Item 1. Business
We are a diversified international transportation services company and one of the world's premier automotive and commercial truck retailers. We operate dealerships principally in the United States, the United Kingdom, Canada, Germany, Italy, and Japan, and we are one of the largest retailers of commercial trucks in North America for Freightliner. We also distribute and retail commercial vehicles, diesel and gas engines, power systems, and related parts and services principally in Australia and New Zealand. Additionally, we own 28.9% of Penske Transportation Solutions, a business that manages a fleet of over 360,000 vehicles providing innovative transportation, supply chain, and technology solutions to North American fleets. We employ nearly 25,000 people worldwide.
In 2021, our business generated $25.6 billion in total revenue, which is comprised of approximately $22.5 billion from retail automotive dealerships, $2.5 billion from retail commercial truck dealerships, and $575.7 million from commercial vehicle distribution operations. We generated $4.4 billion in gross profit, which is comprised of $3.9 billion from retail automotive dealerships, $416.9 million from retail commercial truck dealerships, and $153.7 million from commercial vehicle distribution operations.
Retail Automotive. We are one of the largest global automotive retailers as measured by the $22.5 billion in total retail automotive dealership revenue we generated in 2021. As of December 31, 2021, we operated 320 retail automotive franchised dealerships, of which 146 are located in the U.S. and 174 are located outside of the U.S. The franchised dealerships outside the U.S. are located primarily in the U.K. As described below, we also operate 23 used vehicle dealerships in the U.S. and U.K. under the CarShop brand. Through these franchised and used vehicle dealerships, we retailed and wholesaled more than 553,000 vehicles in 2021. We are diversified geographically with 58% of our total retail automotive dealership revenues in 2021 generated in the U.S. and Puerto Rico and 42% generated outside the U.S. We offer over 35 vehicle brands with 71% of our retail automotive franchised dealership revenue in 2021 generated from premium brands, such as Audi, BMW, Land Rover, Mercedes-Benz, and Porsche. Each of our franchised dealerships offers a wide selection of new and used vehicles for sale. In addition to selling new and used vehicles, we generate higher-margin revenue at each of our dealerships through maintenance and repair services, the sale and placement of third-party finance and insurance products, third-party extended service and maintenance contracts, and replacement and aftermarket automotive products. We operate our franchised dealerships under franchise agreements with a number of automotive manufacturers and distributors that are subject to certain rights and restrictions typical of the industry.
As of December 31, 2021, we operated 23 used vehicle dealerships in the U.S. and the U.K. which retail and wholesale used vehicles under a one price, “no-haggle” methodology under the CarShop brand. Our operations consist of eight retail dealerships in the U.S. and 15 retail dealerships and a vehicle preparation center in the U.K. During 2021, we opened four CarShop dealerships in the U.K. and two CarShop dealerships in the U.S., representing a 35% increase in locations compared to 2020.
During 2021, we acquired three retail automotive franchises in the U.S., were awarded one retail automotive franchise in the U.S. and one in the U.K., and disposed of one retail automotive franchise in the U.K. In October 2021, we also purchased the remaining 51% interest in the Nicole Group, our former retail automotive joint venture in the greater Tokyo area of Japan representing BMW, MINI, Rolls-Royce, Ferrari, and ALPINA, which resulted in ten retail automotive dealerships being consolidated in our financial statements beginning in the fourth quarter of 2021. Retail automotive dealerships represented 88.1% of our total revenues and 87.2% of our total gross profit in 2021.
We believe our diversified retail automotive income streams help to mitigate the historical cyclicality found in some elements of the automotive sector. Revenues from higher margin service and parts sales include warranty work, customer paid work, rapid repair, collision repair services, and wholesale parts sales. Service and parts sales are typically less cyclical than retail vehicle sales and generate the largest part of our retail automotive gross profit.
The following graphics show the percentage of our total retail automotive dealership revenues by product area and their respective contribution to our retail automotive gross profit:
Retail Commercial Truck Dealership. We operate Premier Truck Group (“PTG”), a heavy- and medium-duty truck dealership group offering primarily Freightliner and Western Star trucks (both Daimler brands) with 31 locations in nine U.S. states and six locations in the Canadian province of Ontario which sell new and used trucks, parts and service, and collision repair services. In 2021, we acquired Kansas City Freightliner (“KCFL”), a retailer of heavy- and medium-duty commercial trucks in Kansas and Missouri. KCFL added four full-service dealerships, four parts and service centers, and two collision centers to PTG’s operations. We also acquired McCoy Freightliner, a retailer of heavy- and medium-duty commercial trucks in Oregon, which added two full-service dealerships and a remarketing center to PTG's operations. This business represented 9.6% of our total revenues and 9.4% of our total gross profit in 2021.
Our retail commercial truck business also benefits from diversified income streams similar to those of the retail automotive sector; however, there are several key differences in regard to truck retail as opposed to automotive retail. As exhibited in the following table, a greater part of our gross profit is derived from the sale of service and parts in the retail truck business given the large volume of parts business, in many cases, to fleet customers, as well as historically lower selling, general, and administrative expense as a percentage of gross profit as compared to retail automotive due to less sales compensation and advertising expenses. The following graphics show the percentage of our total retail commercial truck dealership revenues by product area and their respective contribution to our retail commercial truck gross profit:
Penske Australia. Penske Australia is the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler Truck brand), MAN heavy- and medium-duty trucks and buses (a VW Group brand), and Dennis Eagle refuse
collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. In most of these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing 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 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 2.3% of our total revenues and 3.4% of our total gross profit in 2021.
Penske Transportation Solutions. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). We account for our investment in PTL under the equity method, and we therefore record our share of PTL’s earnings on our statements of income under the caption “Equity in earnings of affiliates,” which also includes the results of our other equity method investments. Penske Transportation Solutions (“PTS”) is the universal brand name for PTL’s various business lines through which it is capable of meeting customers’ needs across the supply chain with a broad product offering that includes full-service truck leasing, truck rental, and contract maintenance along with logistic services, such as dedicated contract carriage, distribution center management, transportation management, lead logistics provider services, and dry van truckload carrier services. We recorded $365.8 million in equity earnings from this investment in 2021.
Retail Automotive. In 2021, U.S. industry new light vehicle sales increased 3.3%, as compared to 2020, to 15.1 million units. We believe the year over year increase in overall sales in the U.S. is primarily attributable to improved consumer confidence and a stronger economy as compared to the same time last year at the onset of the COVID-19 pandemic when shelter-in-place rules limited operations in many states, offset by a lower supply of new vehicles available for sale due to disruptions in the supply chain as discussed below. These factors also contributed to higher vehicle gross profit on both new and used vehicles sold, which, coupled with cost cutting measures enacted in response to the COVID-19 pandemic, resulted in improved profitability and earnings. According to the National Automobile Dealers Association, sales for the U.S. light vehicle market are expected to grow to a range of 15.2 to 15.5 million units in 2022 compared to a 15.1 million market in 2021.
Many of our principal vehicle manufacturers have announced production disruptions caused by a shortage of microchips or other components. The shortages are reported to be due to the overall demand for microchips in the global economy and production disruptions caused by staffing and other COVID-19 related issues. IHS Markit has predicted that automotive production globally was reduced by approximately 11.3 million units during 2021 due to the shortage and that production levels will continue to be negatively impacted into 2022. Our new vehicle days’ supply is 17 as of December 31, 2021, compared to 50 as of December 31, 2020. While we expect to continue to have normal levels of used vehicles for sale (our used vehicle days’ supply is 60 as of December 31, 2021, compared to 48 as of December 31, 2020), prolonged shortages could result in lower new vehicle sales volumes which could impact the availability and affordability of used vehicles and adversely affect us. The lower supply of new vehicles contributed to higher vehicle gross profit on both new and used vehicles sold, which contributed to our higher overall profitability. We expect lower inventories of new vehicles and parts disruptions to continue into 2022 until the supply of certain components used to manufacture vehicles improves. When the supply of vehicles improves, we may experience reduced new and used vehicle gross profit together with higher sales volumes.
In 2021, U.K. new vehicle registrations increased 1.0%, as compared to 2020, to 1.6 million registrations, which we believe was the result of the same reasons as noted above. Premium/luxury unit sales, which account for over 92% of our U.K. new unit sales, decreased 2.4% during 2021, as compared to a 1.0% increase for the overall market. In response to the COVID-19 pandemic during the first quarter of 2021, the U.K. reinstated shelter-in-place orders which required our dealership showrooms to remain closed. These shelter-in-place orders largely expired on April 12, 2021, and most of the remaining restrictions expired on July 19, 2021.
We believe U.K. sales were also impacted by the uncertainty of residual values, potentially higher taxes on diesel-powered vehicles, and consumer uncertainty about low emission zones as the U.K. and Western European countries consider the ramifications of diesel engines on the environment, while also providing government incentives on certain electric vehicles. Representatives of the U.K. government have proposed a ban on the sale of gasoline engines in new cars and new vans that would take effect as early as 2030 and a ban on the sale of gasoline hybrid engines in new cars and new vans as early as 2035. Sales of diesel-powered vehicles decreased 48.1% and non-diesel vehicles increased 10.4% during 2021, as compared to the same period last year.
Retail Commercial Truck Dealership. In 2021, North American sales of Class 6-8 medium and heavy-duty trucks, the principal vehicles for our PTG business, increased 11.8% from last year to 400,381 units. The Class 6-7 medium-duty truck market increased 3.9% from last year to 129,648 units, and Class 8 heavy-duty trucks, the largest North American market, increased 16.1% from last year to 270,733 units. The Class 8 heavy-duty truck market in North America is expected to increase approximately 12.0% in 2022 to approximately 298,000 units according to data published by ACT Research. The forecasted increase is driven by expected strong freight demand, an improving economy, and replacement demand. The lower supply of new commercial trucks contributed to higher truck gross profit on both new and used commercial trucks sold. We expect lower inventories of new commercial trucks and parts disruptions to continue into 2022 until the supply of certain components used to manufacture commercial trucks improves. When the supply of commercial trucks improves, we may experience reduced new and used commercial truck gross profit per unit together with higher sales volumes.
Commercial Vehicle Distribution. Our Penske Australia distribution business operates principally in the Australian and New Zealand heavy and medium-duty truck markets. In 2021, the Australian heavy-duty truck market reported sales of 12,999 units, representing an increase of 22.4% from last year, while the New Zealand market reported sales of 3,118 units, representing an increase of 17.0% from last year. We expect the commercial vehicle and power systems market to remain resilient in 2022 and continuing benefits from sales of replacement or upgraded engines.
Penske Transportation Solutions. A majority of the PTS business is generated by multi-year contracts for full-service leasing, contract maintenance, and logistics services. As retail sales for Class 6-8 medium- and heavy-duty trucks are forecasted to increase in 2022, we expect continued resilient performance in 2022 as PTS has experienced increased levels of utilization and profitability as business conditions remain strong. We expect continued demand from businesses for rental trucks, as well as returning demand for consumer rental trucks, which will drive strong operating results.
As discussed in Item 1A. Risk Factors, there are a number of factors that could cause actual results to differ materially from our expectations, including those associated with the COVID-19 pandemic. For a detailed discussion of our financial and operating results, see Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We aim to deliver excellence to our customers, value to our stakeholders, and opportunity to our team members to become the most profitable and growth-oriented transportation retail and services company everywhere we operate. This mission is supported by a set of values embedded in our philosophy to exceed, excel and encourage.
•Exceed: Provide a superior customer experience that exceeds expectations at every touchpoint, and establishes trust and loyalty through honesty, transparency, and accountability
•Excel: Deliver long-term value for our stakeholders through continuous improvement, organic growth, strategic acquisitions and increasing profitability
•Encourage: Provide opportunities for team members to succeed in our organization by cultivating talent, rewarding achievement, and maintaining the highest standards of respect for each other
We employ the following set of strategies to achieve these objectives:
Growing our Business. During 2021, in our retail automotive business, we acquired or were granted open points (new franchises awarded from the automotive manufacturer) representing four dealerships, three located in the U.S. representing Porsche, Mercedes-Benz, and BMW brands, and one located in the U.K. representing the Ferrari brand. In addition, we acquired the remaining 51% ownership interest of our Japan-based joint venture which represented ten retail automotive franchises representing the BMW, MINI, Rolls Royce, Ferrari and Alpina brands. In our retail truck business, we acquired Kansas City Freightliner in Kansas and Missouri, adding four full-service dealerships, four parts and service centers, and two collision centers to PTG’s operations, as well as McCoy Freightliner in Oregon, representing two full service dealerships and a remarketing center.
During 2021, we also opened four CarShop dealerships in the U.K. and two CarShop dealerships in the U.S., representing a 35% increase in locations compared to December 31, 2020. In total, these acquisitions and open points represent approximately $1.3 billion in annualized revenue, and we disposed of one retail automotive franchise in the U.K.,
which represented approximately $48.0 million in annualized revenue. In 2022, we expect to continue to devote our capital resources to buy and build premium retail automotive and truck dealerships both in our franchised and used vehicle businesses.
Return to Shareholders. We increased our quarterly stock dividend each quarter in 2021. Our latest declared dividend is $0.47 per share payable on March 1, 2022, which represents a dividend yield of 1.8% using our January 31, 2022, closing stock price. We also repurchased 3,261,580 shares of our common stock in 2021 for $293.5 million, which, together with quarterly dividends, represents a return to stockholders of approximately $436.0 million. In 2022, we expect to continue our shareholder repurchases, subject to valuation and the other factors noted below. In December 2021, our Board of Directors authorized the repurchase of $250 million worth of our securities. We had $230.4 million and $194.3 million in repurchase authorization remaining under the repurchase program as of December 31, 2021 and February 8, 2022, respectively.
Long-Term Debt. During 2021, we refinanced our senior subordinated notes with $500 million of 3.75% senior subordinated notes due in 2029, generating interest savings. We also reduced our long-term debt by approximately $216 million in 2021.
We believe that our Human Capital is our greatest asset and is an integral component of our growth and value creation strategy. We understand that exceptional customer service can only be consistently delivered by attracting, motivating, training, and retaining the very best team members. We are committed to building a diverse and skilled workforce while providing a work environment that promotes equity and is free from any form of discrimination. With this in mind, we put our employees at the heart of everything that we do by developing their talent and enabling them to build long-term careers.
In recognition of our people-first philosophy, in 2021, 35 of our dealerships were named to the "Automotive News Best Dealerships To Work For" which ranks the top 100 dealerships in the United States. Seven of our dealerships were ranked in the top ten nationally, including the top three places, for their efforts to promote Diversity, Equity & Inclusion. Additionally, in February 2022, we were named one of the “World’s Most Admired Companies” by Fortune Magazine. In 2021, our CarShop U.K. operations were named as one of Glassdoor's "Top 50 Best Places to Work" in the U.K.
Focus on Customer Satisfaction
Maintaining high levels of superior customer service is key to our business model. We strive to deliver a positive, valuable experience at every touchpoint to ensure the highest level of customer satisfaction. By offering outstanding brands in premium facilities, “one-stop” shopping convenience in our aggregated facilities, and a well-trained and knowledgeable staff, we aim to forge lasting relationships with our customers throughout their entire ownership journey.
Reputation management is one of our most powerful marketing tools. We proactively monitor online reputation management sites, including Google, Facebook, Yelp, among others, to enhance our online presence, build loyalty, gain a better understanding of our customers’ needs, attract top talent, and generate business. Our reputation management strategy of actively monitoring and responding quickly to customer reviews is crucial for maintaining a positive online reputation.
Our business benefits from a diversified revenue and gross profit mix, including multiple revenue and gross profit streams in our traditional vehicle and commercial truck dealerships (new vehicles, used vehicles, finance and insurance, and service and parts operations), our commercial vehicle distribution and power systems operations, and returns relating to our joint venture investments, which we believe helps to mitigate the cyclicality that has historically impacted some elements of the automotive sector. Within our franchised automotive dealership operations, we represent more than 35 brands across the U.S. and internationally. Our CarShop used vehicle dealerships in the U.S. and U.K. complement and provide more diversification to our retail automotive operations and provide scalable opportunities across our market areas. Furthermore, PTG provides diversification both by business line and by its business being represented across the U.S. and the Canadian province of Ontario. Finally, our ownership interest in PTS provides us additional diversification as well as equity earnings, cash dividends, and significant tax savings.
The following table shows our consolidated revenue and gross profit by country as a percentage of our total revenue and total gross profit:
|Country||% of Total 2021 Revenue||% of Total 2021 Gross Profit|
|United States||60 ||%||64 ||%|
|United Kingdom||31 ||%||27 ||%|
|Germany/Italy||5 ||%||4 ||%|
|Japan||1 ||%||1 ||%|
|Canada||1 ||%||1 ||%|
|Australia/New Zealand||2 ||%||3 ||%|
We are also diversified within our automotive retail operations by brand. We sell over 35 brands in our markets and our automotive dealership revenue mix consists of 71% related to premium brands, 21% related to volume non-U.S. brands, 1% related to brands of U.S. based manufacturers, and 7% related to our CarShop used vehicle dealerships as further detailed in the chart below:
Digital Strategy/Omni Channel
We are focused on executing a comprehensive multi-channel digital strategy with emphasis on customization, personalization, and creating a connection with our customers. We endeavor to build and optimize our presence across all digital platforms and deliver a seamless, convenient, and transparent experience that gives customers the ability to purchase, sell, or schedule service for their vehicles on their terms.
In 2021, we partnered with Cox Automotive to develop a transformational, fully automated technology platform to enable the end-to-end online retail sale of used vehicles. The automated online buying platform, which is owned exclusively by Cox Automotive, allows consumers to select from high-quality, preowned vehicles through our U.S. CarShop used vehicle dealerships. The digital platform enables consumers to transact 100% online. Cox Automotive's patent-pending artificial intelligence retail technology, Esntial Commerce™, powers CarShop's U.S. digital platform to provide consumers with an automated, 100% online vehicle purchase. Features include personalized monthly payments across all inventories, trade-in capabilities, financing, digital contracting, and digital signatures. Esntial Commerce™ offers payment personalization based on the consumer's risk profile, selected vehicle, and preferred deal structure using an AI/machine learning algorithm.
For customers who wish for a hybrid online/in-person transaction, we offer "Preferred Purchase" as our digital retailing solution in the U.S. This tool provides a digital buying process including trade-value, pricing, leasing, and financing options with customized payments. Customers can add insurance and protection products to their purchase, evaluate manufacturer and lender incentive programs, and pre-qualify for credit all online or in combination with an in-store experience. Preferred Purchase can serve a customer wherever they are at in their buying journey, whether they want to evaluate payment options or complete their purchase online through a secure link where they can sign documents digitally and arrange for curbside or home delivery.
We also promote our U.S. and U.K. automotive retail new and pre-owned vehicle inventory online through PenskeCars.com, Sytner.co.uk, Agnewcars.com, CarShop.com, and CarShop.co.uk. These websites are designed to streamline the car-buying process and allow consumers to view and compare nearly 40,000 new, certified, and pre-owned vehicles. These sites, along with our dealership websites, provide consumers a simple way to view extensive vehicle information, including photos, prices, promotions, videos, and third-party vehicle history reports for pre-owned vehicles, schedule service appointments online 24/7, and use our digital tools to customize their vehicle purchase.
Other initiatives include the “Sell Us Your Car” program where customers can sell their vehicles to us without a requirement to purchase a vehicle and our internally developed “Click & Collect” digital retailing program for our U.K. dealerships.
We recognize we are accountable to key stakeholders and the communities in which we do business. We are committed to responsible business practices, continuous improvement of our operations and strengthening relationships with our stakeholders. We focus our Environmental, Social, and Governance (ESG) efforts where we can have the most positive impact on our business and society, including issues related to:
This important work is driven by our core values and ensures that we enrich our communities, minimize our environmental impact, protect the health and safety of our team members and customers, and provide a diverse and inclusive workplace – all while creating value for our stakeholders. The most important investments we make are in our people. Everything we aspire to be as a company builds on our ability to come together as one team. We take pride in our culture of trust and collaboration, and we provide our team members a supportive work environment that empowers them to do meaningful work while fulfilling their passions and balancing work and life goals.
We are pleased to have published our inaugural 2021 ESG Report which highlights our ESG strategies, activities, progress, metrics, and performance for 2020, which is available on our website under the tab "ESG". The report aligns with the Sustainability Accounting Standards Board (SASB) Multiline & Specialty Distributors sector standard. We are committed to regular, transparent communication of our progress and look forward to bringing our stakeholders along with us on this journey.
We encourage you to review our 2021 ESG Report, which includes additional detail in regard to certain of our key efforts highlighted below.
Community Participation. We believe community participation and charitable giving enrich the neighborhoods where we work, live and play. We are proud of these efforts and we encourage participation by all dealerships and employees. Several examples of our commitment to giving back include:
•Over the last six years, our dealerships have supported The Paralyzed Veterans of America to help serve the needs of veterans with a spinal cord injury, donating more than $7 million through contributions from customers, employees, vendors, and matching contributions of our Company.
•Beginning in 2020, we partnered with a technical education institute to establish a diesel-commercial vehicle technician career skills program for service members on a United States military base. This program will provide hands-on, industry-aligned technician training to service members designed to increase career opportunities for veterans transitioning from military service to civilian life. Graduates of this program will earn a Systems Certified credential and will be offered employment with our commercial truck dealership group.
Environmental Sustainability — Electric Vehicles. Our dealerships sell and service vehicles that are engineered and manufactured by over 35 of the world’s automotive OEMs, including pure electric vehicles (“EVs”). EVs can reduce the emissions that contribute to climate change and smog, improve public health and reduce ecological damage.
We are committed to encouraging the sale and use of EVs and, as part of that commitment, are actively placing charging stations across our network to facilitate a reliable infrastructure for their use. As of December 31, 2021, our network of EV charging stations across the U.S. and internationally totaled approximately 882, including a combination of Level 1 (standard), Level 2 (240V), and Level 3 capabilities. We expect to install additional charging stations to support EVs as our manufacturer partners introduce more of these products to the marketplace. We estimate that approximately 22.6% of our new vehicles sold in 2021 were either electric or hybrid electric vehicles.
Reducing our Energy Use. Reducing our energy use and greenhouse gas (GHG) emissions is important to our customers, team members and company leadership. We recognize our responsibility to advocate for a cleaner environment through self-awareness, leveraging our global partnerships, promoting cleaner driving vehicles through our dealerships and reducing pollution and waste. At our facilities, we have deployed several strategies for reducing our energy use, such as installing LED lighting, occupancy sensors, energy-efficient glass, and high-efficiency heating, ventilation and air conditioning (HVAC) systems. Moreover, we have completed LED lighting upgrades at approximately 60 percent of our U.S. dealerships and collision centers. In the U.K., our new buildings must comply with more stringent construction regulations. Since 2013, every one of our new building projects in the U.K. has received a grade of B or above for their energy plans. In 2020, we avoided the equivalent of 13,755 metric tons of greenhouse gasses through Safety Kleen’s Environmental Programs by recycling used oil and other liquids. In partnership with Shell Energy, we’re piloting an energy savings program at one of our largest campuses to enhance energy efficiency while reducing operating costs. The program provides our campus with the ability to monitor and reduce our energy usage through a unique platform including metered usage and sensors integrated within the HVAC units. In the pilot phase, we have seen an 18% reduction in energy usage.
Reducing Waste. We are committed to reducing the environmental impact of waste produced at our facilities. We deploy several strategies to ensure the efficient use of resources and responsible disposal of waste, including hazardous waste. In the U.K., all of our hazardous waste is collected and processed by a fully licensed ISO-accredited waste management company. Approximately 96 percent of our hazardous waste, including engine oil, oil filters, antifreeze and lead acid batteries, are recycled. The other 4 percent is properly disposed of by the waste management company. In the U.S., we use a third party to manage, collect and process recycling for many of the materials that go through our service departments. These products include mercury bulbs, used oil, oil filters, brake and parts waste, used antifreeze, parts solvent and drain waste.
Other strategies to reduce pollution and waste include:
•All U.S. dealerships participate in a closed-loop recycling program, which helped us avoid the equivalent of 13,755 metric tons of GHG emissions in 2020.
•We eliminate paper at dealerships and in internal communications by using digital tools. We estimate that these changes yield annual reductions of millions of pages of paper.
•We utilize water reclamation systems at many of our dealership locations that typically recycle approximately 85 percent of the water used.
•Our collision and repair centers use water-based paints and solvents that are better for the environment and healthier for our team members and customers than traditional paints, which contain toxins that linger in the atmosphere, impacting people and air quality.
•Our Hardware E-Cycle Policy requires that electronic equipment be disposed of through a specific certified electronics recycler which maintains a zero landfill, zero export policy of unprocessed equipment to non-OECD Countries.
•In 2020, we recycled 98 percent of the 70,000+ worn-out tires from our U.S. retail automotive operations.
Human Capital — Equity, Diversity and Inclusion. We believe that our employees are our greatest asset. We understand that exceptional customer service can only be consistently delivered by attracting, motivating, training, and retaining the very best team members. With this in mind, we put our employees at the heart of everything that we do by developing their talent and enabling them to build long-term careers.
We are committed to building a diverse and skilled workforce while providing a work environment that promotes equity and is free from any form of prohibited discrimination. Our focus on inclusion and diversity at our U.S. automotive dealerships has resulted in over 67% of our workforce being diverse either by race, ethnicity or gender, with our gender diversity higher than the National Automobile Dealer Association (“NADA”) average. Additionally, our U.S. automotive dealerships have a management diversity rate of approximately 49%.
Retail Automotive Dealership Operations
Retail Automotive Franchises. We routinely acquire and dispose of retail automotive franchises. The following table exhibits our retail automotive franchises by location and manufacturer as of December 31, 2021:
Retail Automotive CarShop Used Vehicle Dealerships. The following table exhibits the CarShop used vehicle dealerships we currently operate by geographic location:
|Location||Number of Dealerships|
|New Jersey||2 |
|Total U.S.||8 |
New Vehicle Retail Sales. In 2021, we retailed 195,384 new vehicles which generated 43.7% of our retail automotive dealership revenue and 27.0% of our retail automotive dealership gross profit. New vehicles are typically acquired by
dealerships directly from the manufacturer. We strive to maintain outstanding relationships with the automotive manufacturers based in part on our long-term presence in the retail automotive market, our commitment to providing premium facilities, our commitment to drive customer satisfaction, the reputation of our management team, and the consistent sales volume at our dealerships. Our dealerships finance the purchase of most new vehicles from the manufacturers through floor plan financing provided primarily by various manufacturers’ captive finance companies.
Used Vehicle Retail Sales. In 2021, we retailed 264,520 used vehicles, including 63,403 from our CarShop used vehicle dealerships, which generated 38.0% of our retail automotive dealership revenue and 17.2% of our retail automotive dealership gross profit. We acquire used vehicles from various sources, including trade-ins from consumers in connection with their purchase of a new or used vehicle from us, purchases of used vehicles directly from consumers, lease expirations, public auctions, and auctions open only to authorized new vehicle dealers. To improve customer confidence in our used vehicle inventory, we provide vehicle history reports for all used vehicles, and virtually all of our franchised new vehicle dealerships participate in manufacturer certification processes for used vehicles. If certification is obtained, the used vehicle owner is typically provided benefits and warranties similar to those offered to new vehicle owners by the applicable manufacturer.
Vehicle Finance and Insurance Sales. Finance and insurance sales represented 3.5% of our retail automotive dealership revenue and 20.2% of our retail automotive dealership gross profit in 2021. At our customers’ option, our dealerships can arrange third-party financing or leasing in connection with vehicle purchases. We typically receive a portion of the cost of the financing or leasing paid by the customer for each transaction as a fee. While these services are generally non-recourse to us, we are subject to chargebacks in certain circumstances, such as default under a financing arrangement or prepayment. These chargebacks vary by finance product but typically are limited to the fee we receive.
We also offer our customers various vehicle warranty and extended protection products, including extended service contracts, maintenance programs, guaranteed auto protection (known as “GAP,” this protection covers the shortfall between a customer’s loan balance and insurance payoff in the event of a total loss), lease “wear and tear” insurance, and theft protection products. The extended service contracts and other products that our dealerships currently offer to customers are underwritten by independent third parties, including the vehicle manufacturers’ captive finance companies. Similar to finance transactions, we are subject to chargebacks relating to fees earned in connection with the sale of certain extended protection products. We also offer for sale other aftermarket products, including security systems and protective coatings.
We offer finance and insurance products using a “menu” process, which is designed to ensure that we offer our customers a complete range of finance, insurance, protection, and other aftermarket products in a transparent manner. We utilize docuPAD® at our U.S. dealerships, an interactive tool designed to improve document processing and menu presentation of finance and insurance options.
Service and Parts Sales. Service and parts sales represented 9.6% of our retail automotive dealership revenue and 33.8% of our retail automotive dealership gross profit in 2021. We generate service and parts sales in connection with warranty work performed at each of our franchised dealerships and non-warranty work. We believe our service and parts revenues benefit from the increasingly complex technology used in vehicles that makes it difficult for independent repair facilities or vehicle owners to maintain and repair today’s automobiles.
A goal of each of our dealerships is to make each vehicle purchaser a customer of our service and parts department. Our dealerships keep detailed records of our customers’ maintenance and service histories, and many dealerships send reminders to customers when vehicles are due for periodic maintenance or service. Many of our dealerships have extended evening and weekend service hours for the convenience of our customers. We also offer rapid repair services, such as paintless dent repair, headlight reconditioning, wheel repairs, tire sales, and windshield replacement at most of our facilities in order to offer our customers the convenience of one-stop shopping for all of their automotive requirements. We also operate 34 automotive collision repair centers, each of which is operated as an integral part of our dealership operations.
Fleet and Wholesale Sales. Fleet and wholesale sales represented 5.2% of our retail automotive dealership revenue and 1.8% of our retail automotive dealership gross profit in 2021. Fleet activities represent the sale of new units to customers that are deemed to not be retail customers, such as cities, municipalities, or rental car companies and are generally sold at contracted amounts. Wholesale activities relate to the sale of used vehicles generally to other dealers and occur at auction. Vehicles sold through this channel generally include units acquired by trade-in that do not meet certain standards or aged units. In the U.K., we offer used vehicles to wholesalers and other dealers via online auction.
Retail Commercial Truck Dealership Operations
Premier Truck Group (“PTG”) is a heavy- and medium-duty truck dealership group offering primarily Freightliner and Western Star trucks (both Daimler brands) with 37 locations in nine U.S. states and in the Canadian province of Ontario. PTG dealerships provide a similar suite of services as our automotive dealerships, offering new trucks and a large selection of used trucks for sale, a full range of parts, maintenance and repair services, collision centers, and finance and insurance options by facilitating truck and trailer financing and leasing, extended maintenance plans, physical damage insurance, GAP insurance, roadside relief, and other programs.
The maintenance and repair of commercial trucks is an essential service and a key area of differentiation for our business. We offer “Elite Support” certified locations to help maximize vehicle uptime. Elite Support certified locations provide an express assessment whereby we communicate a primary diagnosis, check parts availability, and provide an estimate of cost and repair time within a few hours of service write-up. As part of this service, many of our locations offer a comfortable environment for customers with amenities such as customer lounges, lockers, showers, and laundry facilities. We also offer roadside remote service for certain repairs and provide 24/7 technician support for breakdown/emergency service.
The collision centers at PTG are full-service, heavy-duty paint and collision repair facilities with certified professionals that can handle everything from light cosmetic issues to complete vehicle reconstruction, including mechanical engine repairs. PTG also carries an extensive inventory of parts for the new and used trucks they sell and service, including Thomas Built Buses, and other makes of medium and heavy-duty trucks. The service and parts business of our PTG commercial truck dealerships represents approximately 62% of our retail commercial truck dealership gross profit.
Commercial Vehicle Distribution Operations
Penske Australia. Penske Australia is the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler Truck brand), MAN heavy- and medium-duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. In most of these same markets, we are also a leading distributor of diesel and gas engines and power systems, principally representing 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 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.
We distribute commercial vehicles and parts to a network which comprises on average of more than 70 dealership locations. Of these dealership locations, nine are company-owned retail commercial vehicle and service and parts dealerships in Australia and three are company-owned retail commercial vehicle dealerships in New Zealand. Our dealership in Brisbane, Australia is the largest retailer of Western Star Trucks in Australia by volume. We finance our purchases of these vehicles under floor plan agreements with a local Daimler affiliate and a local Volkswagen affiliate with terms similar to our other floor plan agreements.
Our local headquarters is located in Brisbane, Australia, which is the country’s third largest city. Our headquarters includes administrative facilities as well as a parts distribution center and a production center.
Western Star trucks are manufactured by Daimler Trucks North America in Portland, Oregon. These technologically advanced, custom-built vehicles are ordered by customers to meet their particular needs for line haul, long distance road train, mining, logging, and other heavy-duty applications. We are also the exclusive importer of MAN trucks and buses. MAN Truck and Bus, a VW Group company, is a leading producer of medium and heavy-duty trucks as well as city and coach buses. These cab-forward, fuel efficient vehicles are principally produced in several sites in Germany and are ordered by customers for line haul, local distribution, mining, and other off-road applications. Dennis Eagle refuse collection vehicles are manufactured by Ros Roca in Warwick, England. These brands represented 6.0% of heavy-duty truck units sold in Australia and 2.6% in New Zealand during 2021.
We also distribute diesel gas engines and power systems to 112 dealer locations that are strategically located throughout Australia, New Zealand, and the Pacific. Most of the dealers (102) represent the Detroit Diesel brand, with the majority aligned to Western Star and/or Freightliner truck manufacturers. The remaining dealers represent the MTU (one) and Allison Transmission (nine) brands. The “off-highway” business principally includes the sale of power systems directly to customers in the commercial, defense, mining, maritime, and power generation sectors from 15 branch facilities
we operate across Australia and New Zealand. We also utilize mobile remote field service units to travel directly to customer premises.
Penske Transportation Solutions
We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P (“PTL”). 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. PTS has a highly diversified customer base ranging from multi-national corporations across industries, such as food and beverage, transportation, manufacturing, automotive, retail, and healthcare, with whom they have long-term contracts to individual consumers who rent a single truck on a daily basis.
PTS operates one of the leading full-service truck leasing, truck rental, and contract maintenance businesses in North America and an international logistics business in North America, South America, Europe, and Asia. PTS also operates its full-service truck leasing and truck rental business in Australia through a joint venture with us.
Full-service truck leasing, truck rental, and contract maintenance. Full-service truck leasing, truck rental, and contract maintenance of commercial trucks, tractors, and trailers constitutes PTS’ largest business. PTS manages a fleet of over 360,000 trucks, tractors, and trailers, consisting of over 244,000 vehicles owned by PTS and leased to customers under full-service lease or rental agreements and over 116,000 customer-owned and -operated vehicles for which they provided contract maintenance services. Terms under its full-service leases generally range from four to seven years for tractors and trucks and six to ten years for trailers. Its commercial and consumer rental fleet as of December 31, 2021, consisted of approximately 97,900 vehicles for use by its full-service truck leasing, small business, and consumer customers for periods generally ranging from less than a day to 12 months. Most of its leased vehicles are configured according to customer specifications, including custom painting and lettering, while its rental trucks bear Penske branding.
Commercial customers often outsource to PTS to reduce the complexity and cost of vehicle ownership. Under a full-service lease, PTS provides and fully maintains the vehicle, which is generally specifically configured for the customer. The services provided under full-service lease and contract maintenance agreements generally include preventive maintenance, advanced diagnostics, emergency road service, fleet services, safety programs, and fuel services through its network of 802 company-operated facilities. In addition, PTS’ commercial rental operations offer short-term availability of tractors, trucks, and trailers typically to accommodate seasonal, emergency, and other temporary needs. A significant portion of these rentals are to existing full-service leasing and contract maintenance customers who are seeking flexibility in their fleet management. PTS’ commercial rental business generated 21% of its revenue for 2021 and its full-service lease and contract maintenance business generated 44% of its revenue in 2021.
For consumer customers, PTS provides short-term rental of light- and medium-duty vehicles on a one-way and local basis, typically to transport household goods. Customers typically include local small businesses and individuals seeking a do-it-yourself solution to their moving needs. PTS’ consumer fleet generally consists of late model vehicles ranging in size from small vans to 26-foot trucks, and its consumer rentals are conducted through approximately 1,950 independent rental agents and approximately 390 of its company-operated leasing and rental facilities. PTS’ consumer business generated 6% of its revenue for 2021.
Logistics. PTS’ logistics business offers an extensive variety of services, including dedicated contract carriage, distribution center management, transportation management, lead logistics provider, and dry van truckload carrier services. PTS coordinates services for its customers across the supply chain, including inbound material flow, handling and packaging, inventory management, distribution and technologies, and sourcing of third-party carriers. These services are available individually or on a combined basis and often involve its associates performing services at the customer’s location. By offering a scalable series of services to its customers, PTS can manage the customer’s entire supply chain or any stand-alone service. PTS also utilizes specialized software that enables real-time fleet visibility and provides reporting metrics, giving customers detailed information on fuel economy and other critical supply chain costs. PTS’ international logistics business has approximately 510 locations in North America, South America, Europe, and Asia. PTS’ logistics business generated 29% of its revenue for 2021.
Retail Automotive. Approximately 58% of our retail automotive dealership revenues are generated in the U.S., which in 2021 was one of the world’s largest automotive retail markets as measured by units sold. In 2021, sales of new cars and light trucks were approximately 15.1 million units, an increase of 3.3% from 2020, and were generated at approximately 16,600 franchised new-car dealerships. According to the latest available data from the National Automobile Dealers Association, dealership revenue is derived as follows: 55% from new vehicle sales, 35% from used vehicle sales, and 10% from service and parts sales. Dealerships also offer a wide range of higher-margin products and services, including extended service contracts, financing arrangements, and credit insurance. The National Automobile Dealers Association figures noted above include finance and insurance revenues within either new or used vehicle sales, as sales of these products are usually incremental to the sale of a vehicle.
In the U.S., the franchised automotive dealer industry is the largest retail business by revenue in a market of approximately $1.2 trillion. Publicly held automotive retail groups account for less than 10% of total industry revenue. Although significant consolidation has already taken place, the industry remains highly fragmented with more than 90% of the U.S. industry’s market share remaining in the hands of smaller regional and independent dealers. Our other markets are similarly fragmented. We believe that further consolidation in these markets is probable due to the significant capital requirements of maintaining manufacturer facility standards and the limited number of viable alternative exit strategies for dealership owners.
Our Western European markets consist of Germany, the U.K., Italy, and Spain, which represented the first, third, fourth, and fifth largest automotive retail markets, respectively, in Western Europe in 2021 and accounted for approximately 62% of the total vehicle sales in Western Europe. Unit sales of automobiles in Western Europe were approximately 10.6 million in 2021, a 1.9% decrease compared to 2020. In Germany, the U.K., Italy, and Spain, new car sales were approximately 2.6 million, 1.6 million, 1.5 million, and 0.9 million units, respectively, in 2021.
In October 2021, we purchased the remaining 51% interest in the Nicole Group, our former retail automotive joint venture in the greater Tokyo area of Japan representing BMW, MINI, Rolls-Royce, Ferrari, and ALPINA, which resulted in ten dealerships being consolidated in our financial statements beginning in the fourth quarter of 2021. Unit sales in Japan were approximately 4.6 million in 2021.
We also operate 23 CarShop used vehicle dealerships in the U.S. and the U.K. Used vehicle sales are even more fragmented than new vehicle sales and are generated by new car dealerships, used vehicle dealerships, individual small lot sellers, as well as individual to individual sales. Used vehicle sales were approximately 40.9 million units in the U.S. and approximately 7.9 million units in the U.K. in 2021.
Dealership. Generally, new vehicle unit sales are cyclical, and historically, fluctuations have been influenced by factors such as manufacturer incentives, interest rates, fuel prices, unemployment, inflation, weather, the level of personal discretionary spending, credit availability, consumer confidence, and other general economic factors. However, from a profitability perspective, automotive and truck retailers have historically been less vulnerable than manufacturers and parts suppliers to declines in new vehicle sales. We believe this is due to the retailers’ more flexible expense structure (a significant portion of the retail industry’s costs are variable) and their diversified revenue streams, such as used vehicle sales and service and parts sales. In addition, manufacturers may offer various dealer incentives when sales are slow, which further increases the volatility in profitability for manufacturers and may help to decrease volatility for franchised automotive retailers.
Retail Commercial Truck Dealership. In 2021, North American sales of Class 6-8 medium and heavy-duty trucks, the principal vehicles for our PTG business, increased 11.8% from last year to 400,381 units and were generated at approximately 2,200 new-truck dealerships. The Class 6-7 medium-duty truck market increased 3.9% from last year to 129,648 units, and Class 8 heavy-duty trucks, the largest North American market, increased 16.1% from last year to 270,733 units. In this market, our principal brands, Freightliner and Western Star, represent approximately 39.3% of that market.
Commercial Vehicle Distribution. Our commercial vehicle distribution business operates principally in Australia and New Zealand. In 2021, heavy-duty truck sales in Australia and New Zealand combined were 16,117 units, representing an increase of 21.4% from 2020.
Penske Transportation Solutions. PTS participates broadly in the global supply chain, estimated at $9.1 trillion annually, and particularly, in the U.S. supply chain, estimated at $1.7 trillion annually. Only 13.8% of the total U.S. supply chain function is outsourced to third parties, such as PTS. We estimate, based on R. L. Polk registration data, that there are
approximately 7.9 million commercial trucks operating in the United States, of which up to 3.7 million could be potential opportunities for PTS’ full-service leasing and contract maintenance offerings.
Information Technology, Data Security, and Customer Privacy
We consolidate financial, accounting, and operational data received from our operations utilizing common centralized management systems predominately licensed from, and in many cases operated by, third parties. Our systems follow our standardized accounting procedures and are compliant with any guidelines established by our vehicle manufacturers. Our technology allows us to extract and aggregate data from the systems in a consistent format to generate consolidated financial and operational analysis. These systems also allow us to access detailed information for each individual location as a group or on a consolidated basis. Information we can access includes, among other things, inventory, cash, unit sales, the mix of new and used vehicle sales, and sales of aftermarket products and services. Our ability to access this data allows us to continually analyze our local results of operations and financial position so as to identify areas for improvement.
As part of our business model, we receive sensitive information regarding customers, associates, and vendors from various online and offline channels. Our internal and third-party systems are under a moderate level of risk from cyber criminals or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks, often including ransomware, continue to grow in number and sophistication thus presenting an ongoing threat to our systems, whether internal or external, used to operate the business on a day-to-day basis. We also regularly train our associates to maintain vigilance against online attempts at data theft and other malicious cyber activity. We perform periodic control testing and audits on our systems as well as employ dedicated and third-party resources to monitor and protect critical assets from cyber-attacks. Despite these measures, our facilities, systems, associates, and those of our third-party service providers could be vulnerable to cyber-attacks, security breaches, social engineering, malicious software, or other events.
Many companies have disclosed security breaches involving sophisticated cyber-attacks and/or ransomware that were not recognized or detected until after such retailers had been affected, notwithstanding the preventive measures such companies had in place. We have been notified by several vendors of attacks or potential attacks, some of which included the potential or actual loss of customer data, and we receive assurances that the affected parties are properly notified. Any security breach or event resulting in the unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors as well as other operational and financial impacts derived from investigations, litigation, the imposition of penalties, or other means. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.
Retail Automotive. Our integrated marketing strategy empowers each dealership to capitalize on local branding while being supported by corporate programs and web presence, allowing us to leverage scale and our parent brand recognition. We align ourselves with the marketing implemented by our vehicle manufacturer partners for their respective brands and integrate those initiatives and resources across the brands we represent.
Our marketing strategy reflects a data-driven approach that combines key metrics and trends from industry and consumer studies, our customer relationship management systems, and performance data from our businesses. This approach emphasizes objectivity and transparency in our marketing efforts, allows us to create customer-focused solutions, and enables us to measure and gauge our success. Our tools quickly deliver personalized content across all channels, and by monitoring behavioral engagement, we can better understand our customers to confidently develop more proactive strategies that meet and surpass their needs.
We leverage scale by using consistent performance metrics to identify opportunities and negotiate enterprise arrangements for key marketing partners. A single, unified content management tool is used by our franchise dealerships in the U.S. to enhance customer communication, provide visibility into our sales pipeline, generate customer insights, enhance team collaboration, and measure return on investment across our organization.
Our marketing strategy places a strong emphasis on digital marketing with a goal of attracting more prospects, converting more leads, and closing more sales. By focusing on social media, video, mobile, email marketing, online advertising, search engine optimization, automation, personalization, branding, and content, we optimize our digital presence across all avenues of engagement to ensure a seamless customer experience at every touchpoint.
We monitor customer satisfaction data to gain insight into our business performance and enhance the areas of our business that drive customer referral and loyalty. Social media is a highly valued element of our marketing strategy that enables us to engage with customers, increase dealership awareness, improve customer satisfaction, and enhance repeat and referral business. Additionally, we leverage corporate social media efforts and partners to benefit our dealerships and create a strong sense of community. Online reputation management sites, such as Google and Yelp, are proactively monitored to ensure we are offering a superior customer experience.
Retail Commercial Truck Dealership and Commercial Vehicle Distribution. We market commercial trucks in the U.S., Canada, and Western Europe and commercial vehicles and other products in Australia and New Zealand, principally through a network of dealership and service locations supported by corporate level marketing efforts. Our digital marketing leverages manufacturer websites supplemented by brand specific websites to promote our brands and services. We also employ local sponsorships to generate brand awareness in our markets and market to customers at various trade shows and other industry events.
Agreements with Vehicle and Equipment Manufacturers
We operate our franchised new vehicle dealerships under separate franchise agreements with the manufacturers or distributors of each brand of vehicle sold at that dealership. These franchise agreements are typical throughout the industry and may contain provisions and standards governing almost every aspect of the dealership including ownership, management, personnel, training, maintenance of a minimum of working capital, net worth requirements, maintenance of minimum lines of credit, advertising and marketing activities, facilities, signs, products and services, maintenance of minimum amounts of insurance, achievement of minimum customer service standards, and monthly financial reporting. In addition, the General Manager and/or the owner of a dealership typically cannot be changed without the manufacturer’s consent. In exchange for complying with these provisions and standards, we are granted the non-exclusive right to sell the manufacturer’s or distributor’s brand of vehicles and related parts and warranty services at our dealerships. The agreements also grant us a non-exclusive license to use each manufacturer’s trademarks, service marks, and designs in connection with our sales and service of its brand at our dealership.
Many of these franchise agreements also grant the manufacturer or distributor a security interest in the vehicles and/or parts sold by them to the dealership as well as other dealership assets and permit them to terminate or not renew the agreement for a variety of causes, including failure to adequately operate the dealership, insolvency or bankruptcy, impairment of the dealer’s reputation or financial standing, changes in the dealership’s management, owners, or location without consent, sales of the dealership’s assets without consent, failure to maintain adequate working capital or floor plan financing, changes in the dealership’s financial or other condition, failure to submit required information to them on a timely basis, failure to have any permit or license necessary to operate the dealership, and material breaches of other provisions of the agreement. In the U.S., these termination rights are subject to state franchise laws that limit a manufacturer’s right to terminate a franchise. In the U.K., we operate without such local franchise law protection (see “Regulation” below).
In the U.S., some of our franchise agreements, including those with BMW, Honda, and Toyota, expire after a specified period of time ranging from one to six years. Manufacturers have not historically terminated our franchise agreements, and our franchise agreements with fixed terms have typically been renewed. We currently expect the manufacturers to renew all of our U.S. franchise agreements as they expire. In the U.K, many of our agreements have fixed terms, including those with BMW, our largest U.K. manufacturer. The BMW franchise agreements have a two-year rolling term. Similar to the U.S., the manufacturers in the U.K. have not historically terminated our franchise agreements, and our franchise agreements with fixed terms have typically been renewed.
Some of our key automotive manufacturer partners have announced plans to explore an agency model of selling new vehicles in the U.K and Europe. Under an agency model, our franchised dealerships would receive a fee for facilitating the sale by the manufacturer of a new vehicle but would not hold the vehicle in inventory as has been historical practice. This
model, if eventually adopted, would negatively impact revenues, although the other impacts to our results of operations remain uncertain. While we are uncertain if agency models will be widely adopted in the U.K. and Europe (though we believe any such adoption would not occur until 2023 at the earliest), Mercedes-Benz U.K. has asked each of its U.K. dealers to voluntarily terminate their existing sales franchise agreements and enter into an agency agreement for a similar model described above. We have 14 Mercedes-Benz franchises in the U.K., and we are currently reviewing Mercedes-Benz U.K.’s request.
In addition, we have certain framework agreements with U.S. manufacturers that allow us as a multi-point, public company to own and operate multiple franchises in exchange for us agreeing, among other things, to limit the total number of dealerships of that brand that we may own in a particular geographic area and in some cases, limit the total number of their vehicles that we may sell as a percentage of a particular manufacturer’s overall sales. Manufacturers may also limit the ownership of stores in contiguous markets. Certain of our franchise agreements have similar limits. We have reached certain geographical limitations with the Lexus brand nationally in the U.S. and certain other manufacturers in the U.S. and U.K in specific local markets. Where these limits are reached, we cannot acquire additional franchises of those brands in the relevant market unless we can negotiate modifications to the agreements. We may not be able to negotiate any such modifications.
These framework agreements usually give the manufacturer or distributor the right in some circumstances (including upon a merger, sale, change of control of the Company, or in some cases a material change in our business or capital structure) to acquire the dealerships from us at fair market value, including, typically, upon a purchase of 20% or more of our voting stock by any new person, entity, or another manufacturer (subject to certain exceptions), an extraordinary corporate transaction (such as a merger, reorganization, or sale of a material amount of assets), or a change of control of our board of directors. Our agreements with Honda, Toyota, and certain other manufacturers contain such provisions.
With respect to our commercial vehicle distribution operations in Australia and New Zealand, we are party to distributor agreements with each manufacturer of products we distribute pursuant to which we are the distributor of these products in those countries and nearby markets. The agreements govern all aspects of our distribution rights, including sales and service activities, service and warranty terms, use of intellectual property, promotion and advertising provisions, pricing and payment terms, and indemnification requirements. The agreement with Western Star expires in 2031, the agreement with MTU expires in 2029, and the agreement with Detroit Diesel expires in 2031. We also are party to shipping agreements with respect to importing those products. For each of our non-company owned dealers, we have signed a franchise agreement with terms that set forth the dealer’s obligations with respect to the sales and servicing of commercial vehicles and associated parts.
Dealership. We believe that the principal factors consumers consider when determining where to purchase a vehicle are the marketing campaigns conducted by manufacturers, the ability of dealerships to offer a wide selection of the most popular vehicles, offering a multi-channel experience to customers so they may purchase a vehicle on site or remotely, the location of dealerships, and the quality of the customer experience. Other factors include customer preference for particular brands of vehicles, pricing (including manufacturer rebates and other special offers), and warranties. We believe that our dealerships are competitive in all of these areas.
The automotive and truck retail industry is currently served by franchised dealerships, automotive manufacturers that sell direct to consumers, independent used vehicle dealerships, and individual consumers who sell used vehicles in private transactions. For new vehicle sales, we compete primarily with automotive manufacturers that sell direct to consumers and other franchised dealers in each of our marketing areas, relying on our premium facilities, superior customer service, advertising and merchandising, management experience, sales expertise, reputation, and the location of our dealerships to attract and retain customers. Each of our markets may include a number of well-capitalized competitors, including in certain instances dealerships owned by manufacturers and national and regional retail chains. In our retail commercial truck dealership operations, we compete with other manufacturers and retailers of medium and heavy-duty trucks, such as Ford, International Kenworth, Mack, Peterbilt, and Volvo. We also compete with dealers that sell the same brands of new vehicles that we sell and with dealers that sell other brands of new vehicles that we do not represent in a particular market. Our new vehicle dealership competitors have franchise agreements which give them access to new vehicles on the same terms as us. Automotive dealers also face competition in the sale of new vehicles from purchasing services, warehouse clubs, and electric vehicle manufacturers that sell direct to consumer. With respect to arranging financing for our customers’ vehicle purchases, we compete with a broad range of financial institutions, such as banks and local credit unions.
For used vehicle sales, we compete in a highly fragmented market which sells approximately 40.9 million units in the U.S. and approximately 7.9 million units in the U.K. annually through other franchised dealers, independent used vehicle dealers, automobile rental agencies, purchasing services, private parties, online retailers, and used vehicle “superstores” for the procurement and resale of used vehicles.
We compete with other franchised dealers to perform warranty repairs and with other dealers, franchised and non-franchised service center chains, and independent garages for non-warranty repair and routine maintenance business. We compete with other dealers, franchised and independent aftermarket repair shops, and parts retailers in our parts operations. We believe that the principal factors consumers consider when determining where to purchase vehicle parts and service are price, the use of factory-approved replacement parts, facility location, the familiarity with a manufacturer’s brands, and the quality of customer service. A number of regional or national chains offer selected parts and services at prices that may be lower than our prices.
We believe the majority of consumers are utilizing the Internet and other digital media in connection with the purchase of new and used vehicles. Accordingly, we face increased competition from online vehicle websites, including those developed by manufacturers and other dealership groups.
Commercial Vehicle Distribution. With respect to our commercial vehicle distribution operations in Australia and New Zealand, we compete with manufacturers, distributors, and retailers of other vehicles and products in our markets.
PTS. As an alternative to using PTS’ full-service truck leasing or contract maintenance services, we believe that most potential customers perform some or all of these services themselves. They may also purchase similar or alternative services from other third-party vendors. Its full-service truck leasing operations compete with companies providing similar services on a national, regional, and local level. Many regional and local competitors provide services on a national level through their participation in various cooperative programs. Competitive factors include price, maintenance, service, and geographic coverage. PTS competes with finance lessors, truck and trailer manufacturers, and independent dealers, each of which provides full-service lease products, finance leases, extended warranty maintenance, rental, and other transportation services. Its contract maintenance offering competes primarily with truck and trailer manufacturers and independent dealers who provide maintenance services.
PTS’ commercial and consumer rental operations compete with several other nationwide vehicle rental systems, a large number of vehicle leasing, and rental companies with multiple branches operating on a regional basis and many similar companies operating primarily on a local basis. Because a significant portion of its consumer rentals are used for moving and relocation, PTS competes with local and national moving and storage companies as well as alternatives such as portable container-based transportation and storage. In its commercial and consumer rental operations, it competes primarily on the basis of equipment availability, geographic location, and customer service.
PTS’ logistics business competes with other dedicated logistics providers, transportation management businesses, freight brokers, warehouse providers, and truckload carriers on a national, regional, and local level as well as with the internal supply chain functions of prospective customers who rely on their own resources for logistics management. Competitive factors include price, efficient logistical design offerings, equipment, maintenance, service, technology, geographic coverage, and driver and operations expertise. PTS seeks to combine its logistics services with its existing full-service truck leasing and truck rental business to create an integrated transportation solution for its customers.
We believe that our Human Capital is our greatest asset. We understand that exceptional customer service can only be consistently delivered by attracting, motivating, training, and retaining the very best team members. We are committed to building a diverse and skilled workforce while providing a work environment that promotes equity and is free from any form of prohibited discrimination. With this in mind, we put our employees at the heart of everything that we do by developing their talent and enabling them to build long term careers.
As of December 31, 2021, we employed nearly 25,000 people, an increase of 5.7% from December 31, 2020, including 1,056 employees due to acquisitions. Approximately 644 of our employees were covered by collective bargaining agreements with labor unions, and we believe our relations with our employees, including those represented by collective bargaining agreements, are good. Further, we are committed to building a diverse and skilled workforce. Our focus on inclusion and diversity at our U.S. automotive dealerships has resulted in over 67% of our workforce being diverse either by race, ethnicity, or gender, with our gender diversity higher than the National Automobile Dealer Association average. Additionally, our U.S. automotive dealerships have a management diversity rate of approximately
49%. This inclusive culture will enhance our ability to attract and retain the most talented leadership and workforce, thereby enabling us to better serve and broaden our customer base.
We maintain a culture grounded in safety and endeavor to eliminate workplace incidents, risks, and hazards. We have partnered with environmental and safety consulting firms to assist in compliance with specific local and federal laws and regulations relating to environmental and safety issues and to promote best safety practices. Audits are regularly performed to assure and maintain compliance.
We believe our employee turnover of approximately 22% is low compared to our peers. We seek to motivate our key managers and salespersons through, among other things, variable compensation programs tied principally to local profitability and customer satisfaction. We also annually survey our employees to gauge their satisfaction and address any resulting concerns. Due to our reliance on vehicle manufacturers, we may be adversely affected by labor strikes or work stoppages at the manufacturers’ facilities.
We operate in a highly regulated industry and a number of regulations affect the marketing, selling, financing, servicing, and distribution of vehicles. Under the laws of the jurisdictions in which we currently operate, we typically must obtain a license in order to establish, operate, relocate a dealership, or operate a repair facility. These laws also regulate our conduct of business, including our advertising, operating, financing, employment, distribution, and sales practices. Other laws and regulations include franchise laws and regulations, environmental laws and regulations (see “Environmental Matters” below), laws and regulations applicable to new and used motor vehicle dealers as well as customer and employee privacy, identity theft prevention, wage-hour, anti-discrimination, and other employment practices laws. With respect to online sales, many laws and regulations applicable to our business were adopted prior to the introduction of the Internet, certain digital technologies, and e-commerce, generally. As a result, we are tasked with maintaining compliance in an uncertain regulatory environment.
Our financing activities with customers are subject to truth-in-lending, consumer leasing, equal credit opportunity, and similar regulations as well as motor vehicle finance laws, installment finance laws, insurance laws, usury laws, and other installment sales laws. Some jurisdictions regulate finance fees that may be paid as a result of vehicle sales. In recent years, private plaintiffs, state attorneys general, and federal agencies in the U.S. have increased their scrutiny of advertising, sales, and finance and insurance activities in the sale and leasing of motor vehicles. See Item 1A. Risk Factors, "Regulatory Issues."
In the U.S., we benefit from the protection of numerous state franchise laws that generally provide that a manufacturer or distributor may not terminate or refuse to renew a franchise agreement unless it has first provided the dealer with written notice setting forth good cause and stating the grounds for termination or non-renewal. Some state franchise laws allow dealers to file protests or petitions or to attempt to comply with the manufacturer’s criteria within the notice period to avoid the termination or non-renewal. Our international locations generally do not have these laws, and as a result, our international operations operate without these types of protections.
We are subject to a wide range of environmental laws and regulations, including those governing discharges into the air and water, the operation and removal of aboveground and underground storage tanks, the use, handling, storage, and disposal of hazardous substances and other materials, and the investigation and remediation of environmental contamination. Our business involves the generation, use, handling, and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, filters, transmission fluid, antifreeze, refrigerant, batteries, solvents, lubricants, tires, and fuel. We have incurred, and will continue to incur, capital and operating expenditures and other costs in complying with such laws and regulations.
Our operations involving the management of hazardous and other environmentally sensitive materials are subject to numerous requirements. Our business also involves the operation of storage tanks containing such materials. Storage tanks are subject to periodic testing, containment, upgrading, and removal under applicable law. Furthermore, investigation or remediation may be necessary in the event of leaks or other discharges from current or former underground or aboveground storage tanks. In addition, water quality protection programs govern certain discharges from some of our operations. Similarly, certain air emissions from our operations, such as vehicle painting, may be subject to relevant laws. Various health and safety standards also apply to our operations.
We may have liability in connection with materials that are sent to third-party recycling, treatment, and/or disposal facilities under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act and comparable statutes. These statutes impose liability for investigation and remediation of contamination without regard to fault or the legality of the conduct that contributed to the contamination. Responsible parties under these statutes may include the owner or operator of the site where the contamination occurred and companies that disposed or arranged for the disposal of the hazardous substances released at these sites.
Many jurisdictions in which we operate have placed additional restrictions and limitations on activities that may affect the environment. U.S. vehicle manufacturers are subject to federally mandated corporate average fuel economy standards, which are expected to increase substantially through 2026. Furthermore, in response to concerns that emissions of carbon dioxide and certain other gases, referred to as “greenhouse gases,” may be contributing to warming of the Earth’s atmosphere, climate change-related legislation and policy changes to restrict greenhouse gas emissions are being considered, or have been implemented, at state and federal levels. Officials of the States of California, Massachusetts, and New York have announced a ban on the sale of new vehicles with gasoline engines in cars in 2035. European regulation requires a 37.5% reduction in emissions carbon dioxide for cars by 2030 and several municipalities in Europe have announced future bans on diesel or combustible fuel vehicles. In November 2020, certain representatives of the U.K. government proposed a ban on the sale of gasoline engines in cars and vans that would take effect as early as 2030 and a ban on the sale of gasoline hybrid engines in cars and vans as early as 2035. Significant increases in fuel economy requirements or new federal and state restrictions on emissions of carbon dioxide on vehicles and fuels could adversely affect prices of and demand for the vehicles that we sell.
We have a proactive strategy related to environmental, health, and safety compliance, which includes contracting with third parties to inspect our facilities periodically. We believe that we do not have any material environmental liabilities and that compliance with environmental laws and regulations will not, individually or in the aggregate, have a material effect on us. However, soil and groundwater contamination are known to exist at certain of our current or former properties. Further, environmental laws and regulations are complex and subject to change. In addition, in connection with our acquisitions, it is possible that we will assume or become subject to new or unforeseen environmental costs or liabilities, some of which may be material. Compliance with current, amended, new, or more stringent laws or regulations, stricter interpretations of existing laws, or the future discovery of environmental conditions could require additional expenditures by us, and such expenditures could be material.
Our business is subject to substantial risk of loss due to significant concentrations of property value, including vehicles and parts at our locations. In addition, we are exposed to liabilities arising out of our operations, such as employee claims, customer claims, claims for personal injury or property damage, and potential fines and penalties in connection with alleged violations of regulatory requirements or data security requirements. We attempt to manage such risks through loss control and risk transfer utilizing insurance programs which are subject to specified deductibles and significant retentions, including information security risk insurance but excluding certain types of insurance. As a result, we are exposed to uninsured and underinsured losses that could have a material adverse effect on us.
For selected financial information concerning our various operating and geographic segments, see Note 18 to our consolidated financial statements included in Item 8 of this report. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website, www.penskeautomotive.com, under the tab “Investors” as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). The SEC maintains an internet site that contains reports, proxy, and information statements and other information that issuers file with the SEC. The address of the SEC’s website is www.sec.gov. We also make available on our website copies of materials regarding our corporate governance, policies, and practices, including our Corporate Governance Guidelines, our Code of Business Ethics, our Environmental, Social, and Governance report, and the charters relating to the committees of our Board of Directors. The content of any website referred to in this Form 10-K is not deemed incorporated by reference into this Form 10-K unless expressly noted. You may obtain a printed copy of any of the foregoing materials by sending a written request to Investor Relations, Penske Automotive Group, Inc., 2555 Telegraph Road, Bloomfield Hills, MI 48302 or by calling 248-648-2500. The information on or linked to our website is not part of this document. We plan to disclose changes to our Code of Business Ethics or waivers, if any, for our executive officers or directors on our website. We incorporated in the state of Delaware in 1990 and began dealership operations in October 1992.
Dealership. Our business is modestly seasonal overall. Our U.S. operations generally experience higher volumes of vehicle sales in the second and third quarters of each year due in part to consumer buying trends 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 the U.S. where dealerships may be subject to severe winters. Our U.K. operations generally experience higher volumes of vehicle sales in the first and third quarters of each year, due primarily to vehicle registration practices in the U.K.
Item 1A. Risk Factors
Our business, financial condition, results of operations, cash flows, prospects, and the prevailing market price and performance of our common stock may be affected by a number of factors, including the matters discussed below. 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 Annual Report on Form 10-K 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.
Although we believe that the expectations, plans, intentions, and projections reflected in our forward-looking statements are reasonable, such statements are subject to known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements.
The material risks, uncertainties, and other factors that our stockholders and prospective investors should consider include the following:
The COVID-19 pandemic has disrupted, and may continue to disrupt, our business, which could adversely affect our financial performance. The outbreak of the COVID-19 pandemic across the globe has adversely impacted each of our markets and the global economy, leading to disruptions to our business. The COVID-19 pandemic continues in all of our markets. Governmental authorities have periodically taken countermeasures to slow the outbreak, including shelter-in-place orders, restrictions on travel, and government-funded assistance programs to individuals and businesses. In response to the COVID-19 pandemic, the U.K. reinstated shelter-in-place orders which required our dealership showrooms to close during the first quarter of 2021. These shelter-in-place orders largely expired on April 12, 2021, and most of the remaining restrictions expired on July 19, 2021. If shelter-in-place orders are re-enacted or other restrictions are placed on our business, we may be adversely impacted. The COVID-19 pandemic is a highly fluid and rapidly evolving situation due to numerous uncertainties, including the duration of the outbreak, travel restrictions, business closures, the effectiveness of actions taken to contain the disease, the distribution rate and acceptance rate of a vaccine, the effect of government assistance programs, production levels from our manufacturing partners, and other unintended consequences, and while we continue to adjust our operations to conform to regulatory changes and consumer preferences in the evolving environment, we cannot anticipate with any certainty the length, scope, or severity of the business impact from the COVID-19 pandemic in each of the jurisdictions that we operate.
This impact could include changes in customer demand, our relationship with, and the financial and operational capacities of, vehicle manufacturers, captive finance companies and other suppliers, workforce availability, risks associated with our indebtedness (including available borrowing capacity, compliance with financial covenants and ability to refinance or repay indebtedness on favorable terms), the adequacy of our cash flow and earnings and other conditions which may affect our liquidity, and disruptions to our technology network and other critical systems, including our dealer management systems and software or other facilities or equipment. We believe that business disruption relating to the COVID-19 pandemic may continue to negatively impact the global economy and may materially affect our businesses as outlined above, or in other manners including global supply chain disruptions resulting in lower levels of vehicles and parts available for sale, all of which would adversely impact our business and results of operations.
Macro-economic and geo-political conditions. Our performance is impacted by geo-political conditions and by general economic conditions overall and in particular by economic conditions in the markets in which we operate. These economic conditions include levels of new and used vehicle sales, availability of consumer credit, changes in consumer demand, consumer confidence levels, fuel prices, personal discretionary spending levels, interest rates, and unemployment rates. When the worldwide economy faltered early in 2020, we were adversely affected, and we expect a similar relationship between general economic and industry conditions and our performance in the future. Any geo-political developments that adversely affect the economies of our markets will also likely affect us.
Adverse conditions affecting one or more significant automotive manufacturers or suppliers will affect us. Our success depends on the overall success of the automotive industry generally and in particular, on the success of the brands of vehicles that each of our dealerships sell. In 2021, revenue generated at our Audi/Volkswagen/Porsche/Bentley, BMW/MINI, Toyota/Lexus, and Mercedes-Benz/Sprinter/smart dealerships represented 22%, 24%, 14%, and 10%, respectively, of our total automotive dealership revenues. In addition, our retail commercial truck operations rely principally on Freightliner and Western Star trucks (both Daimler brands).
Significant adverse weather-related events, supply chain issues, or other events that interrupt vehicle or parts supply to our dealerships would likely have a significant and adverse impact on the industry as a whole, including us, particularly if the events impact any of the manufacturers whose franchises generate a significant percentage of our revenue.
COVID-19 has impacted and may continue to impact the supply of vehicles or parts to the U.S. or U.K markets, and our business could be materially adversely affected. The supply chain required to manufacture and supply the parts for the vehicles we sell is highly complex and integrated. Any failure of that supply chain could materially and adversely affect us. Recently, many of our principal vehicle manufacturers have announced production disruptions caused by a shortage of microchips and other components. The microchip shortage is reported to be due to the overall demand for microchips in the global economy as well as production disruptions caused by staffing and other COVID-19 related issues. IHS Markit has predicted that automotive production globally was reduced by approximately 11.3 million units during 2021 due to the shortage and that production levels will continue to be negatively impacted into 2022. Our new vehicle days’ supply is 17 as of December 31, 2021, compared to 50 as of December 31, 2020. While we expect to continue to have normal levels of used vehicles for sale (our used vehicle days’ supply is 60 as of December 31, 2021, compared to 48 as of December 31, 2020), prolonged shortages could result in lower new vehicle sales volumes which could impact the availability and affordability of used vehicles and adversely affect us. The lower supply of new vehicles contributed to higher vehicle gross profit on both new and used vehicles sold, which contributed to our higher overall profitability. We expect lower inventories of new vehicles and parts disruptions to continue into 2022 until the supply of certain components used to manufacture vehicles improves. When the supply of vehicles improves, we may experience reduced new and used vehicle gross profit together with higher sales volumes. Moreover, due to remote working and lack of mobility associated with the pandemic in some of our markets, we believe our customers may be driving less, which may affect our service revenues should this trend continue.
The success of our commercial vehicle distribution businesses is directly impacted by availability and demand for the vehicles and other products we distribute. We are the exclusive distributor of Western Star commercial trucks, MAN commercial trucks and buses, and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand, and portions of the Pacific. We are also the distributor of diesel and gas engines and power systems in these same markets. The profitability of these businesses depends upon the number of vehicles, engines, power systems, and parts we distribute, which in turn is impacted by demand for these products. We believe demand is subject to general economic conditions, exchange rate fluctuations, regulatory changes, competitiveness of the products, and other factors over which we have limited control. In the event sales of these products are less than we expect, our related results of operations and cash flows for this aspect of our business may be materially adversely affected. The products we distribute are principally manufactured at a limited number of locations. In the event of a supply disruption, sufficient quantities of the vehicles, engines, power systems, and parts are not made available to us, or if we accept these products and are unable to economically distribute them, our cash flows or results of operations may be materially adversely affected.
Australian economic conditions. Our commercial vehicle distribution operations in Australia and New Zealand may be impacted by local economic conditions and in particular, the price of commodities such as copper and iron ore, which may impact the desire of our customers to operate their mining operations and replace their vehicle fleets. Adverse pricing concerns of those, and other commodities, may have a material adverse effect on our ability to distribute, and/or retail, commercial vehicles and other products profitably. These same conditions may also negatively impact the value of the Australian Dollar versus the U.S. Dollar, which negatively impacts our U.S. Dollar reported financial results and the pricing of products sold by Penske Australia, which are manufactured in the U.S., U.K., and Germany.
Additional risks relating to PTS. PTS’ business has additional risks to those in the retail business.
Customers. PTS has a more concentrated customer base than we do and is subject to changes in the financial health of its customers, changes in their asset utilization rates, and increased competition for those customers.
Workforce. PTS requires a significant number of qualified drivers and technicians, which may be difficult to hire, and is subject to increased compliance costs or work stoppages relating to those employees, particularly in regard to changes in labor laws and time of work rules regarding those employees. PTS contributes to nine U.S. multi-employer pension plans that provide defined benefits to approximately 2,820 associates covered by collective bargaining agreements. If they withdraw or are deemed to withdraw from participation in any of these plans, then applicable law could require them to make withdrawal liability payments to the plan. If any of those plans were deemed to be underfunded, PTS could be subject to additional assessments, which could be substantial.
Fleet risk. As one of the largest purchasers of commercial trucks in North America, PTS requires continued availability from truck manufacturers and suppliers of vehicles and parts for its fleet, which may be uncertain, in particular if a significant recall were to occur. PTS is affected by the same pandemic related supply issues noted above and any failure of the supply chain resulting in limited availability of new trucks or parts may have a material adverse impact on PTS. In addition, because PTS sells a large number of trucks each year and is subject to residual risk for the vehicles it leases to customers, changes in values of used trucks affects PTS’ profitability.
Capital markets risk. PTS relies on banks and the capital markets to fund its operations and capital commitments. PTS had a significant amount of total indebtedness at December 31, 2021, which it uses in part to purchase its vehicle fleet and therefore, is subject to changes in, and continued access to, capital markets.
Brand reputation. Our businesses and our commercial vehicle operations, in particular, as those are more concentrated with a particular manufacturer, are impacted by consumer demand and brand preference, including consumers’ perception of the quality of those brands. A decline in the quality and brand reputation of the vehicles or other products we sell or distribute, as a result of events such as manufacturer recalls or legal proceedings, may adversely affect our business. If such events were to occur, the profitability of our business related to those manufacturers could be adversely affected.
Our business is very competitive. We generally compete with other franchised dealerships in our markets, used vehicle dealerships, private market buyers and sellers of used vehicles, an increasing number of internet-based vehicle sellers, recently, electric vehicle manufacturers that sell direct to consumers, national and local service and repair shops and parts retailers with respect to commercial vehicles, distributors of similar products, and manufacturers in certain markets. Purchase decisions by consumers when shopping for a vehicle are extremely price sensitive. The level of competition in the market can lead to lower selling prices and related profits. If there is a prolonged drop in retail prices or if new vehicle sales are allowed to be made over the internet without the involvement of franchised dealers, our business could be materially adversely affected.
Changes to the retail delivery model, including increased digital retailer competition, efforts to sell vehicles direct outside the franchise system, and transition to an “agency model” of distribution each could adversely affect our business, results of operations, financial condition and cash flows. The retail automotive industry is experiencing a period of unprecedented change and disruption in several respects:
Competition from online retailers. The automotive retail industry is experiencing growing competition in the used vehicle market from companies with a primarily online business model, including companies such as Carvana, Vroom, Shift, Cazoo, and others. We and the other traditional automotive retailers are implementing digital retail strategies, providing consumers with online vehicle purchasing experiences, including at-home delivery. We also continue to develop technology solutions to improve the online buying experience. We may face increased competition for market share with these non-traditional delivery models and digital retailers over time which could materially and adversely affect our results of operations. We cannot be sure that our initiatives will be successful or that the amount we invest in these initiatives will result in our maintaining or enhancing market share and continued or improved financial performance.
Sales outside the franchise system. In recent years, new electric vehicle manufacturers have been able to conduct new vehicle sales outside of the franchised automotive system as new entrants. While the sales levels of these new entrants in the U.S. was approximately 4% of new vehicles and approximately 7% of new vehicles in the U.K., continued market share gains by manufacturers operating outside the franchise system may materially and adversely affect us. Moreover, while we expect continued good relations with our manufacturer partners, should U.S. franchise laws be repealed or
amended to allow our existing manufacturer partners to effectively operate outside the franchised system, our results of operations may be materially and adversely impacted. Our franchised automotive dealers in the U.K., European Union, and Japan operate effectively without U.S. franchise law protections.
Agency. Recently, some of our key automotive manufacturer partners have announced plans to explore an agency model of selling new vehicles in the U.K and Europe. Under an agency model, our franchised dealerships would receive a fee for facilitating the sale by the manufacturer of a new vehicle but would not hold the vehicle in inventory as has been historical practice. This model, if eventually adopted, would negatively impact revenues, although the other impacts to our results of operations remain uncertain. While we are uncertain if agency models will be widely adopted in the U.K. and Europe (though we believe any such adoption would not occur until 2023 at the earliest), Mercedes-Benz U.K. has asked each of its U.K. dealers to voluntarily terminate their existing sales franchise agreements and enter into an agency agreement for a similar model described above. We have 14 Mercedes-Benz franchises in the U.K., and we are currently reviewing Mercedes-Benz U.K.’s request.
New mobility models and vehicle electrification will continue to result in rapid changes to the automotive and trucking industries. Shared vehicle services such as Uber and Lyft provide consumers with increased choice in their personal mobility options. The effect of these and similar mobility options on the retail automotive industry is uncertain and may include lower levels of new vehicles sales but with increasing miles driven, which could require additional demand for vehicle maintenance. Most major vehicle manufacturers have announced plans to electrify some or all of their new vehicle fleets in response to concerns about the environment and due to regulatory requirements to limit vehicle emissions. We expect to continue to sell electric and hybrid gas/electric vehicles through our franchised dealerships; however, our service revenues may decline over time as these vehicles may require less physical maintenance than gas and hybrid vehicles due to the absence of certain parts systems. See the risk captioned “Sales outside the franchise system” above.
The effects of the eventual adoption of driverless vehicles are uncertain. Technological advances are facilitating the evolution of driverless vehicles. While many manufacturers offer varying degrees of driver assistance technology, the timing of adoption of true driverless vehicles remains uncertain due to regulatory requirements, additional technological requirements, and uncertain consumer acceptance of these vehicles. The effect of driverless vehicles on the automotive retail and trucking industries is uncertain and could include changes in the level of new and used vehicles sales, the price of new and used vehicles, the levels of service required by driverless vehicles and the role of franchised dealers, any of which could materially and adversely affect our business.
Key personnel. We believe that our success depends to a significant extent upon the efforts and abilities of our senior management and in particular, upon Roger Penske who is our Chair and Chief Executive Officer. To the extent Mr. Penske, or other key personnel, were to depart from our Company unexpectedly, our business could be significantly disrupted.
Leverage. Our significant debt and other commitments expose us to a number of risks, including:
Cash requirements for debt and lease obligations. A significant portion of the cash flow we generate must be used to service the interest and principal payments relating to our various financial commitments, including $2.6 billion of floor plan notes payable, $1.5 billion of non-vehicle long-term debt, and $5.5 billion of future lease commitments (including extension periods that are reasonably assured of being exercised and assuming constant consumer price indices). A sustained or significant decrease in our operating cash flows could lead to an inability to meet our debt service or lease requirements or to a failure to meet specified financial and operating covenants included in certain of our agreements. If this were to occur, it may lead to a default under one or more of our commitments and potentially the acceleration of amounts due, which could have a significant and adverse effect on us.
Availability. Because we finance the majority of our operating and strategic initiatives using a variety of commitments, including floor plan notes payable and revolving credit facilities, we are dependent on continued availability of these sources of funds. If these agreements are terminated or we are unable to access them because of a breach of financial or operating covenants or otherwise, we will likely be materially affected.
Interest rate variability. The interest rates we are charged on a substantial portion of our debt, including the floor plan notes payable we issue to purchase the majority of our inventory, are variable, increasing or decreasing based on changes in certain published interest rates. Increases to such interest rates has resulted and may continue to result in higher interest expense for us, which negatively affects our operating results. Because many of our customers finance their vehicle purchases, increased interest rates may also decrease vehicle sales, which would negatively affect our operating results.
We may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined. 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 have already transitioned to utilizing an alternative benchmark rate. Our U.K. credit agreement transitioned from LIBOR to the Sterling Overnight Index Average as of December 31, 2021. Changes in the method of calculating LIBOR, the elimination of LIBOR, or the replacement of LIBOR with an alternative rate or benchmark may require us to renegotiate or amend these facilities, loans, and programs, which may adversely affect interest rates and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows, and liquidity. We cannot predict the effect of the potential changes to or elimination of LIBOR, the establishment and use of alternative rates or benchmarks, and the corresponding effects on our cost of capital may be adversely affected by changes in LIBOR reporting practices or the method in which LIBOR is determined.
Impairment of our goodwill or other indefinite-lived intangible assets has in the past had, and in the future could have, a material adverse impact on our earnings. We evaluate goodwill and other indefinite-lived intangible assets for impairment annually and upon the occurrence of an indicator of impairment. Our process for impairment testing of these assets is described further under “Impairment Testing” in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates. If we determine that the amount of our goodwill or other indefinite-lived intangible assets are impaired at any point in time, we would be required to reduce the value of these assets on our balance sheet, which would also result in a material non-cash impairment charge that could also have a material adverse effect on our results of operations for the period in which the impairment occurs.
Performance of sublessees. In connection with the sale, relocation, and closure of certain of our franchises, we have entered into a number of third-party sublease agreements. The rent paid by our sub-tenants on such properties in 2021 totaled approximately $22.4 million. In the aggregate, we remain ultimately liable for approximately $150.6 million of such lease payments including payments relating to all available renewal periods. We rely on our sub-tenants to pay the rent and maintain the properties covered by these leases. In the event a subtenant does not perform under the terms of their lease with us, we could be required to fulfill such obligations, which could have a significant and adverse effect on us.
International and foreign currency risk. We have significant operations outside the U.S. that expose us to changes in foreign exchange rates and to the impact of economic and political conditions in the markets where we operate. As exchange rates fluctuate, our results of operations as reported in U.S. Dollars fluctuate. For example, if the U.S. Dollar were to continue to strengthen against the British Pound, our U.K. results of operations would translate into less U.S. Dollar reported results. Sustained levels or an increase in the value of the U.S. Dollar, particularly as compared to the British Pound, could result in a significant and adverse effect on our reported results.
Joint ventures. We have significant investments in a variety of joint ventures, including retail automotive operations in Germany, Italy, and Spain. We have a 28.9% interest in PTS. We expect to receive annual operating distributions from PTS and the other ventures and in the case of PTS, realize significant tax savings. These benefits may not be realized if the joint ventures do not perform as expected, or if changes in tax, financial, or regulatory requirements negatively impact the results of the joint venture operations. Our ability to dispose of these investments may be limited. In addition, the relevant joint venture agreement and other contractual restrictions may limit our access to the cash flows of these joint ventures. For example, PTS’ partnership agreement and certain principal 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, in which case its distributions may not exceed 80% of its consolidated net income.
Legal and Compliance Risks
Vehicle manufacturers exercise significant control over us. Each of our new vehicle dealerships and distributor operations operate under franchise and other agreements with automotive manufacturers, commercial vehicle manufacturers, or related distributors. These agreements govern almost every aspect of the operation of our dealerships and give manufacturers the discretion to terminate or not renew our franchise agreements for a variety of reasons, including certain events outside our control such as accumulation of our stock by third parties. They also limit our ability to acquire dealerships on a national, regional, and local basis. Without franchise or distributor agreements, we would be unable to sell or distribute new vehicles or perform manufacturer authorized warranty service. If a significant number of our franchise agreements are terminated, not renewed, or, with respect to our distributor operations, a competing distributor were introduced, we would be materially affected.
Regulatory issues. We are subject to a wide variety of regulatory activities, including:
Governmental regulations, claims, and legal proceedings. Governmental regulations affect almost every aspect of our business, including the fair treatment of our employees, wage and hour issues, and our financing activities with customers. In California, previous judicial decisions have called into question whether long-standing methods for compensating dealership employees comply with the local wage and hour rules and may do so again. We could be susceptible to claims or related actions if we fail to operate our business in accordance with applicable laws or it is determined that long-standing compensation methods did not comply with local laws. Many laws and regulations applicable to our business were adopted prior to the introduction of online vehicle sales, the Internet and certain digital technology, generally. As a result, we are tasked with maintaining compliance in an uncertain regulatory environment. Claims arising out of actual or alleged violations of law which may be asserted against us or any of our dealers by individuals, through class actions, or by governmental entities in civil or criminal investigations and proceedings, may expose us to substantial monetary damages which may adversely affect us.
Privacy Regulation. We are subject to numerous laws and regulations in the U.S. and internationally designed to protect the information of clients, customers, employees and other third parties that we collect and maintain, including the European Union General Data Protection Regulation (the “EUGDPR”) and the United Kingdom General Data Protection Regulation (the "UKGDPR"). Both the EUGDPR and UKGDPR, among other things, mandate new requirements regarding the handling of personal data of employees and customers, including its use, protection and the ability of persons whose data is stored to correct or delete such data about themselves. The state of California has a similar law called the California Consumer Privacy Act (the “CCPA”). The CCPA was amended in 2020 to create the “California Privacy Protection Agency” which will have the authority to audit and enforce privacy rules, among other responsibilities. If we fail to comply with these laws or other similar regulations applicable to our business, we could be subject to significant litigation, monetary damages, regulatory enforcement actions or fines in one or more jurisdictions. For example, a failure to comply with the UKGDPR could result in finds up to the greater of £17.5 million or 4% of annual global revenues.
Recalls. Legislative and regulatory bodies from time to time have considered laws or regulations that would prohibit companies from renting or selling any vehicle that is subject to a recall until the recall service is performed. Whether any such prohibition may be enacted, and its ultimate scope, cannot be determined at this time. If a law or regulation is enacted that prevents the sale of vehicles until recall service has been performed, we could be required to reserve a significant portion of our vehicles from being available for sale for even a minor recall unrelated to vehicle safety. In addition, various manufacturers have issued stop sale notices in relation to certain recalls that require that we retain vehicles until the recall can be performed, whether or not parts are then available. While servicing recall vehicles yields parts and service revenue to us, the inability to sell a significant portion of our vehicles could increase our costs and have an adverse effect on our results of operations if a large number of our vehicles are the subject of simultaneous recalls or if needed replacement parts are not in adequate supply.
Vehicle requirements. Federal and state governments in our markets have increasingly placed restrictions and limitations on the vehicles sold in the market in an effort to combat perceived negative environmental effects. For example, in the U.S., automotive manufacturers are subject to federally mandated corporate average fuel economy standards, which will increase substantially through 2026. Certain representatives of the U.K. government suggested a ban on the sale of gasoline engines in cars and vans as early as 2030 and a ban on the sale of gasoline hybrid engines in cars and vans as early as 2035. Similar bans have been announced in California, Massachusetts, and New York which would ban the sale of new vehicle with gasoline engines in cars in 2035. Furthermore, numerous states and other jurisdictions, including California, have adopted or are considering regulations requiring the sale of specified numbers of zero-emission vehicles. Significant increases in fuel economy requirements and new restrictions on emissions on vehicles and fuels could adversely affect prices of and demand for the new vehicles that we sell, which could materially adversely affect us.
Tariff and trade risk. Increased tariffs, import product restrictions, and foreign trade risks may impair our ability to sell foreign vehicles profitably. The United States Mexico Canada Agreement allows tariff-free importing of automobiles among the countries only if (i) the vehicles have 75% of their components manufactured in the US, Mexico, or Canada, (ii) workers with an hourly wage of at least $16, manufacture at least 30% of the vehicle, which graduates up to 40% of the vehicle in 2023, or in the case of trucks, 45% and (iii) 70% of the steel and aluminum used in the production of the vehicle is sourced within North America. Should tariffs increase, we expect the price of many new vehicles we sell to increase which may adversely affect our new vehicle sales and related finance and insurance sales. Moreover, new rules in place after the recent Brexit accord between the European Union and the U.K. require varying levels of content in vehicles to originate in either the U.K. or the European Union to remain tariff free. If
automotive manufacturers cannot meet these content rules, there may be import tariffs on any affected vehicles, which could adversely affect our U.K. results.
Franchise laws in the U.S. In the U.S., state law generally provides protections to franchised vehicle dealers from discriminatory practices by manufacturers and from unreasonable termination or non-renewal of their franchise agreements. In many states, the laws require that new vehicle sales be conducted exclusively by automotive retailers (not manufacturers). Should U.S. franchise laws be repealed or amended to allow our existing manufacturer partners to effectively operate outside the franchised system, our results of operations may be materially and adversely impacted. See the risk factor captioned “Sales outside the franchise system” above.
Changes in law. New laws and regulations at the state and federal level may be enacted which could materially adversely impact our business. For example, in 2013, a ballot initiative in California titled the California Car Buyers Protection Act was proposed that would have eliminated our ability to be compensated for assisting in financing customer vehicle purchases, among other matters. If these initiatives or other adverse changes in law were to be enacted, it could have a significant and adverse effect on us.
Climate change and environmental regulations. Scientific evidence suggests that the globe is warming potentially resulting in an environment more prone to natural disasters, such as flooding. To date, we have seen increases in our cost to insure against such risks, which costs could continue to increase should this trend continue. We are subject to a wide range of environmental laws and regulations, including those governing discharges into the air and water; the operation and removal of storage tanks; and the use, storage, and disposal of hazardous substances. In the normal course of our operations we use, generate, and dispose of materials covered by these laws and regulations. In the face of climate change, these laws could become more stringent. 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. Furthermore, should climate change continue, we expect further regulation of gas engines and vehicle emissions which may affect the types of vehicles we sell and service. We cannot predict the future costs to our businesses for these developments.
Accounting rules and regulations. Significant changes to GAAP in the U.S. could significantly affect our reported financial position, earnings, and cash flows upon adoption and effectiveness. In addition, any changes to lease accounting could affect PTS customers’ decisions to purchase or lease trucks, which could adversely affect their business if leasing becomes a less favorable option. See the disclosure provided under “Recent Accounting Pronouncements” in Part II, Item 8, Note 1 of the Notes to our Consolidated Financial Statements for additional detail on accounting standard updates that could have an impact on us.
Related parties. Our two largest stockholders, Penske Corporation and its affiliates (“Penske Corporation”) and Mitsui & Co., Ltd. and its affiliates (“Mitsui”), together beneficially own approximately 63% of our outstanding common stock. The presence of such significant stockholders results in several risks, including:
Our principal stockholders have substantial influence. Penske Corporation and Mitsui have entered into a stockholders agreement pursuant to which they have agreed to vote together as to the election of our directors. As a result, Penske Corporation has the ability to control the composition of our Board of Directors, which may allow it to control our affairs and business. This concentration of ownership coupled with certain provisions contained in our agreements with manufacturers, our certificate of incorporation, and our bylaws could discourage, delay, or prevent a change in control of us.
Some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests. Roger Penske, our Chair and Chief Executive Officer and a director, holds the same offices at Penske Corporation. Robert Kurnick, Jr., our President and a director, is also the Vice Chair and a director of Penske Corporation. Bud Denker, our Executive Vice President, Human Resources, is also the President of Penske Corporation. Each of these officers is paid much of their compensation by Penske Corporation. The compensation they receive from us is based on their efforts on our behalf; however, they are not required to spend any specific amount of time on our matters. One of our directors, Greg Penske, is the son of our Chair and also serves as a director of Penske Corporation. Michael Eisenson, one of our directors, is also a director of Penske Corporation. Kota Odagiri, one of our directors, is also an employee of Mitsui & Co. Roger Penske also serves as Chairman of Penske Transportation Solutions, for which he is compensated by PTS.
Penske Corporation ownership levels. Certain of our agreements have clauses that are triggered in the event of a material change in the level of ownership of our common stock by Penske Corporation, such as our trademark agreement between us and Penske Corporation that governs our use of the “Penske” name which can be terminated 24
months after the date that Penske Corporation no longer owns at least 20% of our voting stock. We may not be able to renegotiate such agreements on terms that are acceptable to us, if at all, in the event of a significant change in Penske Corporation’s ownership.
We have a significant number of shares of common stock eligible for future sale. Penske Corporation and Mitsui own approximately 63% of our common stock, and each has two demand registration rights that could result in a substantial number of shares being introduced for sale in the market. We also have a significant amount of authorized but unissued shares. Penske Corporation has pledged a substantial portion of its shares of our common stock as collateral to secure a loan facility. A default by Penske Corporation could result in the foreclosure on those shares by the lenders, after which the lenders could attempt to sell those shares on the open market or to a third party. The introduction of any of these shares into the market could have a material adverse effect on our stock price.
Property loss, business interruption, or other liabilities. Our business is subject to substantial risk of loss due to the significant concentration of property values, including vehicle and parts inventories at our operating locations; claims by employees, customers, and third parties for personal injury or property damage; and fines and penalties in connection with alleged violations of regulatory requirements. While we have insurance for many of these risks, we retain risk relating to certain of these perils and certain perils are not covered by our insurance. Certain insurers have limited available property coverage in response to the natural catastrophes experienced in recent years. If we experience significant losses that are not covered by our insurance, whether due to adverse weather conditions or otherwise, or we are required to retain a significant portion of a loss, it could have a significant and adverse effect on us.
Information technology. Our information systems are fully integrated into our operations, and we rely on them to operate effectively, including with respect to electronic interfaces with manufacturers and other vendors, customer relationship management, sales and service scheduling, data storage, and financial and operational reporting. The majority of our systems are licensed from third parties; the most significant of which are provided by a limited number of suppliers in the U.S., U.K., and Australia. The failure of our information systems to perform as designed, the failure to protect the integrity of these systems, or the interruption of these systems due to natural disasters, power loss, unexpected termination of our agreements, or other reasons could significantly and adversely disrupt our business operations, impact sales and results of operations, expose us to customer or third-party claims, or result in adverse publicity.
Cyber-security. As part of our business model, we receive sensitive information regarding customers, associates, and vendors from various online and offline channels. We collect, process, and retain this information in the normal course of our business. Our internal and third-party systems are under a moderate level of risk from cyber criminals or other individuals with malicious intent to gain unauthorized access to our systems. Cyber-attacks continue to grow in number and sophistication thus presenting an ongoing threat to our systems, whether internal or external, used to operate the business on a day-to-day basis. Despite the security measures we have in place, our facilities, systems, associates, and those of our third-party service providers, could be vulnerable to cyber-attacks, ransomware attacks, security breaches, social engineering, malicious software, lost or misplaced data, programming errors, human errors, acts of vandalism, or other events. Many companies have disclosed security breaches involving sophisticated cyber-attacks and ransomware attacks that were not recognized or detected until after such companies had been affected, notwithstanding the preventive measures they had in place. Any security breach or event resulting in the misappropriation, loss, or other unauthorized disclosure of confidential information or degradation of services provided by critical business systems, whether by us directly or our third-party service providers, could adversely affect our business operations, sales, reputation with current and potential customers, associates or vendors as well as other operational and financial impacts derived from investigations, litigation, the imposition of penalties, or other means. In addition, our failure to respond quickly and appropriately to such a security breach could exacerbate the consequences of the breach.