UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

Commission file number 1-12297

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		22-3086739 (I.R.S. Employer Identification No.)
2555 Telegraph Road,
Bloomfield Hills, Michigan		48302-0954
(Address of principal executive offices)		(Zip Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 1, 2011, there were 90,241,767 shares of voting common stock outstanding.

 

 

TABLE OF CONTENTS

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of September 30, 2011 and December 31, 2010			3
Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2011 and 2010			4
Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2011 and 2010			5
Consolidated Condensed Statement of Equity for the nine months ended September 30, 2011			6
Notes to Consolidated Condensed Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			25
Item 3. Quantitative & Qualitative Disclosures About Market Risk			44
Item 4. Controls and Procedures			44
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			45
Item 6. Exhibits			46
Exhibit 12
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PENSKE AUTOMOTIVE GROUP, INC.

		September 30,				December 31,
		2011				2010
		(Unaudited)
		(In thousands, except
		per share amounts)
ASSETS
Cash and cash equivalents		$	7,735			$	17,808
Accounts receivable, net of allowance for doubtful accounts of $2,259 and $1,898			385,137				383,379
Inventories			1,481,629				1,449,157
Other current assets			88,676				68,355
Assets held for sale			54,168				117,018
Total current assets			2,017,345				2,035,717
Property and equipment, net			821,421				719,762
Goodwill			915,433				807,874
Franchise value			232,814				203,401
Equity method investments			293,819				288,406
Other long-term assets			14,637				14,672
Total assets		$	4,295,469			$	4,069,832
LIABILITIES AND EQUITY
Floor plan notes payable		$	902,163			$	918,628
Floor plan notes payable — non-trade			597,982				491,889
Accounts payable			226,709				253,277
Accrued expenses			247,185				202,480
Current portion of long-term debt			9,642				10,593
Liabilities held for sale			34,464				84,139
Total current liabilities			2,018,145				1,961,006
Long-term debt			841,927				769,285
Deferred tax liabilities			183,708				178,406
Other long-term liabilities			139,271				115,282
Total liabilities			3,183,051				3,023,979
Commitments and contingent liabilities
Equity
Penske Automotive Group stockholders’ equity:
Preferred Stock, $0.0001 par value; 100 shares authorized; none issued and outstanding			—				—
Common Stock, $0.0001 par value, 240,000 shares authorized; 90,242 shares issued and outstanding at September 30, 2011; 92,100 shares issued and outstanding at December 31, 2010			9				9
Non-voting Common Stock, $0.0001 par value, 7,125 shares authorized; none issued and outstanding			—				—
Class C Common Stock, $0.0001 par value, 20,000 shares authorized; none issued and outstanding			—				—
Additional paid-in-capital			700,949				738,728
Retained earnings			419,814				304,486
Accumulated other comprehensive loss			(12,455	)			(1,673	)
Total Penske Automotive Group stockholders’ equity			1,108,317				1,041,550
Non-controlling interest			4,101				4,303
Total equity			1,112,418				1,045,853
Total liabilities and equity		$	4,295,469			$	4,069,832

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
		(Unaudited)
		(In thousands, except per share amounts)
Revenue:
New vehicle		$	1,471,606			$	1,373,240			$	4,288,746			$	3,882,945
Used vehicle			890,251				750,720				2,580,261				2,170,006
Finance and insurance, net			73,289				65,185				208,765				184,577
Service and parts			354,616				326,494				1,049,467				974,913
Fleet and wholesale vehicle			161,284				154,134				496,471				485,329
Total revenues			2,951,046				2,669,773				8,623,710				7,697,770
Cost of sales:
New vehicle			1,346,995				1,263,386				3,932,360				3,565,684
Used vehicle			823,562				694,806				2,375,508				1,999,446
Service and parts			153,153				139,906				451,600				420,552
Fleet and wholesale			160,229				153,506				490,170				478,712
Total cost of sales			2,483,939				2,251,604				7,249,638				6,464,394
Gross profit			467,107				418,169				1,374,072				1,233,376
Selling, general and administrative expenses			375,432				339,120				1,111,812				1,003,151
Depreciation			12,590				11,820				36,578				35,123
Operating income			79,085				67,229				225,682				195,102
Floor plan interest expense			(7,020	)			(8,805	)			(21,131	)			(24,907	)
Other interest expense			(11,288	)			(12,229	)			(33,264	)			(37,491	)
Debt discount amortization			—				(1,647	)			(1,718	)			(6,990	)
Equity in earnings of affiliates			9,623				7,370				17,527				11,725
Gain on debt repurchase			—				607				—				1,634
Income from continuing operations before income taxes			70,400				52,525				187,096				139,073
Income taxes			(13,355	)			(17,428	)			(51,293	)			(48,485	)
Income from continuing operations			57,045				35,097				135,803				90,588
Loss from discontinued operations, net of tax			(1,000	)			(4,837	)			(5,702	)			(10,312	)
Net income			56,045				30,260				130,101				80,276
Less: Income attributable to non-controlling interests			338				283				907				504
Net income attributable to Penske Automotive Group common stockholders		$	55,707			$	29,977			$	129,194			$	79,772
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.62			$	0.38			$	1.46			$	0.98
Discontinued operations			(0.01	)			(0.05	)			(0.06	)			(0.11	)
Net income attributable to Penske Automotive Group common stockholders		$	0.61			$	0.33			$	1.40			$	0.87
Shares used in determining basic earnings per share			91,390				92,018				92,106				92,097
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	0.62			$	0.38			$	1.46			$	0.98
Discontinued operations			(0.01	)			(0.05	)			(0.06	)			(0.11	)
Net income attributable to Penske Automotive Group common stockholders		$	0.61			$	0.33			$	1.40			$	0.87
Shares used in determining diluted earnings per share			91,431				92,141				92,169				92,171
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations		$	57,045			$	35,097			$	135,803			$	90,588
Less: Income attributable to non-controlling interests			338				283				907				504
Income from continuing operations, net of tax			56,707				34,814				134,896				90,084
Loss from discontinued operations, net of tax			(1,000	)			(4,837	)			(5,702	)			(10,312	)
Net income attributable to Penske Automotive Group common stockholders		$	55,707			$	29,977			$	129,194			$	79,772
Cash dividends per share		$	0.08			$	—			$	0.15			$	—

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

		Nine Months Ended
		September 30,
		2011				2010
		(Unaudited)
		(In thousands)
Operating Activities:
Net income		$	130,101			$	80,276
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation			36,578				35,123
Debt discount amortization			1,718				6,990
Earnings of equity method investments			(17,527	)			(11,725	)
Loss from discontinued operations, net of tax			5,702				10,312
Deferred income taxes			14,801				14,596
Gain on debt repurchase			—				(1,634	)
Changes in operating assets and liabilities:
Accounts receivable			691				(39,961	)
Inventories			28,775				(124,780	)
Floor plan notes payable			(16,464	)			112,148
Accounts payable and accrued expenses			15,580				34,471
Other			(24,155	)			2,907
Net cash from continuing operating activities			175,800				118,723
Investing Activities:
Purchase of equipment and improvements			(80,269	)			(56,433	)
Dealership acquisitions, net, including repayment of sellers’ floor plan notes payable of $54,453 and $5,683, respectively			(232,106	)			(9,280	)
Other			2,865				—
Net cash used in continuing investing activities			(309,510	)			(65,713	)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line			494,500				511,500
Repayments under U.S. credit agreement revolving credit line			(374,500	)			(475,000	)
Repurchase of 3.5% senior subordinated convertible notes			(87,278	)			(156,604	)
Net borrowings (repayments) of other long-term debt			32,461				9,895
Net borrowings of floor plan notes payable — non-trade			106,092				50,656
Proceeds from exercises of options, including excess tax benefit			3,018				403
Repurchases of common stock			(44,263	)			(751	)
Dividends			(13,866	)			—
Net cash from (used in) continuing financing activities			116,164				(59,901	)
Discontinued operations:
Net cash from discontinued operating activities			(35,013	)			(2,511	)
Net cash from discontinued investing activities			47,913				2,340
Net cash from discontinued financing activities			(5,427	)			626
Net cash from discontinued operations			7,473				455
Net change in cash and cash equivalents			(10,073	)			(6,436	)
Cash and cash equivalents, beginning of period			17,808				14,489
Cash and cash equivalents, end of period		$	7,735			$	8,053
Supplemental disclosures of cash flow information:
Cash paid for:
Interest		$	47,004			$	56,456
Income taxes			38,664				22,839
Seller financed/assumed debt			4,865				—

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

																						Total
																		Accumulated				Stockholders’ Equity
		Common Stock								Additional								Other				Attributable to
		Issued								Paid-in				Retained				Comprehensive				Penske				Non-controlling				Total
		Shares				Amount				Capital				Earnings				Income (Loss)				Automotive Group				Interest				Equity
		(Unaudited)
		(Dollars in thousands)
Balance, January 1, 2011			92,099,552			$	9			$	738,728			$	304,486			$	(1,673	)		$	1,041,550			$	4,303			$	1,045,853
Equity compensation			380,315				—				4,094				—				—				4,094				—				4,094
Repurchases of common stock			(2,449,768	)			—				(44,263	)			—				—				(44,263	)			—				(44,263	)
Dividends			—				—				—				(13,866	)			—				(13,866	)			—				(13,866	)
Exercise of options, including tax benefit of $955			211,668				—				3,018				—				—				3,018				—				3,018
Distributions to non-controlling interests			—				—				—				—				—				—				(1,269	)			(1,269	)
Purchase of subsidiary shares from non-controlling interest			—				—				(853	)			—				—				(853	)			3				(850	)
Sale of subsidiary shares to non-controlling interest			—				—				225				—				—				225				157				382
Foreign currency translation			—				—				—				—				(1,170	)			(1,170	)			—				(1,170	)
Other			—				—				—				—				(9,612	)			(9,612	)			—				(9,612	)
Net income			—				—				—				129,194				—				129,194				907				130,101
Balance, September 30, 2011			90,241,767			$	9			$	700,949			$	419,814			$	(12,455	)		$	1,108,317			$	4,101			$	1,112,418

See Notes to Consolidated Condensed Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Interim Financial Statements

Business Overview

Penske Automotive Group, Inc. (the “Company”) is the second largest automotive retailer headquartered in the U.S. as measured by total revenue. As of September 30, 2011, the Company operated 327 retail franchises, of which 172 franchises are located in the U.S. and 155 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. Each of the Company’s dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, the Company generates higher-margin revenue at each of its dealerships through maintenance and repair services and the sale and placement of higher-margin products, such as third-party finance and insurance products, third-party extended service contracts and replacement and aftermarket automotive products. The Company also holds a 9.0% limited partnership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading global transportation services provider.

During the nine months ended September 30, 2011, the Company was awarded four franchises, acquired seven franchises, and disposed of seven franchises.

In 2011, smart USA Distributor, LLC, the Company’s wholly owned subsidiary, completed the sale of certain assets and the transfer of certain liabilities relating to the distribution rights, management, sales and marketing activities of smart USA to Daimler Vehicle Innovations LLC (“DVI”), a wholly owned subsidiary of Mercedes-Benz USA. The reconciliation of working capital and other assets delivered at closing was finalized in the third quarter of 2011. The final aggregate cash purchase price for the assets, which included certain vehicles, parts, signage and other items valued at fair market value, was $44,611. This amount also includes reimbursement of certain operating and wind-down costs of smart USA. As a result, smart USA has been treated as a discontinued operation for all periods presented in the accompanying financial statements.

Basis of Presentation

The unaudited consolidated condensed financial statements of the Company have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of September 30, 2011 and December 31, 2010 and for the three and nine month periods ended September 30, 2011 and 2010 is unaudited, but includes all adjustments which the management of the Company believes to be necessary for the fair presentation of results for the periods presented. The consolidated condensed financial statements for prior periods have been revised for entities which have been treated as discontinued operations through September 30, 2011, and the results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2010, which are included as part of the Company’s Annual Report on Form 10-K.

Results for three and nine months ended September 30, 2010 include a $607 and $1,634 pre-tax gain relating to the repurchase of $43,000 and $155,658 aggregate principal amount of the Company’s 3.5% senior subordinated convertible notes (“Convertible Notes”).

Discontinued Operations

The Company accounts for dispositions in its retail operations as discontinued operations when it is evident that the operations and cash flows of a franchise being disposed of will be eliminated from on-going operations and that the Company will not have any significant continuing involvement in its operations. As noted above, the Company has accounted for the disposition of its smart USA distribution operation as a discontinued operation.

In evaluating whether the cash flows of a dealership in its Retail reportable segment will be eliminated from ongoing operations, the Company considers whether it is likely that customers will migrate to similar franchises that it owns in the same geographic market. The Company’s consideration includes an evaluation of the brands sold at other dealerships it operates in the market and their proximity to the disposed dealership. When the Company disposes of franchises, it typically does not have continuing brand representation in that market. If the franchise being disposed of is located in a complex of Company owned dealerships, the Company does not treat the disposition as a discontinued operation if it believes that the cash flows previously generated by the disposed franchise will be replaced by expanded operations of the remaining or replacement franchises.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The distribution segment has been presented as a discontinued operation due to the transition of the distribution rights of the smart fortwo from smart USA to DVI that occurred in June 2011 and was finalized in the third quarter of 2011. The Company does not have any continuing role in the distribution of the smart fortwo, and as a result, no longer has any operations or cash flows relating to distribution activities.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues		$	61,524			$	86,346			$	231,721			$	268,549
Pre-tax (loss) income			(1,625	)			(7,668	)			(11,080	)			(15,950	)
Gain (loss) on disposal			250				—				2,016				(261	)

		September 30,				December 31,
		2011				2010
Inventories		$	27,452			$	75,069
Other assets			26,716				41,949
Total assets		$	54,168			$	117,018
Floor plan notes payable (including non-trade)		$	25,419			$	68,198
Other liabilities			9,045				15,941
Total liabilities		$	34,464			$	84,139

Estimates

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

Fair Value of Financial Instruments

Financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, debt, floor plan notes payable, and interest rate swaps used to hedge future cash flows. Other than our subordinated notes, the carrying amount of all significant financial instruments approximates fair value due either to length of maturity, the existence of variable interest rates that approximate prevailing market rates, or as a result of mark to market accounting. A summary of the fair value of the subordinated notes, based on quoted, level one market data, follows:

		September 30, 2011
		Carrying Value				Fair Value
7.75% senior subordinated notes due 2016		$	375,000			$	375,000
3.5% senior subordinated convertible notes due 2026			63,324				59,366

New Accounting Pronouncements

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

2. Inventories

Inventories consisted of the following:

		September 30,				December 31,
		2011				2010
New vehicles		$	949,357			$	1,008,005
Used vehicles			453,180				366,404
Parts, accessories and other			79,092				74,748
Total inventories		$	1,481,629			$	1,449,157

The Company receives non-refundable credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $22,939 and $19,070 during the nine months ended September 30, 2011 and 2010, respectively.

3. Business Combinations

The Company acquired seven and two franchises during the nine months ended September 30, 2011 and 2010, respectively, in its retail operations (not including the German operations noted below). The Company’s financial statements include the results of operations of the acquired dealerships from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in the Company’s consolidated condensed financial statements, and may be subject to adjustment pending completion of the final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the nine months ended September 30, 2011 and 2010 follows:

		September 30,
		2011				2010
Accounts receivable		$	953			$	—
Inventory			61,247				6,336
Other current assets			—				17
Property and equipment			40,190				—
Goodwill			107,498				3,014
Franchise value			29,491				—
Other assets			628				—
Current liabilities			(6,190	)			(87	)
Total consideration			233,817				9,280
Seller financed/assumed debt			(1,711	)			—
Cash used in dealership acquisitions		$	232,106			$	9,280

In the first quarter of 2010, the Company exited one of its German joint ventures by exchanging its 50% interest in the joint venture for 100% ownership in three BMW franchises previously held by the joint venture. The Company recorded $13,331 of intangible assets in connection with this transaction.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The following unaudited consolidated pro forma results of operations of the Company for the three and nine months ended September 30, 2011 and 2010 give effect to acquisitions consummated during 2011 and 2010 as if they had occurred on January 1, 2010:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Revenues		$	2,951,046			$	2,795,667			$	8,822,713			$	8,075,752
Income from continuing operations			57,045				36,451				138,110				94,753
Net income			56,045				31,614				132,408				84,441
Income from continuing operations per diluted common share		$	0.62			$	0.40			$	1.50			$	1.03
Net income per diluted common share		$	0.61			$	0.34			$	1.44			$	0.92

4. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and franchise value during the nine months ended September 30, 2011:

						Franchise
		Goodwill				Value
Balance, January 1, 2011		$	807,874			$	203,401
Additions			107,498				29,491
Foreign currency translation			61				(78	)
Balance, September 30, 2011		$	915,433			$	232,814

5. Floor Plan Notes Payable — Trade and Non-trade

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

The floor plan agreements grant a security interest in substantially all of the assets of the Company’s dealership subsidiaries, and in the U.S. are guaranteed by the Company. Interest rates under the floor plan arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Bank Rate, or the Euro Interbank Offer Rate. The Company classifies floor plan notes payable to a party other than the manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as floor plan notes payable — non-trade on its consolidated condensed balance sheets and classifies related cash flows as a financing activity on its consolidated condensed statements of cash flows.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

6. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested restricted stock awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, adjusted for the dilutive effect of stock options. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2011 and 2010 follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Weighted average number of common shares outstanding			91,390				92,018				92,106				92,097
Effect of non-participatory equity compensation			41				123				63				74
Weighted average number of common shares outstanding, including effect of dilutive securities			91,431				92,141				92,169				92,171

There were no anti-dilutive stock options outstanding during the three and nine months ended September 30, 2011 or 2010. In addition, the Company has senior subordinated convertible notes outstanding which, under certain circumstances discussed in Note 7, may be converted to voting common stock. As of September 30, 2011 and 2010, no shares related to the senior subordinated convertible notes were included in the calculation of diluted earnings per share because the effect of such securities was anti-dilutive.

7. Long-Term Debt

Long-term debt consisted of the following:

		September 30,				December 31,
		2011				2010
U.S. credit agreement — revolving credit line		$	120,000			$	—
U.S. credit agreement — term loan			134,000				134,000
U.K. credit agreement — revolving credit line			67,020				54,597
U.K. credit agreement — term loan			—				5,505
U.K. credit agreement — overdraft line of credit			5,012				7,116
7.75% senior subordinated notes due 2016			375,000				375,000
3.5% senior subordinated convertible notes due 2026, net of debt discount			63,324				148,884
Mortgage facilities			77,914				46,052
Other			9,299				8,724
Total long-term debt			851,569				779,878
Less: current portion			(9,642	)			(10,593	)
Net long-term debt		$	841,927			$	769,285

U.S. Credit Agreement

The Company is party to a credit agreement with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation, as amended (the “U.S. Credit Agreement”), which provides for up to $375,000 in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, a non-amortizing term loan with a remaining balance of $134,000, and for an additional $10,000 of availability for letters of credit. The term of the credit agreement was extended on September 20, 2011, by one year through September 30, 2014. In addition, the U.S. Credit Agreement was amended to, among other things, increase the revolving loan availability to up to $375,000 and to reduce the rate for collateralized revolving loan borrowings from LIBOR plus 2.75% to LIBOR plus 2.50%. The revolving loans now bear interest at a defined LIBOR plus 2.50%, subject to an incremental 1.0% for uncollateralized borrowings in excess of a defined borrowing base. The term loan, which bears interest at defined LIBOR plus 2.50%, may be prepaid at any time, but then may not be re-borrowed.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The U.S. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the Company’s domestic subsidiaries and contains a number of significant covenants that, among other things, restrict the Company’s ability to dispose of assets, incur additional indebtedness, repay other indebtedness, pay dividends, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. The Company is also required to comply with defined financial and other tests and ratios, including: a ratio of current assets to current liabilities, a fixed charge coverage ratio, a ratio of debt to stockholders’ equity and a ratio of debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2011, the Company was in compliance with all covenants under the U.S. Credit Agreement.

The U.S. Credit Agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to the Company’s other material indebtedness. Substantially all of the Company’s domestic assets are subject to security interests granted to lenders under the U.S. Credit Agreement. As of September 30, 2011, $134,000 of term loans, $1,250 of letters of credit, and $120,000 of revolver borrowings were outstanding under the U.S. Credit Agreement.

U.K. Credit Agreement

The Company’s subsidiaries in the U.K. (the “U.K. Subsidiaries”) are party to an agreement with the Royal Bank of Scotland plc, as agent for National Westminster Bank plc, which provides for a funded term loan, a revolving credit agreement and a demand overdraft line of credit (collectively, the “U.K. Credit Agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes. The U.K. Credit Agreement provides for (1) up to £92,000 in revolving loans through August 31, 2013, which bear interest between a defined LIBOR plus 1.1% and defined LIBOR plus 3.0%, and (2) a demand overdraft line of credit for up to £10,000 that bears interest at the Bank of England Base Rate plus 1.75%.

The U.K. Credit Agreement is fully and unconditionally guaranteed on a joint and several basis by the U.K. Subsidiaries, and contains a number of significant covenants that, among other things, restrict the ability of the U.K. Subsidiaries to pay dividends, dispose of assets, incur additional indebtedness, repay other indebtedness, create liens on assets, make investments or acquisitions and engage in mergers or consolidations. In addition, the U.K. Subsidiaries are required to comply with defined ratios and tests, including: a ratio of earnings before interest, taxes, amortization, and rental payments (“EBITAR”) to interest plus rental payments, a measurement of maximum capital expenditures, and a debt to EBITDA ratio. A breach of these requirements would give rise to certain remedies under the agreement, the most severe of which is the termination of the agreement and acceleration of the amounts owed. As of September 30, 2011, the U.K. Subsidiaries were in compliance with all covenants under the U.K. Credit Agreement.

The U.K. Credit Agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of the U.K. Subsidiaries. Substantially all of the U.K. Subsidiaries’ assets are subject to security interests granted to lenders under the U.K. Credit Agreement. As of September 30, 2011, outstanding loans under the U.K. Credit Agreement amounted to £46,216 ($72,032).

7.75% Senior Subordinated Notes

In December 2006, the Company issued $375,000 aggregate principal amount of 7.75% senior subordinated notes (the “7.75% Notes”) due 2016. The 7.75% Notes are unsecured senior subordinated notes and are subordinate to all existing and future senior debt, including debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The 7.75% Notes are guaranteed by substantially all of the Company’s wholly-owned domestic subsidiaries on an unsecured senior subordinated basis. Those guarantees are full and unconditional and joint and several. The Company can redeem all or some of the 7.75% Notes at its option beginning in December 2011 at specified redemption prices, or prior to December 2011 at 100% of the principal amount of the notes plus a defined “make-whole” premium. Upon certain sales of assets or specific kinds of changes of control the Company is required to make an offer to purchase the 7.75% Notes. The 7.75% Notes also contain customary negative covenants and events of default. As of September 30, 2011, the Company was in compliance with all negative covenants and there were no events of default.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Senior Subordinated Convertible Notes

Holders of the Convertible Notes had the right to require the Company to purchase their Convertible Notes on April 1, 2011. Of the Convertible Notes outstanding on April 1, 2011, $87,278 were validly tendered to the Company. As a result, $63,324 of the Convertible Notes remained outstanding as of September 30, 2011. Remaining holders of the Convertible Notes may require the Company to purchase all or a portion of their Convertible Notes for cash on each of April 1, 2016 or April 1, 2021 at a purchase price equal to 100% of the principal amount of the Convertible Notes to be purchased, plus accrued and unpaid interest, if any, to the applicable purchase date.

The remaining Convertible Notes mature on April 1, 2026, unless earlier converted, redeemed or purchased by the Company, as discussed below. The Convertible Notes are unsecured senior subordinated obligations and are subordinate to all future and existing debt under the Company’s credit agreements, mortgages and floor plan indebtedness. The Convertible Notes are guaranteed on an unsecured senior subordinated basis by substantially all of the Company’s wholly-owned domestic subsidiaries. The guarantees are full and unconditional and joint and several. The Convertible Notes also contain customary negative covenants and events of default. As of September 30, 2011, the Company was in compliance with all negative covenants and there were no events of default.

Holders of the Convertible Notes may convert them based on a conversion rate of 42.7796 shares of the Company’s common stock per $1,000 principal amount of the Convertible Notes (which is equal to a conversion price of approximately $23.38 per share), subject to adjustment, only under the following circumstances: (1) in any quarterly period, if the closing price of our common stock for twenty of the last thirty trading days in the prior quarter exceeds $28.05 (subject to adjustment), (2) for specified periods, if the trading price of the Convertible Notes falls below specific thresholds, (3) if the Convertible Notes are called for redemption, (4) if specified distributions to holders of our common stock are made or specified corporate transactions occur, (5) if a fundamental change (as defined) occurs, or (6) during the ten trading days prior to, but excluding, the maturity date.

Upon conversion of the Convertible Notes, for each $1,000 principal amount of the Convertible Notes, a holder will receive an amount in cash, equal to the lesser of (i) $1,000 or (ii) the conversion value, determined in the manner set forth in the indenture covering the Convertible Notes, of the number of shares of common stock equal to the conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at its election, cash, common stock or a combination of cash and common stock with respect to the remaining value deliverable upon conversion. The Company will pay additional cash interest commencing with six-month periods beginning on April 1, 2011, if the average trading price of a Convertible Note for certain periods in the prior six-month period equals 120% or more of the principal amount of the Convertible Notes.

The Company may redeem the Convertible Notes, in whole at any time or in part from time to time, for cash at a redemption price of 100% of the principal amount of the Convertible Notes to be redeemed, plus any accrued and unpaid interest to the applicable redemption date, plus any applicable conversion premium.

On issuance of the Convertible Notes, the Company recorded a debt discount which was amortized as additional interest expense through March 31, 2011. The annual effective interest rate on the liability component was 8.25% through March 31, 2011. Beginning April 1, 2011, the annual effective interest rate was 3.5%.

Mortgage Facilities

The Company is party to several mortgages which bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to the Company’s other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of September 30, 2011, we owed $77,914 of principal under our mortgage facilities.

8. 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. The Company is party to forward-starting interest rate swap agreements beginning January 2012 and maturing December 2014 pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt is fixed at a rate of 2.135% and $100,000 of the Company’s floating rate floor plan debt is fixed at a rate of 1.55%. The Company may terminate these agreements at any time, subject to the settlement of the then current fair value of the swap arrangements.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The Company used Level 2 inputs to estimate the fair value of the interest rate swap agreements. As of September 30, 2011, the fair value of the swaps designated as hedging instruments was estimated to be a net liability of $15,157.

During 2010 and through January 2011, the Company was party to interest rate swap agreements pursuant to which the LIBOR portion of $300,000 of the Company’s floating rate floor plan debt was fixed at 3.67%. During the nine months ended September 30, 2011, there was no hedge ineffectiveness recorded in the Company’s income statement and the impact of the swaps on the weighted average interest rate of the Company’s floor plan borrowings was insignificant. During the nine months ended September 30, 2010, the Company recognized a net gain in accumulated other comprehensive income (loss) of $3,643 related to the effective portion of the interest rate swap agreements designated as hedging instruments, and reclassified $6,482 of the existing derivative losses from accumulated other comprehensive income (loss) into floor plan interest expense. Additionally, during the nine months ended September 30, 2010, the swaps increased the weighted average interest rate on the Company’s floor plan borrowings by approximately 0.8%.

9. Commitments and Contingent Liabilities

The Company is involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of September 30, 2011, the Company is not party to any legal proceedings, including class action lawsuits, that, individually or in the aggregate, are reasonably expected to have a material adverse effect on the Company’s results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on the Company’s results of operations, financial condition or cash flows.

The Company has historically structured its operations so as to minimize ownership of real property. As a result, the Company leases or subleases substantially all of its facilities. These leases are generally for a period between five and 20 years, and are typically structured to include renewal options at the Company’s election. Pursuant to the leases for some of the Company’s larger facilities, the Company is required to comply with defined financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio. For these leases, non-compliance with the ratios may require the Company to post collateral in the form of a letter of credit. A breach of the other lease covenants gives rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease. As of September 30, 2011, the Company was in compliance with all covenants under these leases.

The Company has sold a number of dealerships to third parties and, as a condition to certain of those sales, remains liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. The Company is also party to lease agreements on properties that it no longer uses in its retail operations that it has sublet to third parties. The Company relies on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, the Company may not be able to recover amounts owed to it and the Company could be required to fulfill these obligations.

The Company has $20,066 of letters of credit outstanding as of September 30, 2011, and has posted $17,177 of surety bonds in the ordinary course of business.

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

10. Equity

Share Repurchase

During the three months ended September 30, 2011, the Company acquired 1,832 shares of our outstanding common stock for $31,850, or an average of $17.39 per share, under a program approved by the Company’s board of directors. As of September 30, 2011, our remaining authorization under the program was $106,779.

During the nine months ended September 30, 2011, the Company acquired 2,450 shares of our outstanding common stock for $44,263, or an average of $18.07 per share.

Comprehensive income (loss)

Other comprehensive income (loss) includes foreign currency translation gains and losses, as well as changes relating to other individually immaterial items, including certain defined benefit plans in the U.K. and changes in the fair value of interest rate swap agreements, each of which has been excluded from net income and reflected in equity. Total comprehensive income (loss) is summarized as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Attributable to Penske Automotive Group:
Net income		$	55,707			$	29,977			$	129,194			$	79,772
Other comprehensive income (loss):
Foreign currency translation			(20,904	)			31,922				(1,170	)			(10,909	)
Other			(4,923	)			(117	)			(9,612	)			7,098
Total attributable to Penske Automotive Group			29,880				61,782				118,412				75,961
Attributable to the non-controlling interest:
Income			338				283				907				504
Total comprehensive income		$	30,218			$	62,065			$	119,319			$	76,465

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

11. Segment Information

The Company’s operations are organized by management into operating segments by line of business and geography. The Company has determined it has two reportable segments as defined in generally accepted accounting principles for segment reporting, including: (i) Retail, consisting of our automotive retail operations and (ii) PAG Investments, consisting of our investments in businesses other than automotive retail operations. The Retail reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and the retail automotive joint ventures. The individual dealership operations included in the Retail reportable segment have been grouped into four geographic operating segments, which have been aggregated into one reportable segment as their operations (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). The Company previously presented its smart USA distribution operation as a third reportable segment. That operation was sold to DVI in 2011 and is presented in discontinued operations.

The following table summarizes revenues and income from continuing operations before certain items and income taxes, which is the measure by which management allocates resources to its segments, and which we refer to as adjusted segment income, for each of our reportable segments. Adjusted segment income excludes the item in the table below in order to enhance the comparability of segment income from period to period.

Three Months Ended September 30

						PAG
		Retail				Investments				Total
Revenues
2011		$	2,951,046			$	—			$	2,951,046
2010			2,669,773				—				2,669,773
Adjusted segment income
2011			61,925				8,475				70,400
2010			45,153				6,765				51,918

Nine Months Ended September 30

						PAG
		Retail				Investments				Total
Revenues
2011		$	8,623,710			$	—			$	8,623,710
2010			7,697,770				—				7,697,770
Adjusted segment income
2011			171,229				15,867				187,096
2010			127,077				10,362				137,439

The following table reconciles total adjusted segment income to consolidated income from continuing operations before income taxes.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Adjusted segment income		$	70,400			$	51,918			$	187,096			$	137,439
Gain on debt repurchase			—				607				—				1,634
Income from continuing operations before income taxes		$	70,400			$	52,525			$	187,096			$	139,073

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

12. Consolidating Condensed Financial Information

The following tables include condensed consolidating financial information as of September 30, 2011 and December 31, 2010 and for the three and nine month periods ended September 30, 2011 and 2010 for Penske Automotive Group, Inc. (as the issuer of the Convertible Notes and the 7.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing foreign entities). The condensed consolidating financial information includes certain allocations of balance sheet, income statement and cash flow items which are not necessarily indicative of the financial position, results of operations and cash flows of these entities on a stand-alone basis.

CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2011

										Penske								Non-
		Total								Automotive				Guarantor				Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	7,735			$	—			$	—			$	6,156			$	1,579
Accounts receivable, net			385,137				(297,782	)			297,782				186,608				198,529
Inventories			1,481,629				—				—				805,587				676,042
Other current assets			88,676				—				2,141				39,914				46,621
Assets held for sale			54,168				—				—				54,168				—
Total current assets			2,017,345				(297,782	)			299,923				1,092,433				922,771
Property and equipment, net			821,421				—				5,134				518,945				297,342
Intangible assets			1,148,247				—				—				707,451				440,796
Equity method investments			293,819				—				241,598				—				52,221
Other long-term assets			14,637				(1,341,834	)			1,349,226				5,719				1,526
Total assets		$	4,295,469			$	(1,639,616	)		$	1,895,881			$	2,324,548			$	1,714,656
Floor plan notes payable		$	902,163			$	—			$	—			$	446,364			$	455,799
Floor plan notes payable — non-trade			597,982				—				89,008				261,497				247,477
Accounts payable			226,709				—				1,761				85,387				139,561
Accrued expenses			247,185				(297,782	)			370				152,696				391,901
Current portion of long-term debt			9,642				—				—				5,161				4,481
Liabilities held for sale			34,464				—				—				34,464				—
Total current liabilities			2,018,145				(297,782	)			91,139				985,569				1,239,219
Long-term debt			841,927				(37,810	)			692,324				77,571				109,842
Deferred tax liabilities			183,708				—				—				163,025				20,683
Other long-term liabilities			139,271				—				—				92,207				47,064
Total liabilities			3,183,051				(335,592	)			783,463				1,318,372				1,416,808
Total equity			1,112,418				(1,304,024	)			1,112,418				1,006,176				297,848
Total liabilities and equity		$	4,295,469			$	(1,639,616	)		$	1,895,881			$	2,324,548			$	1,714,656

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2010

										Penske								Non-
		Total								Automotive				Guarantor				Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Cash and cash equivalents		$	17,808			$	—			$	—			$	15,437			$	2,371
Accounts receivable, net			383,379				(269,021	)			269,021				227,978				155,401
Inventories			1,449,157				—				—				874,182				574,975
Other current assets			68,355				—				1,127				32,269				34,959
Assets held for sale			117,018				—				—				117,018				—
Total current assets			2,035,717				(269,021	)			270,148				1,266,884				767,706
Property and equipment, net			719,762				—				4,957				447,044				267,761
Intangible assets			1,011,275				—				—				488,687				522,588
Equity method investments			288,406				—				234,214				—				54,192
Other long-term assets			14,672				(1,212,538	)			1,222,168				3,088				1,954
Total assets		$	4,069,832			$	(1,481,559	)		$	1,731,487			$	2,205,703			$	1,614,201
Floor plan notes payable		$	918,628			$	—			$	—			$	566,615			$	352,013
Floor plan notes payable — non-trade			491,889				—				25,000				287,568				179,321
Accounts payable			253,277				—				2,186				85,779				165,312
Accrued expenses			202,480				(269,021	)			564				95,806				375,131
Current portion of long-term debt			10,593				—				—				1,264				9,329
Liabilities held for sale			84,139				—				—				84,139				—
Total current liabilities			1,961,006				(269,021	)			27,750				1,121,171				1,081,106
Long-term debt			769,285				(77,593	)			657,884				49,689				139,305
Deferred tax liabilities			178,406				—				—				165,666				12,740
Other long-term liabilities			115,282				—				—				99,238				16,044
Total liabilities			3,023,979				(346,614	)			685,634				1,435,764				1,249,195
Total equity			1,045,853				(1,134,945	)			1,045,853				769,939				365,006
Total liabilities and equity		$	4,069,832			$	(1,481,559	)		$	1,731,487			$	2,205,703			$	1,614,201

PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

CONDENSED CONSOLIDATING STATEMENT OF INCOME
Three Months Ended September 30, 2011

										Penske								Non-
		Total								Automotive				Guarantor				Guarantor
		Company				Eliminations				Group				Subsidiaries				Subsidiaries
		(In thousands)
Revenues		$	2,951,046			$	—			$	—			$	1,715,582			$	1,235,464
Cost of sales			2,483,939				—				—				1,427,489				1,056,450
Gross profit			467,107				—				—				288,093				179,014
Selling, general and administrative expenses			375,432				—				4,381				226,720				144,331
Depreciation			12,590				—				471				6,687				5,432
Operating income (loss)			79,085				—				(4,852	)			54,686				29,251
Floor plan interest expense			(7,020	)			—				(449	)			(3,258	)			(3,313	)
Other interest expense			(11,288	)			—				(6,347	)			(988	)			(3,953	)
Debt discount amortization			—				—				—				—				—
Equity in earnings of affiliates			9,623				—				7,359				825				1,439
Equity in earnings of subsidiaries			—				(74,351	)			74,351				—				—
Income (loss) from continuing operations before income taxes			70,400				(74,351	)			70,062				51,265				23,424
Income taxes			(13,355	)			14,173				(13,355	)			(7,439	)			(6,734	)
Income (loss) from continuing operations			57,045				(60,178	)			56,707				43,826				16,690
(Loss) income from discontinued operations, net of tax			(1,000	)			1,000				(1,000	)			(1,000	)			—
Net income (loss)			56,045				(59,178	)			55,707				42,826				16,690
Less: Income attributable to non- controlling interests			338				—				—				—				338
Net income (loss) attributable to Penske Automotive Group common stockholders		$	55,707			$	(59,178	)		$	55,707			$	42,826			$	16,352