit and per unit amounts) 2022 vs. 2021 2021 vs. 2020 Used Vehicle Data 2022 2021 Change % Change 2021 2020
Change % Change Used retail unit sales 261,739 264,520 (2,781) (1.1) % 264,520 233,469 31,051 13.3 % Same-store used retail unit sales 247,041 259,489 (12,448) (4.8) % 257,386 230,468 26,918 11.7 % Used retail sales revenue$ 9,011.6 $ 8,549.0 $ 462.6 5.4 %$ 8,549.0 $ 6,414.7 $ 2,134.3 33.3 % Same-store used retail sales revenue$ 8,527.8 $ 8,380.4 $ 147.4 1.8 %$ 8,360.6 $ 6,343.0 $ 2,017.6 31.8 % Used retail sales revenue per unit$ 34,430 $ 32,319 $ 2,111 6.5 %$ 32,319 $ 27,476 $ 4,843 17.6 % Same-store used retail sales revenue per unit$ 34,520 $ 32,296 $ 2,224 6.9 %$ 32,483 $ 27,522 $ 4,961 18.0 % Gross profit - used$ 543.1 $ 666.6 $ (123.5) (18.5) %$ 666.6 $ 388.9 $ 277.7 71.4 % Same-store gross profit - used$ 515.5 $ 652.4 $ (136.9) (21.0) %$ 652.5 $ 386.0 $ 266.5 69.0 % Average gross profit per used vehicle retailed$ 2,075 $ 2,520 $ (445) (17.7) %$ 2,520 $ 1,666 $ 854 51.3 % Same-store average gross profit per used vehicle retailed$ 2,087 $ 2,514 $ (427) (17.0) %$ 2,535 $ 1,675 $ 860 51.3 % Gross margin % - used 6.0 % 7.8 % (1.8) % (23.1) % 7.8 % 6.1 % 1.7 % 27.9 % Same-store gross margin % - used 6.0 % 7.8 % (1.8) % (23.1) % 7.8 % 6.1 % 1.7 % 27.9 % Units Retail unit sales of used vehicles decreased from 2021 to 2022 due to a 12,448 unit, or 4.8%, decrease in same-store used retail unit sales, partially offset by a 9,667 unit increase from net dealership acquisitions. Our same-store units decreased 10.2% in theU.S. and increased 0.5% internationally. Same-store retail units for ourU.S. andU.K. CarShop used vehicle dealerships decreased 23.9% and increased 17.2%, respectively. Overall, our used units decreased 7.4% in theU.S. and increased 5.1% internationally. We believe the decrease in same-store unit sales in theU.S. is primarily due to higher used unit prices attributable to the prolonged low overall vehicle inventory availability for sale caused by supply chain issues discussed above, coupled with higher interest rates and inflation, impacting the overall affordability of used vehicles for customers. We believe the increase in same-store unit sales in theU.K. is primarily due to the absence of lockdown restrictions that were primarily in place during the first half of 2021 due to COVID-19.
Revenues
Used vehicle retail sales revenue increased from 2021 to 2022 due to a$315.2 million increase from net dealership acquisitions, coupled with a$147.4 million , or 1.8%, increase in same-store revenues. Excluding$501.5 million of unfavorable foreign currency fluctuations, same-store used retail revenue increased 7.7%. The increase in same-store revenue is due to a$2,224 per unit increase in same-store comparative average selling price (notwithstanding a$2,030 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased revenue by$549.4 million , partially offset by the decrease in same-store used retail unit sales, which decreased revenue by$402.0 million . The average sales price per unit for our CarShop used vehicle dealerships increased 3.0% to$20,136 . We believe the increase in same-store comparative average selling price is primarily due to higher used unit prices attributable to the prolonged low 38
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overall vehicle inventory availability for sale, which has been caused by supply
chain issues discussed above, impacting the overall affordability of used
vehicles for customers.
Gross Profit
Retail gross profit from used vehicle sales decreased from 2021 to 2022 due to a$136.9 million , or 21.0%, decrease in same-store gross profit, partially offset by a$13.4 million increase from net dealership acquisitions. Excluding$26.4 million of unfavorable foreign currency fluctuations, same-store gross profit decreased 16.9%. The decrease in same-store gross profit is due to a$427 per unit decrease in same-store comparative average gross profit (including a$107 per unit decrease attributable to unfavorable foreign currency fluctuations), which decreased gross profit by$105.5 million , coupled with the decrease in same-store used retail unit sales, which decreased gross profit by$31.4 million . The average gross profit per unit for our CarShop used vehicle dealerships decreased 36.5% to$758 . We believe the decrease in same-store comparative average gross profit per unit is primarily due to the more challenging used vehicle environment as consumers face increased costs of acquiring used vehicles resulting from the prolonged low supply of new vehicles available for sale, which decreased our gross margin.
Retail Automotive Dealership Finance and Insurance Data
(In millions, except unit and per unit amounts)
2022 vs. 2021 2021 vs. 2020
Finance and
Insurance Data 2022 2021 Change % Change 2021 2020 Change % Change
Total retail unit
sales 447,570 459,904 (12,334) (2.7) % 459,904 411,906 47,998 11.7 %
Total same-store
retail unit sales 420,977 452,200 (31,223) (6.9) % 451,332 406,341 44,991 11.1 %
Finance and
insurance revenue $ 848.1 $ 780.5 $ 67.6 8.7 % $ 780.5 $ 576.3 $ 204.2 35.4 %
Same-store finance
and insurance
revenue $ 811.0 $ 770.1 $ 40.9 5.3 % $ 768.5 $ 570.1 $ 198.4 34.8 %
Finance and
insurance revenue
per unit $ 1,895 $ 1,697 $ 198 11.7 % $ 1,697 $ 1,399 $ 298 21.3 %
Same-store finance
and insurance
revenue per unit $ 1,926 $ 1,703 $ 223 13.1 % $ 1,703 $ 1,403 $ 300 21.4 %
Finance and insurance revenue increased from 2021 to 2022 due to a $40.9
million , or 5.3%, increase in same-store revenues, coupled with a $26.7 million
increase from net dealership acquisitions. Excluding $33.5 million of
unfavorable foreign currency fluctuations, same-store finance and insurance
revenue increased 9.7%. The increase in same-store revenue is due to a $223 per
unit increase in same-store comparative average finance and insurance revenue
(notwithstanding an $80 per unit decrease attributable to unfavorable foreign
currency fluctuations), which increased revenue by $93.9 million , partially
offset by the decrease in same-store retail unit sales, which decreased revenue
by $53.0 million . Finance and insurance revenue per unit increased 20.5% in the
U.S. and increased 1.2% in the U.K. We believe the increase in same-store
finance and insurance revenue per unit is primarily due to higher average
selling prices of new and used vehicles and changes in the sales mix of new
vehicles, with an increased percentage of purchases and decreased percentage of
leasing. The higher mix of purchases have also driven increased product
penetration rates, coupled with our efforts to increase finance and insurance
penetration, which include implementing interactive digital customer sales
platforms, additional training, and targeting underperforming locations, in
addition to the increase in average selling price per unit of new and used
vehicles.
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Retail Automotive Dealership Service and Parts Data
(In millions)
2022 vs. 2021 2021 vs. 2020
Service and Parts
Data 2022 2021 Change % Change 2021 2020 Change % Change
Service and parts
revenue $ 2,426.7 $ 2,165.6 $ 261.1 12.1 % $ 2,165.6 $ 1,883.7 $ 281.9 15.0 %
Same-store
service and parts revenue$ 2,272.7 $ 2,130.3 $ 142.4 6.7 %$ 2,141.0 $ 1,857.2 $ 283.8 15.3 % Gross profit - service and parts$ 1,439.4 $ 1,307.3 $ 132.1 10.1 %$ 1,307.3 $ 1,127.4 $ 179.9 16.0 %
Same-store
service and parts gross profit$ 1,355.9 $ 1,285.6 $ 70.3 5.5 %$ 1,291.7 $ 1,113.0 $ 178.7 16.1 % Gross margin % - service and parts 59.3 % 60.4 % (1.1) % (1.8) % 60.4 % 59.9 % 0.5 % 0.8 %
Same-store
service and parts gross margin % 59.7 % 60.3 % (0.6) % (1.0) % 60.3 % 59.9 % 0.4 % 0.7 % Revenues Service and parts revenue increased from 2021 to 2022 with an increase of 13.0% in theU.S. and an increase of 10.1% internationally. The increase in service and parts revenue is due to a$142.4 million , or 6.7%, increase in same-store revenues, coupled with a$118.7 million increase from net dealership acquisitions. Excluding$85.2 million of unfavorable foreign currency fluctuations, same-store revenue increased 10.7%. The increase in same-store revenue is due to a$123.8 million , or 8.0%, increase in customer pay revenue; a$15.6 million , or 12.2%, increase in vehicle preparation and body shop revenue; and a$3.0 million , or 0.6%, increase in warranty revenue. We believe the increase in same-store service and parts revenue is related to increases in vehicle miles traveled compared to the same period last year, coupled with our efforts to proactively increase customer pay service work and improve technician efficiency, as well as increases in effective labor rates and the retail cost of parts due to inflation. Gross Profit Service and parts gross profit increased from 2021 to 2022 due to a$70.3 million , or 5.5%, increase in same-store gross profit, coupled with a$61.8 million increase from net dealership acquisitions. Excluding$49.1 million of unfavorable foreign currency fluctuations, same-store gross profit increased 9.3%. The increase in same-store gross profit is due to the increase in same-store revenues, which increased gross profit by$84.9 million , partially offset by a 0.6% decrease in same-store gross margin, which decreased gross profit by$14.6 million . The increase in same-store gross profit is due to a$52.0 million , or 6.9%, increase in customer pay gross profit; a$15.2 million , or 5.4%, increase in vehicle preparation and body shop gross profit; and a$3.1 million , or 1.2%, increase in warranty gross profit. 40
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Retail Commercial Truck Dealership Data
(In millions, except unit and per unit amounts)
2022 vs. 2021 2021 vs. 2020
New Commercial
Truck Data 2022 2021 Change % Change 2021 2020 Change % Change
New retail unit
sales 17,932 13,000 4,932 37.9 % 13,000 11,324 1,676 14.8 %
Same-store new
retail unit sales 14,078 10,983 3,095 28.2 % 10,983 11,324 (341) (3.0) %
New retail sales
revenue $ 2,308.7 $ 1,540.1 $ 768.6 49.9 % $ 1,540.1 $ 1,315.9 $ 224.2 17.0 %
Same-store new
retail sales
revenue $ 1,813.6 $ 1,322.3 $ 491.3 37.2 % $ 1,322.3 $ 1,315.9 $ 6.4 0.5 %
New retail sales
revenue per unit $ 128,750 $ 118,467 $ 10,283 8.7 % $ 118,467 $ 116,201 $ 2,266 2.0 %
Same-store new
retail sales
revenue per unit $ 128,828 $ 120,399 $ 8,429 7.0 % $ 120,399 $ 116,201 $ 4,198 3.6 %
Gross profit - new $ 126.4 $ 80.2 $ 46.2 57.6 % $ 80.2 $ 50.4 $ 29.8 59.1 %
Same-store gross
profit - new $ 101.7 $ 72.8 $ 28.9 39.7 % $ 72.8 $ 50.4 $ 22.4 44.4 %
Average gross
profit per new
truck retailed $ 7,048 $ 6,166 $ 882 14.3 % $ 6,166 $ 4,451 $ 1,715 38.5 %
Same-store average
gross profit per
new truck retailed $ 7,225 $ 6,628 $ 597 9.0 % $ 6,628 $ 4,451 $ 2,177 48.9 %
Gross margin % -
new 5.5 % 5.2 % 0.3 % 5.8 % 5.2 % 3.8 % 1.4 % 36.8 %
Same-store gross
margin % - new 5.6 % 5.5 % 0.1 % 1.8 % 5.5 % 3.8 % 1.7 % 44.7 %
Units
Retail unit sales of new trucks increased from 2021 to 2022 due to a 3,095 unit,
or 28.2%, increase in same-store new retail unit sales, coupled with a 1,837
unit increase from net dealership acquisitions. We believe the increase in
same-store unit sales is primarily due to the increased replacement demand for
medium- and heavy-duty trucks, coupled with the timing of production recovery
from production delays during 2021, partially offset by the supply chain issues
discussed above.
Revenues
New commercial truck retail sales revenue increased from 2021 to 2022 due to a
$491.3 million , or 37.2%, increase in same-store revenues, coupled with a $277.3
million increase from net dealership acquisitions. The increase in same-store
revenue is due to the increase in same-store new retail unit sales, which
increased revenue by $398.7 million , coupled with an $8,429 per unit increase in
same-store comparative average selling price, which increased revenue by $92.6
million . We believe the increase in same-store comparative average selling price
is due to higher prices driven by replacement demand and surcharges initiated by
the manufacturer related to supply chain challenges and cost increases for items
such as commodities, logistics, and wages.
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Gross Profit
New commercial truck retail gross profit increased from 2021 to 2022 due to a$28.9 million , or 39.7%, increase in same-store gross profit, coupled with a$17.3 million increase from net dealership acquisitions. The increase in same-store gross profit is due to the increase in same-store new retail unit sales, which increased gross profit by$22.3 million , coupled with a$597 per unit increase in same-store comparative average gross profit, which increased gross profit by$6.6 million . We believe the increase in same-store comparative average gross profit per unit is attributed to increased customer demand and the prolonged limited supply of new trucks available for sale, which has been caused by supply chain issues discussed above. 2022 vs. 2021 2021 vs. 2020 Used Commercial Truck Data 2022 2021 Change % Change 2021 2020
Change % Change Used retail unit sales 2,669 3,431 (762) (22.2) % 3,431 3,826 (395) (10.3) % Same-store used retail unit sales 2,115 3,191 (1,076) (33.7) % 3,191 3,826 (635) (16.6) % Used retail sales revenue$ 301.3 $ 270.6 $ 30.7 11.3 %$ 270.6 $ 194.2 $ 76.4 39.3 % Same-store used retail sales revenue$ 239.1 $ 251.3 $ (12.2) (4.9) %$ 251.3 $ 194.2 $ 57.1 29.4 % Used retail sales revenue per unit$ 112,900 $ 78,874 $ 34,026 43.1 %$ 78,874 $ 50,747 $ 28,127 55.4 % Same-store used retail sales revenue per unit$ 113,072 $ 78,766 $ 34,306 43.6 %$ 78,766 $ 50,747 $ 28,019 55.2 % Gross profit - used$ 22.0 $ 48.1 $ (26.1) (54.3) %$ 48.1 $ 0.4 $ 47.7 11,925.0 % Same-store gross profit - used$ 17.1 $ 44.3 $ (27.2) (61.4) %$ 44.3 $ 0.4 $ 43.9 10,975.0 % Average gross profit per used truck retailed$ 8,247 $ 14,015 $ (5,768) (41.2) %$ 14,015 $ 97 $ 13,918 14,348.5 % Same-store average gross profit per used truck retailed$ 8,064 $ 13,872 $ (5,808) (41.9) %$ 13,872 $ 97 $ 13,775 14,201.0 % Gross margin % - used 7.3 % 17.8 % (10.5) % (59.0) % 17.8 % 0.2 % 17.6 % 8,800.0 % Same-store gross margin % - used 7.2 % 17.6 % (10.4) % (59.1) % 17.6 % 0.2 % 17.4 % 8,700.0 % Units Retail unit sales of used trucks decreased from 2021 to 2022 due to a 1,076 unit, or 33.7%, decrease in same-store retail unit sales, partially offset by a 314 unit increase from net dealership acquisitions. We believe the decrease in same-store unit sales is primarily due to the lack of availability of used truck inventory for acquisition due to the supply chain issues discussed above as customers retained their existing truck fleet.
Revenues
Used commercial truck retail sales revenue increased from 2021 to 2022 due to a$42.9 million increase from net dealership acquisitions, partially offset by a$12.2 million , or 4.9%, decrease in same-store revenues. The decrease in same-store revenue is due to the decrease in same-store used retail unit sales, which decreased revenue by$84.8 million , partially offset by a$34,306 per unit increase in same-store comparative average selling price, which increased revenue by$72.6 million . We believe the increase in same-store comparative average selling price is primarily due to the supply constraints and lack of availability of new trucks in the market which drove higher demand for used trucks. 42
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Gross Profit
Used commercial truck retail gross profit decreased from 2021 to 2022 due to a$27.2 million , or 61.4%, decrease in same-store gross profit, partially offset by a$1.1 million increase from net dealership acquisitions. The decrease in same-store gross profit is due to the decrease in same-store used retail unit sales, which decreased gross profit by$14.9 million , coupled with a$5,808 per unit decrease in same-store comparative average gross profit, which decreased gross profit by$12.3 million . We believe the decrease in same-store comparative average gross profit per unit is primarily due to the increased cost of acquiring used trucks. 2022 vs. 2021 2021 vs. 2020 Service and Parts Data 2022 2021 Change % Change 2021 2020 Change % Change Service and parts revenue$ 852.2 $ 609.0 $ 243.2 39.9 %$ 609.0 $ 478.1 $ 130.9 27.4 %
Same-store service
and parts revenue
21.6 %$ 537.6 $ 478.1 $ 59.5 12.4 %
Gross profit –
service and parts
40.3 %$ 257.0 $ 207.3 $ 49.7 24.0 % Same-store service and parts gross profit$ 277.8 $ 228.3 $ 49.5 21.7 %$ 228.3 $ 207.3 $ 21.0 10.1 % Gross margin % - service and parts 42.3% 42.2% 0.1 % 0.2 % 42.2% 43.4% (1.2) % (2.8) % Same-store service and parts gross margin % 42.5% 42.5% - % - % 42.5% 43.4% (0.9) % (2.1) % Revenues Service and parts revenue increased from 2021 to 2022 due to a$127.1 million increase from net dealership acquisitions, coupled with a$116.1 million , or 21.6%, increase in same-store revenues. Customer pay work represented approximately 81.0% of PTG's service and parts revenue, largely due to the significant amount of retail sales of parts and accessories. The increase in same-store revenue is due to a$99.9 million , or 23.4%, increase in customer pay revenue; a$14.7 million , or 16.8%, increase in warranty revenue; and a$1.5 million , or 6.8%, increase in body shop revenue. We believe the increase in same-store service and parts revenue is being driven by the prolonged replacement cycle of trucks due to supply shortages of new trucks in the market, higher utilization by customers of existing trucks, and as a result, increased mileage accumulation across existing fleets.
Gross Profit
Service and parts gross profit increased from 2021 to 2022 due to a$54.0 million increase from net dealership acquisitions, coupled with a$49.5 million , or 21.7%, increase in same-store gross profit. The increase in same-store gross profit is due to the increase in same-store revenues, which increased gross profit by$49.5 million . The increase in same-store gross profit is due to a$39.7 million , or 25.4%, increase in customer pay gross profit; an$8.0 million , or 16.0%, increase in warranty gross profit; and a$1.8 million , or 8.4%, increase in body shop gross profit. Commercial Vehicle Distribution and Other Data (In millions, except unit amounts) 2022 vs. 2021 2021 vs. 2020 Penske Australia Data 2022 2021 Change % Change 2021 2020
Change % Change Commercial vehicle units (wholesale and retail) 1,229 1,628 (399) (24.5) % 1,628 966 662 68.5 % Power systems units 1,430 1,123 307 27.3 % 1,123 1,058 65 6.1 % Sales revenue $ 578.8 $ 575.7$ 3.1 0.5 % $ 575.7 $ 454.2$ 121.5 26.8 % Gross profit $ 157.3 $ 153.7$ 3.6 2.3 % $ 153.7 $ 122.3$ 31.4 25.7 % 43
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Penske Australia primarily distributes and services commercial vehicles, engines, and power systems. This business generated$578.8 million of revenue during 2022 compared to$575.7 million of revenue during 2021, an increase of 0.5%. This business also generated$157.3 million of gross profit during 2022 compared to$153.7 million of gross profit during 2021, an increase of 2.3%. Excluding$50.4 million of unfavorable foreign currency fluctuations, revenues increased 9.3% primarily due to an increase in sales from our energy solutions and mining product lines, as well as an increase in sales from service and parts, partially offset by supply chain constraints. Excluding$13.4 million of unfavorable foreign currency fluctuations, gross profit increased 11.1% primarily due to an increase in commercial vehicle gross profit per unit and an increase in gross profit per unit in our power generation product lines. Selling, General, and Administrative Data (In millions) 2022 vs. 2021 2021 vs. 2020 Selling, General, and Administrative Data 2022 2021 Change % Change 2021 2020 Change % Change Personnel expense$ 2,013.3 $ 1,848.9 $ 164.4 8.9 %$ 1,848.9 $ 1,402.4 $ 446.5 31.8 % Advertising expense$ 122.0 $ 119.2 $ 2.8 2.3 %$ 119.2 $ 81.1 $ 38.1 47.0 %
Rent & related expense
28.0 8.2 %$ 342.7 $ 316.6 $ 26.1 8.2 % Other expense$ 717.7 $ 652.1 $ 65.6 10.1 %$ 652.1 $ 564.4 $ 87.7 15.5 % Total SG&A expenses$ 3,223.7 $ 2,962.9 $ 260.8 8.8 %$ 2,962.9 $ 2,364.5 $ 598.4 25.3 %
Same-store SG&A expenses
87.6 3.0 %$ 2,893.3 $ 2,334.3 $ 559.0 23.9 % Personnel expense as % of gross profit 41.6 % 41.6 % - % - % 41.6 % 44.0 % (2.4) % (5.5) % Advertising expense as % of gross profit 2.5 % 2.7 % (0.2) % (7.4) % 2.7 % 2.5 % 0.2 % 8.0 % Rent & related expense as % of gross profit 7.7 % 7.7 % - % - % 7.7 % 9.9 % (2.2) % (22.2) % Other expense as % of gross profit 14.8 % 14.7 % 0.1 % 0.7 % 14.7 % 17.9 % (3.2) % (17.9) % Total SG&A expenses as % of gross profit 66.6 % 66.7 % (0.1) % (0.1) % 66.7 % 74.3 % (7.6) % (10.2) % Same-store SG&A expenses as % of same-store gross profit 66.6 % 67.0 % (0.4) % (0.6) % 66.7 % 74.0 % (7.3) % (9.9) % Selling, general, and administrative expenses ("SG&A") increased from 2021 to 2022 due to a$173.2 million increase from net acquisitions, coupled with an$87.6 million , or 3.0%, increase in same-store SG&A. Excluding$127.2 million of favorable foreign currency fluctuations, same-store SG&A increased 7.4%. We believe the increase in same-store SG&A expenses is primarily due to the inflationary effect on our personnel, rent, and other expenses. SG&A expenses as a percentage of total revenue were 11.6% each year in 2022, 2021, and 2020 and as a percentage of gross profit were 66.6%, 66.7%, and 74.3%, in 2022, 2021, and 2020, respectively. Depreciation (In millions) 2022 vs. 2021 2022 vs. 2021 2022 2021 Change % Change 2021 2020 Change % Change Depreciation$ 127.3 $ 121.5 $ 5.8 4.8 %$ 121.5 $ 115.5 $ 6.0 5.2 % Depreciation increased from 2021 to 2022 due to a$7.5 million increase from net dealership acquisitions, partially offset by a$1.7 million , or 1.4%, decrease in same-store depreciation. 44
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Floor Plan Interest Expense
(In millions)
2022 vs. 2021 2021 vs. 2020
2022 2021 Change % Change 2021 2020 Change % Change
Floor plan interest
expense $ 52.4 $ 26.2 $ 26.2 100.0 % $ 26.2 $ 46.3 $ (20.1) (43.4) %
Floor plan interest expense increased from 2021 to 2022 due to a $23.2 million ,
or 90.0%, increase in same-store floor plan interest expense, coupled with a
$3.0 million increase from net acquisitions. We believe the overall increase is
primarily due to increases in applicable rates, coupled with increases in
amounts outstanding under floor plan arrangements.
Other Interest Expense
(In millions)
2022 vs. 2021 2021 vs. 2020
2022 2021 Change % Change 2021 2020 Change % Change
Other interest expense $ 70.4 $ 68.6 $ 1.8 2.6 % $ 68.6 $ 111.0 $ (42.4) (38.2) %
Other interest expense increased from 2021 to 2022 primarily due to increases in
applicable rates, partially offset by the redemption and refinancing of our
5.50% senior subordinated notes during 2021, generating interest savings.
Equity in Earnings of Affiliates
(In millions)
2022 vs. 2021 2021 vs. 2020
2022 2021 Change % Change 2021 2020 Change % Change
Equity in earnings of
affiliates $ 494.2 $ 374.5 $ 119.7 32.0 % $ 374.5 $ 169.0 $ 205.5 121.6 %
Equity in earnings of affiliates increased from 2021 to 2022 due to a $124.2
million , or 34.0%, increase in earnings from our investment in PTS, coupled with
the increase in earnings from our retail automotive joint ventures which were
partially offset by the decrease in equity earnings from our previous joint
venture in Japan as we no longer include the results of this business in this
line item due to our acquiring 100% of this joint venture. We believe the
increase in our PTS equity earnings is due to improved PTS operating results,
most significantly in its commercial rental business due to strong utilization,
a larger fleet, favorable pricing, and higher gains from the sale of revenue
earning vehicles, as well as continued strong demand and profitability for
commercial rental trucks and full-service leasing.
Income Taxes
(In millions)
2022 vs. 2021 2021 vs. 2020
2022 2021 Change % Change 2021 2020 Change % Change
Income taxes $ 473.0 $ 416.3 $ 56.7 13.6 % $ 416.3 $ 162.7 $ 253.6 155.9 %
Income taxes increased from 2021 to 2022 primarily due to a $251.5 million
increase in our pre-tax income compared to the prior year. Our effective tax
rate was 25.4% during 2022 compared to 25.9% during 2021 primarily due to
fluctuations in our geographic pre-tax income mix, coupled with the increase in
net income tax expense in the prior year of $10.8 million related to U.K. tax
legislation changes.
Liquidity and Capital Resources
Our cash requirements are primarily for working capital, inventory financing,
the acquisition of new businesses, the improvement and expansion of existing
facilities, the purchase or construction of new facilities, debt service and
repayments, dividends, and potential repurchases of our outstanding securities
under the program discussed below. Historically, these cash requirements have
been met through cash flow from operations, borrowings under our credit
agreements and floor plan arrangements, the issuance of debt securities,
sale-leaseback transactions, real estate financings, and dividends and
distributions from joint venture investments.
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We have historically expanded our operations through organic growth and the acquisition of dealerships and other businesses. We believe that cash flow from operations, dividends and distributions from PTS and our joint venture investments, and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our existing operations and current commitments for at least the next twelve months. In the event that economic conditions are more severely impacted than we expect due to geo-political conditions, the COVID-19 pandemic or vehicle shortages resulting from supply chain difficulties, we pursue significant acquisitions or other expansion opportunities, pursue 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. Future events, including acquisitions, divestitures, new or revised operating lease agreements, borrowings or repayments under our credit agreements and our floor plan arrangements, raising capital, and purchases or refinancing of our securities, may also impact our liquidity. We expect that scheduled payments of our debt instruments will be funded through cash flows from operations or borrowings under our credit agreements. In the case of payments upon the maturity or termination dates of our debt instruments, we currently expect to be able to refinance such instruments in the normal course of business or otherwise fund them from cash flows from operations or borrowings under our credit agreements. Refer to the disclosures provided in Part II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements set forth below for a detailed description of our long-term debt obligations and scheduled interest payments. Floor plan notes payable are revolving inventory-secured financing arrangements. Refer to the disclosures provided in Part II, Item 8, Note 9 of the Notes to our Consolidated Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other revolving arrangements. Refer to the disclosures provided in Part II, Item 8, Note 11 of the Notes to our Consolidated Financial Statements for a description of our off-balance sheet arrangements which includes a repurchase commitment related to our floor plan credit agreement withMercedes-Benz Financial Services Australia and Mercedes-Benz Financial Services New Zealand. As ofDecember 31, 2022 , we had$106.5 million of cash available to fund our operations and capital commitments. In addition, we had$800.0 million , £142.0 million ($171.8 million ), AU$43.3 million ($29.5 million ), and$92.0 million available for borrowing under ourU.S. credit agreement,U.K. credit agreement,Australia credit agreement, and the revolving mortgage facility throughToyota Motor Credit Corporation , 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, through a pre-arranged trading plan, pursuant to the terms of an accelerated share repurchase program, or by other means. We have historically funded any such repurchases using cash flow from operations, borrowings under ourU.S. credit agreement, and borrowings under ourU.S. floor plan arrangements. The decision to make repurchases will be based on factors such as general economic and industry conditions, the market price of the relevant security versus our view of its intrinsic value, the potential impact of such repurchases on our capital structure, and our consideration of any alternative uses of our capital, such as for acquisitions, the repayment of our existing indebtedness, and strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy. InOctober 2022 , our Board of Directors increased the authority delegated to management to repurchase our outstanding securities by$250 million . As ofFebruary 7, 2023 ,$3.6 million of that authority remained outstanding and available for repurchases. OnFebruary 16, 2023 , our Board of Directors delegated to management an additional$250 million in authority to repurchase our outstanding securities, resulting in$253.6 million of authority outstanding and available for repurchases. This authority has no expiration. Refer to the disclosures provided in Part II, Item 8, Note 14 of the Notes to our Consolidated Financial Statements for a summary of shares repurchased during 2022. 46
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Dividends
We paid the following cash dividends on our common stock in 2021 and 2022:
Per Share Dividends
2021
First Quarter $ 0.43
Second Quarter $ 0.44
Third Quarter $ 0.45
Fourth Quarter $ 0.46
2022
First Quarter $ 0.47
Second Quarter $ 0.50
Third Quarter $ 0.53
Fourth Quarter $ 0.57
We also announced a cash dividend of $0.61 per share payable on March 1, 2023 ,
to stockholders of record as of February 10, 2023 . While future quarterly or
other cash dividends will depend upon a variety of factors considered relevant
by our Board of Directors, which may include our expectations regarding the
severity and duration of the COVID-19 pandemic, vehicle production issues, the
rate of inflation, including its impact on vehicle affordability, earnings, cash
flow, capital requirements, restrictions relating to any then-existing
indebtedness, financial condition, alternative uses of capital, and other
factors, we currently expect to continue to pay comparable dividends in the
future.
Vehicle Financing
Refer to the disclosures provided in Part II, Item 8, Note 9 of the Notes to our Consolidated Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other revolving arrangements.
Long-Term Debt Obligations
As of
outstanding:
December 31,
(In millions) 2022
U.S. credit agreement - revolving credit line $ -
U.K. credit agreement - revolving credit line 24.2
U.K. credit agreement - overdraft line of credit -
3.50% senior subordinated notes due 2025 546.2
3.75% senior subordinated notes due 2029 495.1
Australia credit agreement 21.6
Mortgage facilities 494.3
Other 40.7
Total long-term debt $ 1,622.1
As of December 31, 2022 , we were in compliance with all covenants under our
credit agreements, and we believe we will remain in compliance with such
covenants for the next twelve months. Refer to the disclosures provided in Part
II, Item 8, Note 10 of the Notes to our Consolidated Financial Statements set
forth below for a detailed description of our long-term debt obligations.
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Short-Term Borrowings
We have five principal sources of short-term borrowings: the revolving portion of theU.S. credit agreement, the revolving portion of theU.K. credit agreement, ourAustralia credit agreement (which replaced our priorAustralia working capital loan agreement), the revolving mortgage facility throughToyota Motor Credit Corporation , and the floor plan agreements that we utilize to finance our vehicle inventories. We are also able to access availability under the floor plan agreements to fund our cash needs. During 2022, outstanding revolving commitments varied between$0.0 million and$282.0 million under theU.S. credit agreement, between £0.0 million and £95.0 million ($0.0 million and$114.9 million ) under theU.K. credit agreement's revolving credit line (excluding the use of any overdraft facility), between AU$0.0 million and AU$29.0 million ($0.0 million and$19.8 million ) under theAustralia working capital loan agreement, between AU$0.0 million and AU$31.7 million ($0.0 million and$21.6 million ) under theAustralia credit agreement, and between$0.0 million and$205.2 million under the revolving mortgage facility throughToyota Motor Credit Corporation . 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 The Company periodically uses interest rate swaps to manage interest rate risk associated with the Company's variable rate floor plan debt. InApril 2020 , we entered into a five-year interest rate swap agreement pursuant to which the LIBOR portion of$300.0 million of ourU.S. floating rate floor plan debt was fixed at 0.5875% This arrangement was in effect throughApril 2025 . However, we terminated this arrangement inNovember 2021 resulting in a realized gain of$3.0 million . PTS Dividends We hold a 28.9% ownership interest in PTS as noted above. Their partnership agreement requires PTS, subject to applicable law and the terms of its credit agreements, to make quarterly distributions to the partners with respect to each fiscal year by no later than 45 days after the end of each of the first three quarters of the year and byApril 15 of the following year. PTS' partnership agreement and certain of its debt agreements allow partner distributions only as long as it is not in default under those agreements and the amount it pays does not exceed 50% of its consolidated net income, unless its debt-to-equity ratio is less than 3.0 to 1.0, in which case its distributions may not exceed 80% of its consolidated net income. We receive pro rata cash distributions relating to this investment, typically in April, May, August, and November of each year. During 2022, 2021, and 2020, we received$356.6 million ,$165.5 million , and$72.2 million , respectively, of pro rata cash distributions relating to this investment. We currently expect to continue to receive future distributions from PTS quarterly, subject to its financial performance.
Sale/Leaseback Arrangements
We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds that vary from period to period.
Operating Leases
We estimate the total rent obligations under our operating leases, including any extension periods that we are reasonably certain to exercise at our discretion and assuming constant consumer price indices, to be$5.4 billion . As ofDecember 31, 2022 , we were in compliance with all financial covenants under these leases consisting principally of leases for dealership and other properties, and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part II, Item 8, Note 3 and Note 11 of the Notes to our Consolidated Financial Statements for a description of our operating leases.
Discontinued Operations
We had no entities newly classified as held for sale in 2022, 2021, or 2020 that met the criteria to be classified as discontinued operations. As such, results from discontinued operations represent only retail automotive dealerships and our car rental business that were classified as discontinued operations prior to the adoption of ASU No. 2014-08 onJanuary 1, 2015 . 48
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Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to senior subordinated notes ofPenske Automotive Group, Inc. ("PAG") as the issuer of the 3.50% Notes and the 3.75% Notes (collectively the "Senior Subordinated Notes"). Each of the Senior Subordinated Notes are unsecured, senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% ownedU.S. subsidiaries ("Guarantor subsidiaries"). Each of the Senior Subordinated Notes also contain customary negative covenants and events of default. If we experience certain "change of control" events specified in their respective indentures, holders of these Senior Subordinated Notes will have the option to require us to purchase for cash all or a portion of their Senior Subordinated Notes at a price equal to 101% of the principal amount of the Senior Subordinated 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 Senior Subordinated Notes at a price equal to 100% of the principal amount of the Senior Subordinated Notes, plus accrued and unpaid interest. Guarantor subsidiaries are directly or indirectly 100% owned by PAG, and the guarantees are full and unconditional and joint and several. The guarantees may be released under certain circumstances upon resale or transfer by us of the stock of the related guarantor or all or substantially all of the assets of the guarantor to a non-affiliate. Non-wholly owned and foreign subsidiaries of PAG do not guarantee the Senior Subordinated Notes ("Non-Guarantor subsidiaries"). The following tables present summarized financial information for PAG and the Guarantor subsidiaries on a combined basis. The financial information of PAG and Guarantor subsidiaries is presented on a combined basis; intercompany balances and transactions between PAG and Guarantor subsidiaries have been eliminated; PAG's or Guarantor subsidiaries' amounts due from, amounts due to, and transactions with non-issuer and Non-Guarantor subsidiaries and related parties are disclosed separately.
Condensed income statement information:
PAG and Guarantor Subsidiaries
Year Ended Year Ended
December 31, December 31,
2022 2021
Revenues $ 16,093.8 $ 14,605.6
Gross profit 3,003.6 2,731.0
Equity in earnings of affiliates 490.0 366.2
Income from continuing operations 1,081.7 908.2
Net income 1,081.7 909.5
Net income attributable to Penske Automotive Group 1,081.7 909.5
Condensed balance sheet information:
PAG and Guarantor Subsidiaries
December 31, 2022 December 31, 2021
Current assets (1) $ 2,600.2 $ 2,245.6
Property and equipment, net 1,342.8 1,264.9
Equity method investments 1,593.5 1,645.6
Other noncurrent assets 3,603.3 3,524.0
Current liabilities 2,147.5 1,843.9
Noncurrent liabilities 3,993.9 3,858.9
_______________
(1)Includes
respectively, due from Non-Guarantor subsidiaries.
During the years ended
and
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Cash Flows
The following table summarizes the changes in our cash provided by (used in)
operating, investing, and financing activities. The major components of these
changes are discussed below.
Year Ended December 31,
(In millions) 2022 2021 2020
Net cash provided by continuing operating activities
Net cash used in continuing investing activities (641.7)
(623.1) (136.5) Net cash used in continuing financing activities (798.0) (615.5) (1,053.9) Net cash provided by discontinued operations - 1.3 0.3 Effect of exchange rate changes on cash and cash equivalents (13.5) (3.5) 10.0 Net change in cash and cash equivalents$ 5.8 $
51.2
Cash Flows from Continuing Operating Activities
Cash flows from continuing operating activities includes net income, as adjusted
for non-cash items and the effects of changes in working capital.
We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale (however, see Item 1A. Risk Factors for a discussion of agency), and a portion of our used vehicle inventories for retail sale under floor plan and other revolving arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. We retain the right to select which, if any, financing source to utilize in connection with the procurement of vehicle inventories. Many vehicle manufacturers provide vehicle financing for the dealers representing their brands; however, it is not a requirement that we utilize this financing. Historically, our floor plan finance source has been based on aggregate pricing considerations. In accordance with generally accepted accounting principles relating to the statement of cash flows, we report all cash flows arising in connection with floor plan notes payable with the manufacturer of a particular new vehicle as an operating activity in our statement of cash flows, and we report all cash flows arising in connection with floor plan notes payable to a party other than the manufacturer of a particular new vehicle, all floor plan notes payable relating to pre-owned vehicles, and all floor plan notes payable related to our commercial vehicles inAustralia and New Zealand as a financing activity in our statement of cash flows. Currently, the majority of our non-trade vehicle financing is with other manufacturer captive lenders. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing. We believe that changes in aggregate floor plan liabilities are typically linked to changes in vehicle inventory and therefore, are an integral part of understanding changes in our working capital and operating cash flow. As a result, we prepare the following reconciliation to highlight our operating cash flows with all changes in vehicle floor plan being classified as an operating activity for informational purposes: Year Ended December 31, (In millions) 2022 2021 2020 Net cash from continuing operating activities as reported$ 1,459.0 $ 1,292.0 $ 1,201.5 Floor plan notes payable - non-trade as reported 82.9 38.9 (230.2) Net cash from continuing operating activities including all floor plan notes payable$ 1,541.9 $
1,330.9
Cash Flows from Continuing Investing Activities
Cash flows from continuing investing activities consist primarily of cash used for capital expenditures, proceeds from the sale of dealerships, proceeds from the sale of property and equipment, and net expenditures for acquisitions and other investments. Capital expenditures were$282.5 million ,$248.9 million , and$185.9 million during 2022, 2021, and 2020, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities, the construction of new facilities, the acquisition of the property or buildings associated with existing leased facilities, and the acquisition of land for future development. We currently expect to finance our capital expenditures with operating cash flows or borrowings under our credit agreements. Proceeds from the sale of dealerships were$13.1 million ,$4.3 million , and$40.6 50
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million during 2022, 2021, and 2020, respectively. Proceeds from the sale of property and equipment were$32.3 million ,$54.9 million , and$19.8 million during 2022, 2021, and 2020, respectively. We had$393.4 million and$431.8 million of cash used in acquisitions and other investments, net of cash acquired, during 2022 and 2021, respectively, and included cash used to repay sellers' floor plan liabilities in such business acquisitions of$51.3 million and$43.0 million , respectively, compared to no cash used in acquisitions and other investments during 2020.
Cash Flows from Continuing Financing Activities
Cash flows from continuing financing activities include net borrowings or
repayments of long-term debt, net repayments or borrowings of floor plan notes
payable non-trade, repurchases of common stock, dividends, payments for
contingent consideration, and payments for debt issuance costs.
We had net borrowings of long-term debt of$160.1 million during 2022 and net repayments of long-term debt of$212.2 million and$681.4 million during 2021 and 2020, respectively. We had net borrowings of floor plan notes payable non-trade of$82.9 million and$38.9 million during 2022 and 2021, respectively, and net repayments of floor plan notes payable non-trade of$230.2 million during 2020. In 2022, 2021, and 2020, we repurchased 8.1 million, 3.1 million, and 0.9 million shares of common stock under our securities repurchase program for$869.3 million ,$280.6 million , and$29.4 million , respectively. In 2022, 2021, and 2020, we acquired 0.15 million, 0.15 million, and 0.14 million shares from employees in connection with a net share settlement feature of employee equity awards for$17.2 million ,$12.9 million , and$5.0 million , respectively. We also paid$154.1 million ,$142.5 million , and$68.1 million of cash dividends to our stockholders during 2022, 2021, and 2020, respectively. We made no payments to settle contingent consideration to sellers related to previous acquisitions during 2022 and 2021 compared to$31.6 million during 2020. We made payments of$0.3 million ,$6.3 million , and$8.1 million for debt issuance costs during 2022, 2021, and 2020, respectively.
Related Party Transactions
Stockholders Agreement
Several of our directors and officers are affiliated withPenske Corporation or related entities.Roger Penske , our Chair of the Board and Chief Executive Officer, is also Chair of the Board and Chief Executive Officer ofPenske Corporation and through entities affiliated withPenske Corporation is our largest stockholder owning approximately 51% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, "Mitsui") own approximately 19% of our outstanding common stock. Mitsui,Penske Corporation andPenske Automotive Holdings Corp. (together withPenske Corporation , the "Penske companies") are parties to a stockholders agreement which expiresMarch 26, 2030 . Pursuant to the stockholders agreement, the Penske companies agreed to vote their shares for two directors who are representatives of Mitsui as long as Mitsui owns in excess of 20% of our outstanding common stock, and for one director as long as Mitsui owns in excess of 10% of our outstanding common stock. Mitsui agreed to vote its shares for up to fourteen directors voted for by the Penske companies.
Other Related Party Interests and Transactions
Robert Kurnick , Jr., our President and a director, is also the Vice Chair and a director ofPenske Corporation .Bud Denker , our Executive Vice President, Human Resources, is also the President ofPenske Corporation .Greg Penske , the Vice Chair of our Board of Directors, is the son of our chair and is also a director ofPenske Corporation .Michael Eisenson , one of our directors, is also a director ofPenske Corporation .Kota Odagiri , one of our directors, is also an employee of Mitsui & Co. We sometimes pay to and/or receive fees fromPenske Corporation , its subsidiaries, and its affiliates for services rendered in the ordinary course of business or to reimburse payments made to third parties on each other's behalf. These transactions are reviewed periodically by our Audit Committee and reflect the provider's cost or an amount mutually agreed upon by both parties. We own a 28.9% interest in PTS. PTS, discussed previously, is owned 41.1% byPenske Corporation , 28.9% by us, and 30.0% by Mitsui. The PTS partnership agreement, among other things, provides us with specified partner distribution and governance rights and restricts our ability to transfer our interest. The partnership previously had a six-member advisory committee, and we were entitled to appoint one of the representatives serving on the advisory committee. InFebruary 2023 , we amended the PTS partnership agreement principally to augment PTS' governance to replace the advisory committee with an eleven-memberAdvisory Board . We retain the right to appoint oneAdvisory Board member and appointedRobert H. Kurnick , Jr., our President.Lisa Davis , one of our directors, was also appointed to the expandedAdvisory Board . The amended PTS partnership agreement also authorizes theAdvisory Board to appoint committees with 51
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such powers and authority of theAdvisory Board granted to the committee by theAdvisory Board . We are entitled to designate a non-voting observer to all committees as long as we retain the right to appoint anAdvisory Board member. We continue to have the right to pro rata quarterly distributions equal to at least 50% of PTS' consolidated net income, as well as specified minority rights which require our and/or Mitsui's consent for certain actions taken by PTS as specified in the PTS partnership agreement. We have also entered into other joint ventures with certain related parties as more fully discussed in Part II, Item 8, Note 12 of the Notes to our Consolidated Financial Statements.
Cyclicality
Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, fluctuating with general economic cycles. During economic downturns, the automotive and truck retailing industries tend to experience periods of decline and recession similar to those experienced by the general economy. We believe that these industries are influenced by general economic conditions and particularly, by consumer confidence, the level of personal discretionary spending, the rate of inflation, including its impact on vehicle affordability, fuel prices, interest rates, and credit availability. Our business is dependent on a number of factors, including general economic conditions, the availability of vehicle inventory, fuel prices, the rate of inflation, including its impact on vehicle affordability, interest rate fluctuations, credit availability, labor availability, environmental and other government regulations, and customer business cycles.U.S. light vehicle sales have ranged from a low of 10.4 million units in 2009 to a high of 17.5 million units in 2016. Unit sales of new commercial vehicles have historically been subject to substantial cyclical variation based on these general economic conditions. According to data published byACT Research , in recent years, totalU.S. retail sales of new Class 8 commercial vehicles have ranged from a low of approximately 97,000 in 2009 to a high of approximately 334,000 in 2019. Through geographic diversification, concentration on higher margin regular service and parts revenues, and diversification of our customer base, we have attempted to reduce the negative impact of adverse general economic conditions or cyclical trends affecting any one industry or geographic area on our earnings.
Seasonality
Retail Automotive Dealership. Our business is modestly seasonal overall. OurU.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends and the introduction of new vehicle models. Also, vehicle demand, and to a lesser extent demand for service and parts, is generally lower during the winter months than in other seasons, particularly in regions of theU.S. where dealerships may be subject to severe winters. OurU.K. operations generally experience higher volumes of new vehicle sales in the first and third quarters of each year, due primarily to new vehicle registration practices in theU.K.
Inflation
Many of the markets in which we operate are experiencing high rates of inflation. Inflation affects the price of vehicles, the price of parts, the rate of pay of our employees, consumer credit availability, and consumer demand. During 2022, used vehicle prices in particular experienced periods of high rates of inflation. Higher rates of inflation may adversely affect consumer demand and increase our costs, which may materially and adversely affect us.
Forward-Looking Statements
Certain statements and information set forth herein, as well as other written or
oral statements made from time to time by us or by our authorized officers on
our behalf, constitute "forward-looking statements" within the meaning of the
Federal Private Securities Litigation Reform Act of 1995. Words such as
"anticipate," "believe," "estimate," "expect," "intend," "may," "goal," "plan,"
"seek," "project," "continue," "will," "would," and variations of such words and
similar expressions are intended to identify such forward-looking statements. We
intend for our forward-looking statements to be covered by the safe harbor
provisions for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995, and we set forth this statement in order to
comply with such safe harbor provisions. You should note that our
forward-looking statements speak only as of the date of this report or when
made, and we undertake no duty or obligation to update or revise our
forward-looking statements, whether as a result of new information, future
events, or otherwise. Forward-looking statements include, without limitation,
statements with respect to:
•the impact of macro-economic and geo-political conditions and events, including
their impact on new and used vehicle sales, availability of consumer credit,
changes in consumer demand, consumer confidence levels, fuel
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prices, the rate of inflation, personal discretionary spending levels, consumer
credit availability, interest rates, and unemployment rates;
•our future financial and operating performance;
•future dealership openings, acquisitions, and dispositions;
•future potential capital expenditures and securities repurchases;
•our ability to realize cost savings and synergies;
•our ability to respond to economic cycles;
•trends and sales levels in the automotive retail industry, commercial vehicles
industries, and in the general economy in the various countries in which we
operate;
•our expectations regarding the COVID-19 pandemic and the resolution of vehicle
production issues;
•the rate of adoption of electric vehicles and its effect on our business;
•our ability to access the remaining availability under our credit agreements;
•our liquidity;
•performance of joint ventures, including PTS;
•future foreign currency exchange rates and geopolitical events;
•the outcome of various legal proceedings;
•results of self-insurance plans;
•trends affecting the automotive or trucking industries generally, such as
changes to an agency model of distribution in the
countries, and 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 under Part I, Item 1A. Risk Factors. Important factors that could cause actual results to differ materially from our expectations include those mentioned in Part I, Item 1A. Risk Factors and the following: •our business and the automotive retail and commercial vehicles industries in general are susceptible to adverse economic and geo-political conditions, including changes in interest rates, foreign currency exchange rates, customer demand, customer confidence, the rate of inflation, including its impact on vehicle affordability, fuel prices, unemployment rates and credit availability; •we depend on the success, popularity and availability of the brands we sell, and adverse conditions affecting one or more of these vehicle manufacturers, including the adverse impact on the vehicle and parts supply chain due to natural disasters, the shortage of microchips or other components, the COVID-19 pandemic, the war inUkraine , challenges in sourcing labor, or other disruptions that interrupt the supply of vehicles and parts to us may negatively impact our revenues and profitability; •the number of new and used vehicles sold in our markets, which impacts our ability to generate new and used vehicle gross profit and future service and parts operations; •the effect on our businesses of the changing retail environment due to certain manufacturers selling direct to consumers outside the franchise system, changes to an agency model of distribution in theU.K. and other European countries which will reduce reported revenues, reduce SG&A expenses, and reduce floor plan interest expense (although other impacts to our results of operations remain uncertain), and the growing number of electric vehicles; 53
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•the effect on our businesses of the new mobility technologies such as shared
vehicle services, such as Uber and Lyft, and the eventual availability of
driverless vehicles;
•vehicle manufacturers exercise significant control over our operations, and we depend on them and the continuation of our franchise and distribution agreements in order to operate our business;
•we are subject to the risk that a substantial number of our new or used
inventory may be unavailable due to recall or other reasons;
•the success of our commercial vehicle distribution operations and engine and power systems distribution operations depends upon continued availability of the vehicles, engines, power systems, and other parts we distribute, demand for those vehicles, engines, power systems, and parts and general economic conditions in those markets;
•a restructuring of any significant vehicle manufacturer or supplier;
•our operations may be affected by severe weather or other periodic business
interruptions;
•with respect to PTS, changes in the financial health of its customers, labor strikes or work stoppages by its employees, a reduction in PTS' asset utilization rates, continued availability from truck manufacturers and suppliers of vehicles and parts for its fleet, changes in values of used trucks which affects PTS' profitability on truck sales, compliance costs in regard to its trucking fleet and truck drivers, its ability to retain qualified drivers and technicians, risks associated with its participation in multi-employer pension plans, conditions in the capital markets to assure PTS' continued availability of capital to purchase trucks, the effect of changes in lease accounting rules on PTS customers' purchase/lease decisions, industry competition, new or enhanced regulatory requirements or vehicle mandates, changes in consumer sentiment regarding the transportation industry, and vulnerabilities with respect to its centralized information systems, each of which could impact distributions to us;
•we have substantial risk of loss not covered by insurance;
•we may not be able to satisfy our capital requirements for acquisitions,
facility renovation projects, financing the purchase of our inventory, or
refinancing of our debt when it becomes due;
•our level of indebtedness and cash required for lease obligations may limit our ability to obtain financing generally and may require that a significant portion of our cash flow be used for debt service;
•non-compliance with the financial ratios and other covenants under our credit
agreements and operating leases;
•higher interest rates may significantly increase our variable rate interest
costs and because many customers finance their vehicle purchases, adversely
impact vehicle affordability, and decrease vehicle sales;
•our operations outside of the
relating to changes in foreign currency values;
•we are dependent on continued security and availability of our information technology systems, which systems are increasingly threatened by ransomware and other cyber-attacks, and we may be subject to significant litigation, fines, penalties, and other costs under applicable privacy laws and regulations if we do not maintain our confidential customer and employee information properly;
•if we lose key personnel, especially our Chief Executive Officer, or are unable
to attract additional qualified personnel;
•new or enhanced regulations in both our domestic and international markets relating to automobile dealerships and vehicle sales, including those enacted in certain European countries,Washington, California ,Massachusetts , andNew York banning the sale of new vehicles with gasoline engines (with regulations inEurope proposed to start as early as 2025, andCalifornia requiring 35% of all new consumer vehicles to be emission free in 2026, 68% to be emission free by 2030, and 100% to be emission free by 2035, with some allowances for plug-in hybrid vehicles); •new or enhanced regulations, including those related to emissions standards, or changes in consumer sentiment relating to commercial truck sales that may hinder our or PTS' ability to maintain, acquire, sell, or operate trucks; 54
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•increased tariffs, import product restrictions, and foreign trade risks that
may impair our ability to sell foreign vehicles profitably;
•changes in tax, financial or regulatory rules, or requirements, including new regulations proposed by theFederal Trade Commission for automotive dealers that would change industry-accepted practices with regard to sales and advertising, require an extensive series of oral and written disclosures to consumers in regard to the sale price of vehicles, credit terms, and voluntary protection products, mandate the posting of certain pricing and other information on dealer websites, and impose burdensome recordkeeping requirements that, if adopted as proposed, may lead to additional transaction times for the sale of vehicles, complicate the transaction process, and decrease customer satisfaction and enhance compliance risk, among other effects;
•we could be subject to legal and administrative proceedings which, if the
outcomes are adverse to us, could have a material adverse effect on our
business;
•if state dealer laws in theU.S. are repealed or weakened or new manufacturers such as those selling electric vehicles are able to conduct significant vehicle sales outside of the franchised automotive system, our automotive dealerships may be subject to increased competition and may be more susceptible to termination, non-renewal, or renegotiation of their franchise agreements; •we are subject to a wide range of environmental laws and regulations governing the use, generation, and disposal of materials used in our ordinary course of operations, and we face potentially significant costs relating to claims, penalties, and remediation efforts in the event of non-compliance with existing and future laws and regulations which may become more stringent in the face of climate change;
•some of our directors and officers may have conflicts of interest with respect
to certain related party transactions and other business interests; and
•shares of our common stock eligible for future sale may cause the market price
of our common stock to drop significantly, even if our business is doing well.
We urge you to carefully consider these risk factors and further information under Part I, Item 1A. Risk Factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by the federal securities laws and theSecurities and Exchange Commission's rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events, or otherwise.
Additional Information
Investors and others should note that we may announce material financial information using our company website (www.penskeautomotive.com), our investor relations website (investors.penskeautomotive.com),SEC filings, press releases, public conference calls, and webcasts. Information about the Company, its business, and its results of operations may also be announced by posts on the following social media channels:
•Penske Automotive Group’s Twitter feed (www.twitter.com/penskecars)
•Penske Automotive Group’s Facebook page (www.facebook.com/penskecars)
•Penske Automotive Group’s Instagram page (www.instagram.com/penskecars)
•Penske Automotive Group’s Social website (www.penskesocial.com)
The information that we post on these social media channels could be deemed to be material information. As a result, we encourage investors, the media, and others interested inPenske Automotive Group to review the information that we post on these social media channels. These channels may be updated from time to time onPenske Automotive Group's investor relations website. The information on or accessible through our websites and social media channels is not incorporated by reference in this Annual Report on Form 10-K, and our references to such content are intended to be inactive textual or oral references only.
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