PENSKE AUTOMOTIVE GROUP, INC. (Form: 10-Q, Received: 10/26/2018 16:18:36)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended September 30, 2018

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

For the transition period from to

Commission file number 1-12297

Penske Automotive Group, Inc.

(Exact name of registrant as specified in its charter)


Delaware		22-3086739
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

Registrant’s telephone number, including area code:

(248) 648-2500

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐		Non-accelerated filer ☐		Smaller reporting company ☐		Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

As of October 22, 2018, there were 84,861,435 shares of voting common stock outstanding.

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Condensed Balance Sheets as of September 30, 2018 and December 31, 2017	3

Consolidated Condensed Statements of Income for the three and nine months ended September 30, 2018 and 2017	4

Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	5

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	6

Consolidated Condensed Statement of Equity for the nine months ended September 30, 2018	7

Notes to Consolidated Condensed Financial Statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3. Quantitative & Qualitative Disclosures About Market Risk	62

Item 4. Controls and Procedures	63

PART II — OTHER INFORMATION

Item 1. Legal Proceedings	64

Item 6. Exhibits	65

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED BALANCE SHEETS


	September 30,		December 31,
	2018		2017
	(Unaudited)
	(In millions, except share
	and per share amounts)
ASSETS
Cash and cash equivalents	$	37.6	$	45.7
Accounts receivable, net of allowance for doubtful accounts of $5.3 and $5.5		953.4		954.9
Inventories		3,783.4		3,944.1
Other current assets		91.8		81.8
Total current assets		4,866.2		5,026.5
Property and equipment, net		2,178.2		2,108.6
Goodwill		1,692.6		1,660.5
Other indefinite-lived intangible assets		471.9		474.0
Equity method investments		1,299.7		1,256.6
Other long-term assets		18.3		14.4
Total assets	$	10,526.9	$	10,540.6
LIABILITIES AND EQUITY
Floor plan notes payable	$	2,169.5	$	2,343.2
Floor plan notes payable — non-trade		1,359.0		1,418.6
Accounts payable		633.8		641.6
Accrued expenses		570.2		523.5
Current portion of long-term debt		92.7		72.8
Liabilities held for sale		0.7		0.7
Total current liabilities		4,825.9		5,000.4
Long-term debt		1,993.3		2,090.4
Deferred tax liabilities		547.9		481.5
Other long-term liabilities		547.8		540.3
Total liabilities		7,914.9		8,112.6
Commitments and contingent liabilities (Note 9)
Equity
Penske Automotive Group stockholders’ equity:
Preferred Stock, $0.0001 par value; 100,000 shares authorized; none issued and outstanding		—		—
Common Stock, $0.0001 par value, 240,000,000 shares authorized; 84,863,169 shares issued and outstanding at September 30, 2018; 85,787,507 shares issued and outstanding at December 31, 2017		—		—
Non-voting Common Stock, $0.0001 par value; 7,125,000 shares authorized; none issued and outstanding		—		—
Class C Common Stock, $0.0001 par value; 20,000,000 shares authorized; none issued and outstanding		—		—
Additional paid-in capital		487.9		532.3
Retained earnings		2,299.2		2,009.4
Accumulated other comprehensive income (loss)		(203.8)		(146.5)
Total Penske Automotive Group stockholders’ equity		2,583.3		2,395.2
Non-controlling interest		28.7		32.8
Total equity		2,612.0		2,428.0
Total liabilities and equity	$	10,526.9	$	10,540.6

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2018		2017		2018		2017
	(Unaudited)
	(In millions, except per share amounts)
Revenue:
Retail automotive dealership		$	5,148.5	$	5,085.4	$	15,900.0	$	14,882.5
Retail commercial truck dealership			385.3		299.6		1,016.5		739.8
Commercial vehicle distribution and other			124.8		139.4		429.3		366.6
Total revenues			5,658.6		5,524.4		17,345.8		15,988.9
Cost of sales:
Retail automotive dealership			4,386.3		4,341.2		13,561.5		12,684.0
Retail commercial truck dealership			327.5		255.3		859.7		619.1
Commercial vehicle distribution and other			92.2		105.3		317.8		271.6
Total cost of sales			4,806.0		4,701.8		14,739.0		13,574.7
Gross profit			852.6		822.6		2,606.8		2,414.2
Selling, general and administrative expenses			662.8		646.1		2,001.3		1,869.8
Depreciation			25.9		24.3		77.2		70.0
Operating income			163.9		152.2		528.3		474.4
Floor plan interest expense			(20.2)		(16.4)		(59.0)		(45.6)
Other interest expense			(28.3)		(27.8)		(86.7)		(79.2)
Equity in earnings of affiliates			41.7		30.9		95.0		70.9
Income from continuing operations before income taxes			157.1		138.9		477.6		420.5
Income taxes			(27.1)		(44.7)		(104.7)		(136.0)
Income from continuing operations			130.0		94.2		372.9		284.5
Income (loss) from discontinued operations, net of tax			0.1		0.1		0.2		(0.3)
Net income			130.1		94.3		373.1		284.2
Less: (Loss) income attributable to non-controlling interests			(0.1)		(0.1)		0.2		1.0
Net income attributable to Penske Automotive Group common stockholders		$	130.2	$	94.4	$	372.9	$	283.2
Basic earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	1.53	$	1.10	$	4.37	$	3.30
Discontinued operations			0.00		0.00		0.00		0.00
Net income attributable to Penske Automotive Group common stockholders		$	1.53	$	1.10	$	4.37	$	3.30
Shares used in determining basic earnings per share			84.9		85.9		85.2		85.9
Diluted earnings per share attributable to Penske Automotive Group common stockholders:
Continuing operations		$	1.53	$	1.10	$	4.37	$	3.30
Discontinued operations			0.00		0.00		0.00		0.00
Net income attributable to Penske Automotive Group common stockholders		$	1.53	$	1.10	$	4.37	$	3.30
Shares used in determining diluted earnings per share			84.9		86.0		85.3		85.9
Amounts attributable to Penske Automotive Group common stockholders:
Income from continuing operations		$	130.0	$	94.2	$	372.9	$	284.5
Less: (Loss) income attributable to non-controlling interests			(0.1)		(0.1)		0.2		1.0
Income from continuing operations, net of tax			130.1		94.3		372.7		283.5
Income (loss) from discontinued operations, net of tax			0.1		0.1		0.2		(0.3)
Net income attributable to Penske Automotive Group common stockholders		$	130.2	$	94.4	$	372.9	$	283.2
Cash dividends per share		$	0.36	$	0.32	$	1.05	$	0.93

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOM E


		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2018		2017		2018		2017
	(Unaudited)
	(In millions)
Net income		$	130.1	$	94.3	$	373.1	$	284.2
Other comprehensive income:
Foreign currency translation adjustment			(19.6)		31.7		(57.2)		94.1
Other adjustments to comprehensive income, net			2.1		3.6		(1.3)		7.8
Other comprehensive (loss) income, net of tax			(17.5)		35.3		(58.5)		101.9
Comprehensive income			112.6		129.6		314.6		386.1
Less: Comprehensive (loss) income attributable to non-controlling interests			(0.2)		0.6		(1.0)		3.8
Comprehensive income attributable to Penske Automotive Group common stockholders		$	112.8	$	129.0	$	315.6	$	382.3

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2018		2017
	(Unaudited)
	(In millions)
Operating Activities:
Net income	$	373.1	$	284.2
Adjustments to reconcile net income to net cash from continuing operating activities:
Depreciation		77.2		70.0
Earnings of equity method investments		(69.5)		(53.1)
(Income) loss from discontinued operations, net of tax		(0.2)		0.3
Deferred income taxes		64.3		204.9
Changes in operating assets and liabilities:
Accounts receivable		6.1		(48.7)
Inventories		205.2		(226.7)
Floor plan notes payable		(165.2)		137.8
Accounts payable and accrued expenses		26.2		98.4
Other		18.7		(0.3)
Net cash provided by continuing operating activities		535.9		466.8
Investing Activities:
Purchase of equipment and improvements		(188.5)		(180.1)
Proceeds from sale of dealerships		58.4		9.0
Proceeds from sale-leaseback transactions		10.7		—
Acquisition of additional ownership interest in Penske Truck Leasing		—		(239.1)
Acquisitions net, including repayment of sellers’ floor plan notes payable of $25.8 and $101.6, respectively		(168.6)		(449.7)
Other		(3.5)		4.3
Net cash used in continuing investing activities		(291.5)		(855.6)
Financing Activities:
Proceeds from borrowings under U.S. credit agreement revolving credit line		1,163.0		1,621.0
Repayments under U.S. credit agreement revolving credit line		(1,335.0)		(1,645.0)
Issuance of 3.75% senior subordinated notes		—		300.0
Net borrowings of other long-term debt		131.0		74.3
Net (repayments) borrowings of floor plan notes payable — non-trade		(59.6)		155.2
Payment of debt issuance costs		—		(4.0)
Repurchases of common stock		(55.8)		(18.5)
Dividends		(89.7)		(80.1)
Other		(6.2)		(5.8)
Net cash (used in) provided by continuing financing activities		(252.3)		397.1
Discontinued operations:
Net cash provided by discontinued operating activities		0.3		0.5
Net cash provided by discontinued investing activities		—		2.4
Net cash used in discontinued financing activities		—		(0.2)
Net cash provided by discontinued operations		0.3		2.7
Effect of exchange rate changes on cash and cash equivalents		(0.5)		2.2
Net change in cash and cash equivalents		(8.1)		13.2
Cash and cash equivalents, beginning of period		45.7		24.0
Cash and cash equivalents, end of period	$	37.6	$	37.2
Supplemental disclosures of cash flow information:
Cash paid for:
Interest	$	127.4	$	102.2
Income taxes		36.5		21.3
Seller financed/assumed debt		—		3.8
Non cash activities:
Deferred consideration	$	6.8	$	—
Consideration transferred through common stock issuance		—		32.4
Contingent consideration		—		20.0

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

CONSOLIDATED CONDENSED STATEMENT OF EQUITY


								Accumulated		Total
	Common Stock			Additional				Other		Penske
	Issued			Paid-in		Retained		Comprehensive		Automotive Group		Non-controlling		Total
	Shares	Amount		Capital		Earnings		Income (Loss)		Stockholders’ Equity		Interest		Equity
	(Unaudited)
	(Dollars in millions)
Balance, December 31, 2017	85,787,507	$	—	$	532.3	$	2,009.4	$	(146.5)	$	2,395.2	$	32.8	$	2,428.0
Adoption of ASC 606 (Note 1)	—		—		—		6.6		—		6.6		—		6.6
Equity compensation	328,286		—		13.0				—		13.0		—		13.0
Repurchases of common stock	(1,252,624)		—		(55.8)		—		—		(55.8)		—		(55.8)
Dividends	—		—		—		(89.7)		—		(89.7)		—		(89.7)
Purchase of subsidiary shares from non-controlling interest	—		—		(1.4)		—		—		(1.4)		(3.1)		(4.5)
Distributions to non-controlling interest	—		—		—		—		—		—		(0.8)		(0.8)
Foreign currency translation	—		—		—		—		(56.0)		(56.0)		(1.2)		(57.2)
Other	—		—		(0.2)		—		(1.3)		(1.5)		0.8		(0.7)
Net income	—		—		—		372.9		—		372.9		0.2		373.1
Balance, September 30, 2018	84,863,169	$	—	$	487.9	$	2,299.2	$	(203.8)	$	2,583.3	$	28.7	$	2,612.0

See Notes to Consolidated Condensed Financial Statements

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PENSKE AUTOMOTIVE GROUP, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

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

1. Interim Financial Statements

Business Overview

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

We are a diversified international transportation services company that operates automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe, and distributes commercial vehicles, diesel engines, gas engines, power systems and related parts and services principally in Australia and New Zealand.

Retail Automotive Dealership. We believe we are the second largest automotive retailer headquartered in the U.S. as measured by the $19.8 billion in total retail automotive dealership revenue we generated in 2017. As of September 30, 2018, we operated 342 retail automotive franchises, of which 151 franchises are located in the U.S. and 191 franchises are located outside of the U.S. The franchises outside the U.S. are located primarily in the U.K. In the nine months ended September 30, 2018, we retailed and wholesaled more than 493,000 vehicles. We are diversified geographically, with 54% of our total retail automotive dealership revenues in the nine months ended September 30, 2018 generated in the U.S. and Puerto Rico and 46% generated outside the U.S. We offer over 40 vehicle brands, with 69% of our retail automotive dealership revenue in the nine months ended September 30, 2018 generated from premium brands, such as Audi, BMW, 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 and 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.

We operate fourteen stand-alone used vehicle dealerships in the U.S. and the U.K. W e acquired CarSense in the U.S. and CarShop in the U.K. in the first quarter of 2017 and acquired The Car People in the U.K. in January 2018. Our CarSense operations in the U.S. consist of five locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas, including southern New Jersey. Our CarShop operations in the U.K. consist of five retail locations and a vehicle preparation center operating principally throughout Southern England. The Car People operations in the U.K. consist of four retail locations operating across Northern England, which complement CarShop’s Southern England locations.

During the nine months ended September 30, 2018, we acquired four retail automotive franchises, were awarded one retail automotive franchise, and disposed of six retail automotive franchises. The four retail automotive franchises acquired are located in Italy and represent the Mercedes-Benz and smart brands.

Retail Commercial Truck Dealership. We operate a heavy and medium duty truck dealership group known as Premier Truck Group (“PTG”) with locations in Texas, Oklahoma, Tennessee, Georgia, and Canada. As of September 30, 2018, PTG operated twenty-one locations, including fifteen full-service dealerships and six collision centers, offering primarily Freightliner and Western Star branded trucks. One of these locations was acquired in April 2018 in Canada. PTG also offers a full range of used trucks available for sale as well as service and parts departments, providing a full range of maintenance and repair services.

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business, known as Penske Commercial Vehicles Australia (“PCV Australia”), distributes commercial vehicles and parts to a network of more than 70 dealership locations, including eight company-owned retail commercial vehicle dealerships.

We are also a leading distributor of diesel and gas engines and power systems, principally representing MTU, Detroit Diesel, Allison Transmission and MTU Onsite Energy. This business, known as Penske Power Systems (“PPS”), offers products across the on- and off-highway markets in Australia, New Zealand and portions of the Pacific and supports full parts and aftersales service through a network of branches, field locations and dealers across the region. The on-highway portion of this business complements our PCV Australia distribution business, including integrated operations at retail locations selling PCV brands.

Penske Truck Leasing. We hold a 28.9% ownership interest in Penske Truck Leasing Co., L.P. (“PTL”), a leading provider of transportation services and supply chain management. PTL 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 and lead logistics provider. On September 7, 2017, we acquired an additional 5.5% ownership interest in PTL from subsidiaries of GE Capital Global Holdings, LLC (collectively, “GE Capital”). Prior to this acquisition, we held a 23.4% ownership interest in PTL. PTL is currently owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui & Co., Ltd. (“Mitsui”). GE Capital no longer owns any ownership interests in PTL. 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.

Basis of Presentation

The accompanying unaudited consolidated condensed financial statements of PAG have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted pursuant to the SEC rules and regulations. The information presented as of September 30, 2018 and December 31, 2017 and for the three and nine month periods ended September 30, 2018 and 2017 is unaudited, but includes all adjustments which our management believes to be necessary for the fair presentation of results for the periods presented. Results for interim periods are not necessarily indicative of results to be expected for the year. These consolidated condensed financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2017, which are included as part of our Annual Report on Form 10-K.

Estimates

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

Fair Value of Financial Instruments

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


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

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Level 2

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

Level 3

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

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

Our fixed rate debt consists of amounts outstanding under our senior subordinated notes and mortgage facilities. We estimate the fair value of our senior unsecured notes using quoted prices for the identical liability (Level 2), and we estimate the fair value of our mortgage facilities using a present value technique based on current market interest rates for similar types of financial instruments (Level 2). A summary of our fixed rate debt is as follows:


	September 30, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
3.75% senior subordinated notes due 2020	$	297.5	$	296.8	$	296.5	$	301.7
5.75% senior subordinated notes due 2022		546.6		557.5		545.9		562.3
5.375% senior subordinated notes due 2024		297.5		294.2		297.2		300.2
5.50% senior subordinated notes due 2026		494.9		491.4		494.4		505.0
Mortgage facilities		243.0		238.5		235.5		233.4

Assets Held for Sale and Discontinued Operations

We had no entities newly classified as held for sale during the nine months ended September 30, 2018 or 2017 that met the criteria to be classified as discontinued operations. The financial information for entities that were classified as discontinued operations prior to adoption of Accounting Standards Update No. 2014-08 are included in “Income (loss) from discontinued operations” in the accompanying consolidated condensed statements of income and “Liabilities held for sale” in the accompanying consolidated condensed balance sheets for all periods presented.

Disposals

During the nine months ended September 30, 2018, we disposed of six retail automotive franchises. The results of operations for these businesses are included within continuing operations for the three and nine months ended September 30, 2018 and 2017, as these franchises did not meet the criteria to be classified as held for sale and treated as discontinued operations.

Income Taxes

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

The U.S. Tax Cuts and Jobs Act (the “Act”) was signed into law on December 22, 2017. The Act modified several provisions of the Internal Revenue Code related to corporations, including a permanent corporate income tax rate

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reduction from 35% to 21%, effective January 1, 2018. The Act also significantly changed international tax laws for tax years beginning after December 31, 2017 and required a one-time mandatory deemed repatriation of all cumulative post-1986 foreign earnings and profits of a U.S. shareholder’s foreign subsidiaries, which we recognized in 2017, the year of enactment.

On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date for companies to complete such income tax accounting under ASC 740.

In accordance with SAB 118, we have now obtained, prepared, and analyzed additional information about facts and circumstances that existed as of the enactment date and computed the U.S. tax impact of the Act. Since the enactment of new tax legislation, the Internal Revenue Service (“IRS”) and state tax authorities have issued news releases, notices, instructions and other forms of guidance to assist taxpayers with implementing the Act. We have also considered the impact of any new information provided by the IRS and state tax authorities in reaching our conclusions. We consider our conclusions to be final and complete.

We determined that our final U.S. federal and state tax liability as a result of the transition tax on repatriation resulted in $52.2 million on a deemed repatriation of $946.0 million of foreign earnings and profits. The remeasurement of certain deferred tax assets and liabilities due to the corporate income tax rate reduction provided an income tax benefit of $301.2 million.

Changes made to provisional estimates for the tax year ended December 31, 2017 were primarily related to our foreign earnings and profits, foreign tax credits, and partnership outside basis difference related to our investment in Penske Truck Leasing.

The following adjustments to our provisional estimates have been recorded to current tax expense or deferred tax expense, as applicable, in the third quarter of 2018:


(In millions)
Federal and State Changes Due to Repatriation	$	12.5
Other Adjustments		(0.9)
Total SAB 118 Benefit	$	11.6

As a result of the changes made to the provisional estimates mentioned above, the total benefit recorded as a result of the enactment of the Act increased from $243.4 million to $255.0 million, with the corresponding income tax benefit of $11.6 million recorded in the third quarter of 2018.

We have considered and analyzed the applicability of the global intangible low-taxed income (“GILTI”) provisions of the Act beginning in 2018 and its effect on our annualized effective tax rate for 2018. The effect of the GILTI inclusions on the 2018 annualized effective tax rate is not material. We have adopted the method of accounting for GILTI inclusions as a period expense and therefore have not accrued any deferred taxes in relation to this provision in the first nine months of 2018 or in the 2017 consolidated financial statements.

Recent Accounting Pronouncements

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The FASB also issued additional ASUs containing various updates to Topic 606 which are to be adopted along with ASU 2014-09 (collectively, “the new revenue recognition standard,” “ASC 606”). ASC 606 supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition.” In accordance with the new revenue recognition standard, an entity recognizes revenue when it

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transfers promised goods or services to customers using a five-step model that requires entities to exercise judgment when considering the terms of contracts with customers. For public companies, the new revenue recognition standard is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods. Entities may adopt the new guidance retrospectively to each prior reporting period presented under a full retrospective approach, or as a cumulative-effect adjustment as of the date of adoption under a modified retrospective approach. We adopted ASC 606 on January 1, 2018 using the modified retrospective approach to contracts not completed as of the date of adoption, with no restatement of comparative periods, and a cumulative-effect adjustment to retained earnings recognized as of the date of adoption.

As part of the adoption of ASC 606, we performed an assessment of the impact the new revenue recognition standard would have on our consolidated financial statements. Our assessment also considered required changes in internal controls resulting from the adoption of the new revenue recognition standard. Although new controls have been implemented as a result of the adoption, such changes were not deemed material. A summary of the impact of the adoption of ASC 606 on our consolidated financial statements is included below.

For our Retail Automotive and Retail Commercial Truck reportable segments, under legacy guidance we recognized revenues at a point in time upon meeting relevant revenue recognition criteria. Under ASC 606, the timing of revenue recognition for our service, parts and collision revenue stream changed, as we concluded that performance obligations for service and collision work are satisfied over time under the new revenue recognition standard. All other revenue streams for these businesses continue to be recognized at a point in time, and our performance obligations and revenue recognition timing and practices are substantially similar to how revenues were recorded under legacy guidance.

For our Other reportable segment consisting primarily of our businesses in Australia and New Zealand, Penske Commercial Vehicles Australia and Penske Power Systems, under legacy guidance we recognized revenues for vehicles, engines, parts, and services at a point in time upon meeting relevant revenue recognition criteria. For our long-term power generation contracts at Penske Power Systems, we recognized revenues using the percentage of completion method in accordance with contract milestones. Under ASC 606, the timing of revenue recognition for the service and parts revenue stream for PCV Australia and PPS changed, as we concluded that performance obligations for service work are satisfied over time under the new revenue recognition standard. For revenues previously recognized using the percentage of completion method, these revenues are recognized as performance obligations are satisfied over time, consistent with the timing of recognition under legacy guidance, but are now recognized using an output method, which measures the value to the customer of the goods or services transferred to date relative to the remaining goods or services promised. All other revenue streams for these businesses continue to be recognized at a point in time, and our performance obligations and revenue recognition timing and practices are substantially similar to how revenues were recorded under legacy guidance.

See Note 2 “Revenues” for additional disclosures in accordance with the new revenue recognition standard.

The adoption of the new revenue recognition standard resulted in a net, after-tax cumulative effect adjustment to retained earnings of approximately $6.6 million as of January 1, 2018. The details of this adjustment are summarized below.


	Balance at		Adjustments Due		Balance at
	December 31, 2017		to ASC 606		January 1, 2018
Assets
Accounts receivable	$	954.9	$	22.4	$	977.3
Inventories		3,944.1		(13.4)		3,930.7

Liabilities and Equity
Accrued expenses	$	523.5	$	0.1	$	523.6
Deferred tax liabilities		481.5		2.3		483.8
Retained earnings		2,009.4		6.6		2,016.0

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The following tables summarize the impact of the adoption of ASC 606 on our consolidated condensed statement of income and consolidated condensed balance sheet for the three and nine months ended and as of September 30, 2018:


	For the Three Months Ended September 30, 2018
Statement of Income	As		Without Adoption		Impact of Adoption
	Reported		of ASC 606		of ASC 606
Revenue:
Retail automotive dealership	$	5,148.5	$	5,149.4	$	(0.9)
Retail commercial truck dealership		385.3		384.3		1.0
Commercial vehicle distribution and other		124.8		126.2		(1.4)

Cost of sales:
Retail automotive dealership		4,386.3		4,387.0		(0.7)
Retail commercial truck dealership		327.5		327.0		0.5
Commercial vehicle distribution and other		92.2		92.9		(0.7)

Gross profit		852.6		853.0		(0.4)
Income taxes		(27.1)		(27.2)		(0.1)
Net income		130.1		130.4		(0.3)


	For the Nine Months Ended September 30, 2018
Statement of Income	As		Without Adoption		Impact of Adoption
	Reported		of ASC 606		of ASC 606
Revenue:
Retail automotive dealership	$	15,900.0	$	15,898.2	$	1.8
Retail commercial truck dealership		1,016.5		1,015.4		1.1
Commercial vehicle distribution and other		429.3		426.9		2.4

Cost of sales:
Retail automotive dealership		13,561.5		13,560.4		1.1
Retail commercial truck dealership		859.7		859.1		0.6
Commercial vehicle distribution and other		317.8		316.8		1.0

Gross profit		2,606.8		2,604.2		2.6
Income taxes		(104.7)		(103.9)		0.8
Net income		373.1		371.3		1.8


	September 30, 2018
Balance Sheet	As		Without Adoption		Impact of ASC 606
	Reported		of ASC 606		Adoption
Assets
Accounts receivable	$	953.4	$	925.7	$	27.7
Inventories		3,783.4		3,799.2		(15.8)

Liabilities and Equity
Accrued expenses	$	570.2	$	569.8	$	0.4
Deferred tax liabilities		547.9		544.9		3.0
Retained earnings		2,299.2		2,290.7		8.5

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Accounting for Leases

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this new guidance, a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The FASB has since issued further ASUs related to the standard providing additional practical expedients and an optional transition method allowing entities to not recast comparative periods. We intend to adopt this ASU, including all available practical expedients, on January 1, 2019 using the optional transition method. As such, we will recognize the effects of applying the new standard as a cumulative-effect adjustment to retained earnings as of January 1, 2019.

We have a significant amount of leases for property and equipment that are classified as operating leases under current lease accounting guidance. The adoption of this ASU will result in a significant increase to our consolidated balance sheets for lease liabilities and right-of-use assets. We believe our current off-balance sheet leasing commitments are reflected in our credit rating. We are also in the process of evaluating and documenting any changes in controls and procedures that may be necessary as part of our implementation of the new standards; however, we do not expect material changes. We will continue to assess the impact that these new standards will have our on our consolidated financial statements throughout the remainder of 2018.

Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments.” This ASU provides new guidance on eight specific cash flow issues related to how such cash receipts and cash payments should be presented in a statement of cash flows. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2017, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied retrospectively. We adopted this ASU retrospectively on January 1, 2018. The adoption of this accounting standard update did not have an impact on our consolidated cash flows for the nine months ended September 30, 2018 and September 30, 2017.

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement — Reporting Comprehensive Income (Topic 220) — Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the enactment of the U.S. Tax Cuts and Jobs Act (“the Act”). The update also requires entities to disclose whether or not they elected to reclassify the tax effects related to the Act as well as their accounting policy for releasing income tax effects from accumulated other comprehensive income. This ASU is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. We do not intend to adopt the optional guidance of this accounting standard update, as the potential impact on our consolidated financial statements is not material.

Fair Value Measurement Disclosure

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement.” This ASU eliminates, modifies, and adds certain disclosure requirements on fair value measurements. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. Entities are permitted to early adopt any eliminated or amended disclosures and delay adoption of the additional disclosure requirements until the effective date. We intend to adopt this ASU on January 1, 2020. We do not expect the adoption of this accounting standard update to have a significant impact on our consolidated financial statements.

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Accounting for Cloud Computing Arrangements

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under this new guidance, certain implementation costs incurred in a hosted cloud computing service arrangement will be capitalized in accordance with ASC 350-40. For public companies, this ASU is effective for financial statements issued for annual periods beginning after December 15, 2019, and interim periods within those annual periods, with early adoption permitted. The amendments from this update are to be applied retrospectively or prospectively to all implementation costs incurred after adoption. We intend to adopt this ASU on January 1, 2020. We are currently evaluating the impacts the adoption of this accounting standard update will have on our consolidated financial statements.

2. Revenues

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

Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition

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

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

Dealership Finance and Insurance Sales. Subsequent to the sale of a vehicle to a customer, we sell installment sale contracts to various financial institutions on a non‑recourse basis (with specified exceptions) to mitigate the risk of default. We receive a commission from the lender equal to either the difference between the interest rate charged to the customer and the interest rate set by the financing institution or a flat fee. We also receive commissions for facilitating the sale of various products to customers, including guaranteed vehicle protection insurance, vehicle theft protection and extended service contracts. These commissions are recorded as revenue at a point in time when the customer enters into the contract. Payment is typically due and collected within 30 days subsequent to the execution of the contract with the customer. In the case of finance contracts, a customer may prepay or fail to pay their contract, thereby terminating the contract. Customers may also terminate extended service contracts and other insurance products, which are fully paid at purchase, and become eligible for refunds of unused premiums. In these circumstances, a portion of the commissions we

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received may be charged back based on the terms of the contracts. The revenue we record relating to these transactions is net of an estimate of the amount of chargebacks we will be required to pay. Our estimate is based upon our historical experience with similar contracts, including the impact of refinance and default rates on retail finance contracts and cancellation rates on extended service contracts and other insurance products. Aggregate reserves relating to chargeback activity were $25.9 million and $24.9 million as of September 30, 2018 and December 31, 2017, respectively.

Commercial Vehicle Distribution and Other Revenue Recognition

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

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

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

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

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

Other. Other revenue primarily consists of our non-automotive motorcycle dealership operations. Revenue recognition practices for these operations do not differ materially from those described under “Retail Automotive and Retail Commercial Truck Dealership Revenue Recognition” above.

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Retail Automotive Dealership

The following tables disaggregate our retail automotive reportable segment revenue by product type and geographic location for the three and nine months ended September 30, 2018 and 2017:


	Three Months Ended September 30,				Nine Months Ended September 30,
Retail Automotive Dealership Revenue	2018		2017		2018		2017
New vehicle	$	2,350.2	$	2,480.8	$	7,325.6	$	7,189.9
Used vehicle		1,825.2		1,669.5		5,588.9		4,850.6
Finance and insurance, net		158.5		152.0		482.2		436.6
Service and parts		523.8		520.9		1,615.1		1,540.1
Fleet and wholesale		290.8		262.2		888.2		865.3
Total retail automotive dealership revenue	$	5,148.5	$	5,085.4	$	15,900.0	$	14,882.5


	Three Months Ended September 30,				Nine Months Ended September 30,
Retail Automotive Dealership Revenue	2018		2017		2018		2017
U.S.	$	2,891.6	$	2,953.1	$	8,596.4	$	8,625.5
U.K.		1,945.1		1,864.6		6,244.9		5,412.3
Germany and Italy		311.8		267.7		1,058.7		844.7
Total retail automotive dealership revenue	$	5,148.5	$	5,085.4	$	15,900.0	$	14,882.5

Retail Commercial Truck Dealership

The following table disaggregates our retail commercial truck reportable segment revenue by product type for the three and nine months ended September 30, 2018 and 2017:


	Three Months Ended September 30,				Nine Months Ended September 30,
Retail Commercial Truck Dealership Revenue	2018		2017		2018		2017
New truck	$	249.4	$	184.3	$	630.5	$	411.5
Used truck		32.5		25.7		86.3		67.9
Finance and insurance, net		2.9		2.1		9.0		6.6
Service and parts		93.1		83.3		275.7		244.6
Other		7.4		4.2		15.0		9.2
Total retail commercial truck dealership revenue	$	385.3	$	299.6	$	1,016.5	$	739.8

Commercial Vehicle Distribution and Other

The following table disaggregates our other reportable segment revenue by business for the three and nine months ended September 30, 2018 and 2017:


	Three Months Ended September 30,				Nine Months Ended September 30,
Commercial Vehicle Distribution and Other	2018		2017		2018		2017
Penske Commercial Vehicles Australia	$	50.4	$	70.7	$	169.6	$	191.6
Penske Power Systems		73.3		67.6		256.8		171.8
Other		1.1		1.1		2.9		3.2
Total commercial vehicle distribution and other revenue	$	124.8	$	139.4	$	429.3	$	366.6

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Contract Balances

The following table summarizes our accounts receivable and unearned revenues as of September 30, 2018 and December 31, 2017:


	September 30,		December 31,
	2018		2017
Accounts receivable
Contracts in transit	$	318.7	$	356.1
Vehicle receivables		251.9		233.0
Manufacturer receivables		216.8		230.1
Trade receivables		158.9		136.7

Accrued expenses
Unearned revenues	$	271.7	$	302.6

Contracts in transit represent receivables from unaffiliated finance companies relating to the sale of customers’ installment sales and lease contracts arising in connection with the sale of a vehicle by us. Vehicle receivables represent receivables for any portion of the vehicle sales price not paid by the finance company. Manufacturer receivables represent amounts due from manufacturers, including incentives, holdbacks, rebates, warranty claims, and other receivables due from the factory. Trade receivables represent receivables due from customers, including amounts due for parts and service sales, as well as receivables due from finance companies and others for the commissions earned on financing and commissions earned on insurance and extended service products provided by third parties. We evaluate collectability of receivables and estimate an allowance for doubtful accounts based on the age of the receivable and historical collection experience, which is recorded within “Accounts receivable” on our consolidated balance sheets with our receivables presented net of the allowance.

Unearned revenues primarily relate to payments received from customers prior to satisfaction of our performance obligations, such as customer deposits and deferred revenues from operating leases. These amounts are presented within “Accrued expenses” on our consolidated balance sheets. Of the amounts recorded as unearned revenues as of December 31, 2017, $220. 3 million was recognized as revenue during the nine months ended September 30, 2018.

Additional Revenue Recognition Related Policies

We do not have any material significant payment terms associated with contracts with our customers. Payment is due and collected as previously detailed for each reportable segment. We do not offer material rights of return or service-type warranties.

Taxes collected from customers and remitted to governmental authorities are recorded on a net basis (excluded from revenue). Shipping costs incurred subsequent to transfer of control to our customers are recognized as cost of sales. Sales promotions that we offer to customers are accounted for as a reduction of revenues at the time of sale.

We expense sales commissions as incurred, as the amortization period for such costs would be less than one year. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less nor for contracts that we recognize revenue at the amount to which we have the right to invoice for services performed. The effect of applying these practical expedients is not material.

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3. Inventories

Inventories consisted of the following:


	September 30,		December 31,
	2018		2017
Retail automotive dealership new vehicles	$	2,143.2	$	2,344.1
Retail automotive dealership used vehicles		1,042.4		993.1
Retail automotive parts, accessories and other		126.3		141.7
Retail commercial truck dealership vehicles and parts		245.9		207.0
Commercial vehicle distribution vehicles, parts and engines		225.6		258.2
Total inventories	$	3,783.4	$	3,944.1

We receive credits from certain vehicle manufacturers that reduce cost of sales when the vehicles are sold. Such credits amounted to $15.1 million and $15.7 million during the three months ended September 30, 2018 and 2017, respectively, and $40.7 million and $40.2 million during the nine months ended September 30, 2018 and 2017, respectively.

4. Business Combinations

During the nine months ended September 30, 2018, we acquired The Car People, a stand-alone specialty retailer of used vehicles in the U.K. representing four locations; acquired four retail automotive franchises; and acquired one retail commercial truck dealership. During the nine months ended September 30, 2017, we acquired CarSense, a stand-alone specialty retailer of used vehicles in the U.S. representing five locations, acquired CarShop, a stand-alone specialty retailer of used vehicles in the U.K. representing five retail locations and a vehicle preparation center, and acquired eight retail automotive franchises. Our financial statements include the results of operations of the acquired entities from the date of acquisition. The fair value of the assets acquired and liabilities assumed have been recorded in our consolidated condensed financial statements, and may be subject to adjustment pending completion of final valuation. A summary of the aggregate consideration paid and the aggregate amounts of the assets acquired and liabilities assumed for the nine months ended September 30, 2018 and 2017 follows:


	September 30,
	2018		2017
Accounts receivable	$	3.6	$	11.1
Inventories		62.8		139.9
Other current assets		—		2.9
Property and equipment		52.6		21.8
Indefinite-lived intangibles		73.9		366.9
Other noncurrent assets		—		0.1
Current liabilities		(16.9)		(33.6)
Noncurrent liabilities		(0.6)		(3.2)
Total consideration		175.4		505.9
Deferred consideration		(6.8)		—
Consideration transferred through common stock issuance		—		(32.4)
Contingent consideration		—		(20.0)
Seller financed/assumed debt		—		(3.8)
Total cash used in acquisitions	$	168.6	$	449.7

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The following unaudited consolidated pro forma results of operations of PAG for the three and nine months ended September 30, 2018 and 2017 give effect to acquisitions consummated during 2018 and 2017 as if they had occurred effective at the beginning of the periods:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Revenues	$	5,658.6	$	5,621.8	$	17,365.7	$	16,432.4
Income from continuing operations		130.1		95.4		372.7		288.9
Net income		130.2		95.5		373.0		288.6
Income from continuing operations per diluted common share	$	1.53	$	1.11	$	4.37	$	3.36
Net income per diluted common share	$	1.53	$	1.11	$	4.37	$	3.36

5. Intangible Assets

Following is a summary of the changes in the carrying amount of goodwill and other indefinite-lived intangible assets during the nine months ended September 30, 2018:


			Other Indefinite-
			Lived Intangible
	Goodwill		Assets
Balance, January 1, 2018	$	1,660.5	$	474.0
Additions		65.0		8.9
Disposals		(6.7)		(3.3)
Foreign currency translation		(26.2)		(7.7)
Balance, September 30, 2018	$	1,692.6	$	471.9

The additions and disposals during the nine months ended September 30, 2018 were within our Retail Automotive and Retail Commercial Truck reportable segments. During the nine months ended September 30, 2018 we sold six franchises and terminated several franchises. As of September 30, 2018, the goodwill balance within our Retail Automotive, Retail Commercial Truck, and Other reportable segments was $1,449.9 million, $163.5 million and $79.2 million, respectively. There is no goodwill recorded in our Non-Automotive Investments reportable segment.

6. Vehicle Financing

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

The agreements typically grant a security interest in substantially all of the assets of our dealership and distribution subsidiaries and, in the U.S., Australia and New Zealand, are guaranteed or partially guaranteed by us. Interest rates under the arrangements are variable and increase or decrease based on changes in the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, the Australian Bank Bill Swap Rate (“BBSW”), or the New Zealand Bank Bill Benchmark Rate. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing. We also receive non-refundable credits from certain of our vehicle manufacturers, which are treated as a reduction of cost of sales as vehicles are sold.

The weighted average interest rate on floor plan borrowings was 2.2% for the nine months ended September 30, 2018 and 1.8% for the nine months ended September 30, 2017. We classify floor plan notes payable to a party other than the

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manufacturer of a particular new vehicle, and all floor plan notes payable relating to pre-owned vehicles, as “Floor plan notes payable — non-trade” on our consolidated balance sheets and classify related cash flows as a financing activity on our consolidated statements of cash flows.

7. Earnings Per Share

Basic earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, including outstanding unvested equity awards which contain rights to non-forfeitable dividends. Diluted earnings per share is computed using net income attributable to Penske Automotive Group common stockholders and the number of weighted average shares of voting common stock outstanding, adjusted for any dilutive effects. A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 follows:


	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2018	2017	2018	2017
Weighted average number of common shares outstanding	84,865,046	85,921,118	85,248,758	85,873,142
Effect of non-participatory equity compensation	40,000	45,000	40,000	45,000
Weighted average number of common shares outstanding, including effect of dilutive securities	84,905,046	85,966,118	85,288,758	85,918,142

8. Long-Term Debt

Long-term debt consisted of the following:


	September 30,		December 31,
	2018		2017
U.S. credit agreement — revolving credit line	$	—	$	172.0
U.K. credit agreement — revolving credit line		108.2		47.3
U.K. credit agreement — overdraft line of credit		1.2		—
3.75% senior subordinated notes due 2020		297.5		296.5
5.75% senior subordinated notes due 2022		546.6		545.9
5.375% senior subordinated notes due 2024		297.5		297.2
5.50% senior subordinated notes due 2026		494.9		494.4
Australia capital loan agreement		34.9		39.0
Australia working capital loan agreement		5.8		—
Mortgage facilities		243.0		235.5
Other		56.4		35.4
Total long-term debt		2,086.0		2,163.2
Less: current portion		(92.7)		(72.8)
Net long-term debt	$	1,993.3	$	2,090.4

U.S. Credit Agreement

Our U.S. credit agreement (the “U.S. credit agreement”) with Mercedes-Benz Financial Services USA LLC and Toyota Motor Credit Corporation provides for up to $700.0 million in revolving loans for working capital, acquisitions, capital expenditures, investments and other general corporate purposes, which includes $250.0 million in revolving loans solely for future U.S. acquisitions. The U.S. credit agreement provides for a maximum of $150.0 million of future borrowings for foreign acquisitions and expires on September 30, 2021. The revolving loans bear interest at LIBOR plus 2.00%, subject to an incremental 1.50% for uncollateralized borrowings in excess of a defined borrowing base.

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

The U.S. credit agreement also contains typical events of default, including change of control, non-payment of obligations and cross-defaults to our other material indebtedness. Substantially all of our U.S. assets are subject to security interests granted to the lenders under the U.S. credit agreement. As of September 30, 2018, we had no revolver borrowings outstanding under the U.S. credit agreement.

U.K. Credit Agreement

Our subsidiaries in the U.K. (the “U.K. subsidiaries”) are party to a £150.0 million revolving credit agreement with the Royal Bank of Scotland plc (RBS) and BMW Financial Services (GB) Limited, and an additional demand overdraft line of credit with RBS (collectively, the “U.K. credit agreement”) to be used for working capital, acquisitions, capital expenditures, investments and general corporate purposes. The loans mature on the termination date of the facility, which is December 19, 2019. The revolving loans bear interest between defined LIBOR plus 1.35% and defined LIBOR plus 3.0% and the demand overdraft line of credit bears interest at the Bank of England Base Rate plus 1.75%. As of September 30, 2018, outstanding loans under the U.K. credit agreement amounted to £84.0 million ($109.4 million).

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

The U.K. credit agreement also contains typical events of default, including change of control and non-payment of obligations and cross-defaults to other material indebtedness of our U.K. subsidiaries. Substantially all of our U.K. subsidiaries’ assets are subject to security interests granted to the lenders under the U.K. credit agreement.

3.75% Senior Subordinated Notes due 2020

In August 2017, we issued $300.0 million in aggregate principal amount of 3.75% Senior Subordinated Notes due 2020 (the “3.75% Notes”). Interest on the 3.75% Notes is payable semi-annually on February 15 and August 15 of each year. The 3.75% Notes mature on August 15, 2020, unless earlier redeemed or purchased by us. The 3.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% owned U.S. subsidiaries. The 3.75% Notes also contain customary negative covenants and events of default.

At any time, we may redeem the 3.75% Notes at a redemption price equal to 100% of the principal amount of the 3.75% Notes, plus an applicable make whole premium, and any accrued and unpaid interest. If we experience certain “change of control” events specified in the indenture, holders of the 3.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

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5.50% Senior Subordinated Notes due 2026

In May 2016, we issued $500.0 million in aggregate principal amount of 5.50% Senior Subordinated Notes due 2026 (the “5.50% Notes”). Interest on the 5.50% Notes is payable semi-annually on May 15 and November 15 of each year. The 5.50% Notes mature on May 15, 2026, unless earlier redeemed or purchased by us. The 5.50% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% owned U.S. subsidiaries. The 5.50% Notes also contain customary negative covenants and events of default.

Prior to May 15, 2021, we may redeem the 5.50% Notes at a redemption price equal to 100% of the principal amount of the 5.50% Notes, plus an applicable make whole premium, and any accrued and unpaid interest. On or after May 15, 2021, we may redeem the 5.50% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. We may also redeem up to 40% of the 5.50% Notes using the proceeds of specified equity offerings at any time prior to May 15, 2019 at a price specified in the indenture. If we experience certain “change of control” events specified in the indenture, holders of the 5.50% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

5.375% Senior Subordinated Notes due 2024

In November 2014, we issued $300.0 million in aggregate principal amount of 5.375% Senior Subordinated Notes due 2024 (the “5.375% Notes”). Interest on the 5.375% Notes is payable semi-annually on June 1 and December 1 of each year. The 5.375% Notes mature on December 1, 2024, unless earlier redeemed or purchased by us. The 5.375% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% owned U.S. subsidiaries. The 5.375% Notes also contain customary negative covenants and events of default.

Prior to December 1, 2019, we may redeem the 5.375% Notes at a redemption price equal to 100% of the principal amount of the 5.375% Notes, plus an applicable make whole premium, and any accrued and unpaid interest. On or after December 1, 2019, we may redeem the 5.375% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. If we experience certain “change of control” events specified in the indenture, holders of the 5.375% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

5.75% Senior Subordinated Notes due 2022

In August 2012, we issued $550.0 million in aggregate principal amount of 5.75% Senior Subordinated Notes due 2022 (the “5.75% Notes”). Interest on the 5.75% Notes is payable semi-annually on April 1 and October 1 of each year. The 5.75% Notes mature on October 1, 2022, unless earlier redeemed or purchased by us. The 5.75% Notes are our unsecured senior subordinated obligations and are guaranteed on an unsecured senior subordinated basis by our 100% owned U.S. subsidiaries. The 5.75% Notes also contain customary negative covenants and events of default.

We may redeem the 5.75% Notes for cash at the redemption prices noted in the indenture, plus any accrued and unpaid interest. If we experience certain “change of control” events specified in the indenture, holders of the 5.75% Notes will have the option to require us to purchase for cash all or a portion of their notes at a price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the notes at a price equal to 100% of the principal amount of the notes, plus accrued and unpaid interest.

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Australia Loan Agreements

Penske Commercial Vehicles Australia and Penske Power Systems are party to two facilities with Volkswagen Financial Services Australia Pty Limited representing a five-year AU $50.0 million capital loan and a one-year AU $50.0 million working capital loan. Both facilities are subject to annual extensions. These agreements each provide the lender with a secured interest in all assets of these businesses. The loans bear interest at the Australian BBSW 30-day Bill Rate plus 3.0%. Irrespective of the term of the agreements, both agreements provide the lender with the ability to call the loans on 90 days’ notice. These facilities are also guaranteed by our U.S. parent company up to AU $50.0 million. As of September 30, 2018, we had AU $48.3 million ($34.9 million) outstanding under the capital loan agreement and AU $8.0 million ($5.8 million) outstanding under the working capital loan agreement.

Mortgage Facilities

We are party to several mortgages that bear interest at defined rates and require monthly principal and interest payments. These mortgage facilities also contain typical events of default, including non-payment of obligations, cross-defaults to our other material indebtedness, certain change of control events, and the loss or sale of certain franchises operated at the properties. Substantially all of the buildings and improvements on the properties financed pursuant to the mortgage facilities are subject to security interests granted to the lender. As of September 30, 2018, we owed $243.0 million of principal under our mortgage facilities.

9. Commitments and Contingent Liabilities

We are involved in litigation which may relate to claims brought by governmental authorities, issues with customers, and employment related matters, including class action claims and purported class action claims. As of September 30, 2018, we were not party to any legal proceedings, including class action lawsuits that, individually or in the aggregate, are reasonably expected to have a material adverse effect on our results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect on our results of operations, financial condition or cash flows.

We have historically structured our operations so as to minimize ownership of real property. As a result, we lease or sublease substantially all of our facilities. These leases are generally for a period between 5 and 20 years, and are typically structured to include renewal options at our election. Pursuant to the leases for some of our larger facilities, we are required to comply with specified financial ratios, including a “rent coverage” ratio and a debt to EBITDA ratio, each as defined. For these leases, non-compliance with the ratios may require us to post collateral in the form of a letter of credit. A breach of the other lease covenants gives rise to certain remedies by the landlord, the most severe of which include the termination of the applicable lease and acceleration of the total rent payments due under the lease.

We have sold a number of dealerships to third parties and, as a condition to certain of those sales, remain liable for the lease payments relating to the properties on which those businesses operate in the event of non-payment by the buyer. We are also party to lease agreements on properties that we no longer use in our retail operations that we have sublet to third parties. We rely on subtenants to pay the rent and maintain the property at these locations. In the event the subtenant does not perform as expected, we may not be able to recover amounts owed to us and we could be required to fulfill these obligations.

Our floor plan credit agreement with Mercedes Benz Financial Services Australia (“MBA”) provides us revolving loans for the acquisition of commercial vehicles for distribution to our retail network. This facility includes a commitment to repurchase dealer vehicles in the event the dealer’s floor plan agreement with MBA is terminated.

We have $41.1 million of letters of credit outstanding as of September 30, 2018, and have posted $28.7 million of surety bonds in the ordinary course of business.

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10. Equity

During the nine months ended September 30, 2018, we repurchased or acquired 1,252,624 shares of our common stock. In the first quarter of 2018, we repurchased 1,133,016 shares of our outstanding common stock from Mitsui for $50.0 million, or an average of $44.13 per share, under our securities repurchase program approved by our Board of Directors. During the second and third quarters of 2018, we did not repurchase any common stock under this program. As of September 30, 2018, our remaining authorization under our securities repurchase program was $150.0 million. During the second quarter of 2018, we acquired 119,608 shares of our common stock for $5.8 million, or an average of $48.61 per share, from employees in connection with a net share settlement feature of employee equity awards. We did not acquire any additional shares in connection with the net share settlement feature of employee equity awards during the third quarter of 2018.

11. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss) by component and the reclassifications out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2018 and 2017, respectively, attributable to Penske Automotive Group common stockholders follows:

Three Months Ended September 30, 2018


	Foreign
	Currency
	Translation		Other		Total
Balance at June 30, 2018	$	(170.5)	$	(15.9)	$	(186.4)
Other comprehensive income before reclassifications		(19.5)		2.1		(17.4)
Amounts reclassified from accumulated other comprehensive income — net of tax		—		—		—
Net current period other comprehensive income		(19.5)		2.1		(17.4)
Balance at September 30, 2018	$	(190.0)	$	(13.8)	$	(203.8)

Three Months Ended September 30, 2017


	Foreign
	Currency
	Translation		Other		Total
Balance at June 30, 2017	$	(169.7)	$	(16.5)	$	(186.2)
Other comprehensive income before reclassifications		31.0		3.6		34.6
Amounts reclassified from accumulated other comprehensive income — net of tax		—		—		—
Net current period other comprehensive income		31.0		3.6		34.6
Balance at September 30, 2017	$	(138.7)	$	(12.9)	$	(151.6)

Nine Months Ended September 30, 2018


	Foreign
	Currency
	Translation		Other		Total
Balance at December 31, 2017	$	(134.0)	$	(12.5)	$	(146.5)
Other comprehensive income before reclassifications		(56.0)		(1.3)		(57.3)
Amounts reclassified from accumulated other comprehensive income — net of tax		—		—		—
Net current period other comprehensive income		(56.0)		(1.3)		(57.3)
Balance at September 30, 2018	$	(190.0)	$	(13.8)	$	(203.8)

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Nine Months Ended September 30, 2017


	Foreign
	Currency
	Translation		Other		Total
Balance at December 31, 2016	$	(230.0)	$	(20.7)	$	(250.7)
Other comprehensive income before reclassifications		91.3		7.8		99.1
Amounts reclassified from accumulated other comprehensive income — net of tax		—		—		—
Net current period other comprehensive income		91.3		7.8		99.1
Balance at September 30, 2017	$	(138.7)	$	(12.9)	$	(151.6)

12. Segment Information

Our operations are organized by management into operating segments by line of business and geography. We have determined that we have four reportable segments as defined in generally accepted accounting principles for segment reporting: (i) Retail Automotive, consisting of our retail automotive dealership operations; (ii) Retail Commercial Truck, consisting of our retail commercial truck dealership operations in the U.S. and Canada; (iii) Other, consisting of our commercial vehicle and power systems distribution operations and other non-automotive consolidated operations; and (iv) Non-Automotive Investments, consisting of our equity method investments in non-automotive operations. The Retail Automotive reportable segment includes all automotive dealerships and all departments relevant to the operation of the dealerships and our retail automotive joint ventures. The individual dealership operations included in the Retail Automotive reportable segment represent six operating segments: Eastern, Central, and Western United States, Stand-Alone Used United States, International, and Stand-Alone Used International. These operating segments have been aggregated into one reportable segment as their operations (A) have similar economic characteristics (all are automotive dealerships having similar margins), (B) offer similar products and services (all sell new and/or used vehicles, service, parts and third-party finance and insurance products), (C) have similar target markets and customers (generally individuals) and (D) have similar distribution and marketing practices (all distribute products and services through dealership facilities that market to customers in similar fashions). Revenue and segment income for the three and nine months ended September 30, 2018 and 2017 follows:

Three Months Ended September 30



	Retail		Retail Commercial				Non-Automotive		Intersegment
	Automotive		Truck		Other		Investments		Elimination		Total
Revenues
2018	$	5,148.5	$	385.3	$	124.8	$	—	$	—	$	5,658.6
2017		5,085.4		299.6		139.4		—		—		5,524.4
Segment income
2018	$	94.6	$	19.1	$	2.6	$	40.8	$	—	$	157.1
2017		94.3		11.7		2.4		30.5		—		138.9

Nine Months Ended September 30



	Retail		Retail Commercial				Non-Automotive		Intersegment
	Automotive		Truck		Other		Investments		Elimination		Total
Revenues
2018	$	15,900.0	$	1,016.5	$	429.3	$	—	$	—	$	17,345.8
2017		14,882.5		739.8		366.6		—		—		15,988.9
Segment income
2018	$	318.2	$	47.2	$	20.4	$	91.8	$	—	$	477.6
2017		319.9		27.5		4.9		68.2		—		420.5

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13. Condensed Consolidating Financial Information

The following tables include condensed consolidating financial information as of September 30, 2018 and December 31, 2017 and for the three and nine month periods ended September 30, 2018 and 2017 for Penske Automotive Group, Inc. (as the issuer of the 5.75% Notes, the 5.375% Notes, the 5.50% Notes, and the 3.75% Notes), guarantor subsidiaries and non-guarantor subsidiaries (primarily representing non-U.S. entities). Guarantor subsidiaries are directly or indirectly 100% owned by PAG, and the guarantees are full and unconditional, and joint and several. The guarantees may be released under certain circumstances upon resale, or transfer by us of the stock of the related guarantor or all or substantially all of the assets of the guarantor to a non-affiliate.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2018


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Cash and cash equivalents	$	37.6	$	—	$	—	$	3.4	$	34.2
Accounts receivable, net		953.4		(477.0)		477.0		435.1		518.3
Inventories		3,783.4		—		—		1,897.7		1,885.7
Other current assets		91.8		—		5.0		17.2		69.6
Total current assets		4,866.2		(477.0)		482.0		2,353.4		2,507.8
Property and equipment, net		2,178.2		—		2.7		1,034.5		1,141.0
Intangible assets		2,164.5		—		—		1,328.7		835.8
Equity method investments		1,299.7		—		1,235.3		—		64.4
Other long-term assets		18.3		(2,719.5)		2,724.9		4.2		8.7
Total assets	$	10,526.9	$	(3,196.5)	$	4,444.9	$	4,720.8	$	4,557.7
Floor plan notes payable	$	2,169.5	$	—	$	—	$	1,193.7	$	975.8
Floor plan notes payable — non-trade		1,359.0		—		173.3		551.8		633.9
Accounts payable		633.8		—		5.5		173.7		454.6
Accrued expenses		570.2		(477.0)		1.2		187.1		858.9
Current portion of long-term debt		92.7		—		—		5.0		87.7
Liabilities held for sale		0.7		—		—		0.7		—
Total current liabilities		4,825.9		(477.0)		180.0		2,112.0		3,010.9
Long-term debt		1,993.3		(92.5)		1,652.9		189.0		243.9
Deferred tax liabilities		547.9		—		—		545.0		2.9
Other long-term liabilities		547.8		—		—		64.5		483.3
Total liabilities		7,914.9		(569.5)		1,832.9		2,910.5		3,741.0
Total equity		2,612.0		(2,627.0)		2,612.0		1,810.3		816.7
Total liabilities and equity	$	10,526.9	$	(3,196.5)	$	4,444.9	$	4,720.8	$	4,557.7

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CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2017


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Cash and cash equivalents	$	45.7	$	—	$	—	$	14.8	$	30.9
Accounts receivable, net		954.9		(463.6)		463.6		523.8		431.1
Inventories		3,944.1		—		—		1,935.0		2,009.1
Other current assets		81.8		—		7.3		16.8		57.7
Total current assets		5,026.5		(463.6)		470.9		2,490.4		2,528.8
Property and equipment, net		2,108.6		—		3.3		1,032.9		1,072.4
Intangible assets		2,134.5		—		—		1,334.6		799.9
Equity method investments		1,256.6		—		1,186.9		—		69.7
Other long-term assets		14.4		(2,772.7)		2,777.8		4.6		4.7
Total assets	$	10,540.6	$	(3,236.3)	$	4,438.9	$	4,862.5	$	4,475.5
Floor plan notes payable	$	2,343.2	$	—	$	—	$	1,272.4	$	1,070.8
Floor plan notes payable — non-trade		1,418.6		—		196.6		601.9		620.1
Accounts payable		641.6		—		3.9		194.4		443.3
Accrued expenses		523.5		(463.6)		1.0		165.2		820.9
Current portion of long-term debt		72.8		—		—		5.5		67.3
Liabilities held for sale		0.7		—		—		0.7		—
Total current liabilities		5,000.4		(463.6)		201.5		2,240.1		3,022.4
Long-term debt		2,090.4		(150.2)		1,809.4		191.6		239.6
Deferred tax liabilities		481.5		—		—		480.1		1.4
Other long-term liabilities		540.3		—		—		64.7		475.6
Total liabilities		8,112.6		(613.8)		2,010.9		2,976.5		3,739.0
Total equity		2,428.0		(2,622.5)		2,428.0		1,886.0		736.5
Total liabilities and equity	$	10,540.6	$	(3,236.3)	$	4,438.9	$	4,862.5	$	4,475.5

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2018


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Revenues	$	5,658.6	$	—	$	—	$	3,061.9	$	2,596.7
Cost of sales		4,806.0		—		—		2,584.1		2,221.9
Gross profit		852.6		—		—		477.8		374.8
Selling, general and administrative expenses		662.8		—		6.3		356.6		299.9
Depreciation		25.9		—		0.4		14.0		11.5
Operating income		163.9		—		(6.7)		107.2		63.4
Floor plan interest expense		(20.2)		—		(1.9)		(12.7)		(5.6)
Other interest expense		(28.3)		—		(19.1)		(2.3)		(6.9)
Equity in earnings of affiliates		41.7		—		40.7		—		1.0
Equity in earnings of subsidiaries		—		(144.2)		144.2		—		—
Income from continuing operations before income taxes		157.1		(144.2)		157.2		92.2		51.9
Income taxes		(27.1)		24.8		(27.1)		(14.6)		(10.2)
Income from continuing operations		130.0		(119.4)		130.1		77.6		41.7
Income from discontinued operations, net of tax		0.1		(0.1)		0.1		0.1		—
Net income		130.1		(119.5)		130.2		77.7		41.7
Other comprehensive (loss) income, net of tax		(17.5)		19.8		(17.5)		—		(19.8)
Comprehensive income		112.6		(99.7)		112.7		77.7		21.9
Less: Comprehensive (loss) income attributable to non-controlling interests		(0.2)		0.1		(0.1)		—		(0.2)
Comprehensive income attributable to Penske Automotive Group common stockholders	$	112.8	$	(99.8)	$	112.8	$	77.7	$	22.1

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

Three Months Ended September 30, 2017


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Revenues	$	5,524.4	$	—	$	—	$	3,047.0	$	2,477.4
Cost of sales		4,701.8		—		—		2,570.2		2,131.6
Gross profit		822.6		—		—		476.8		345.8
Selling, general and administrative expenses		646.1		—		6.3		354.4		285.4
Depreciation		24.3		—		0.4		13.4		10.5
Operating income		152.2		—		(6.7)		109.0		49.9
Floor plan interest expense		(16.4)		—		(1.3)		(9.8)		(5.3)
Other interest expense		(27.8)		—		(19.8)		(2.3)		(5.7)
Equity in earnings of affiliates		30.9		—		30.5		—		0.4
Equity in earnings of subsidiaries		—		(136.3)		136.3		—		—
Income from continuing operations before income taxes		138.9		(136.3)		139.0		96.9		39.3
Income taxes		(44.7)		43.8		(44.7)		(36.0)		(7.8)
Income from continuing operations		94.2		(92.5)		94.3		60.9		31.5
Income from discontinued operations, net of tax		0.1		(0.1)		0.1		0.1		—
Net income		94.3		(92.6)		94.4		61.0		31.5
Other comprehensive income, net of tax		35.3		(31.9)		35.3		—		31.9
Comprehensive income		129.6		(124.5)		129.7		61.0		63.4
Less: Comprehensive income attributable to non-controlling interests		0.6		(0.8)		0.8		—		0.6
Comprehensive income attributable to Penske Automotive Group common stockholders	$	129.0	$	(123.7)	$	128.9	$	61.0	$	62.8

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2018


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Revenues	$	17,345.8	$	—	$	—	$	8,990.2	$	8,355.6
Cost of sales		14,739.0		—		—		7,561.6		7,177.4
Gross profit		2,606.8		—		—		1,428.6		1,178.2
Selling, general and administrative expenses		2,001.3		—		19.1		1,059.6		922.6
Depreciation		77.2		—		1.2		41.3		34.7
Operating income		528.3		—		(20.3)		327.7		220.9
Floor plan interest expense		(59.0)		—		(5.3)		(36.3)		(17.4)
Other interest expense		(86.7)		—		(58.8)		(6.2)		(21.7)
Equity in earnings of affiliates		95.0		—		91.7		—		3.3
Equity in earnings of subsidiaries		—		(470.1)		470.1		—		—
Income from continuing operations before income taxes		477.6		(470.1)		477.4		285.2		185.1
Income taxes		(104.7)		104.0		(104.7)		(67.0)		(37.0)
Income from continuing operations		372.9		(366.1)		372.7		218.2		148.1
Income from discontinued operations, net of tax		0.2		(0.2)		0.2		0.2		—
Net income		373.1		(366.3)		372.9		218.4		148.1
Other comprehensive (loss) income, net of tax		(58.5)		56.4		(58.5)		—		(56.4)
Comprehensive income		314.6		(309.9)		314.4		218.4		91.7
Less: Comprehensive (loss) income attributable to non-controlling interests		(1.0)		1.2		(1.2)		—		(1.0)
Comprehensive income attributable to Penske Automotive Group common stockholders	$	315.6	$	(311.1)	$	315.6	$	218.4	$	92.7

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CONDENSED CONSOLIDATING STATEMENT OF INCOME

Nine Months Ended September 30, 2017


					Penske
	Total				Automotive		Guarantor		Non-Guarantor
	Company		Eliminations		Group		Subsidiaries		Subsidiaries
Revenues	$	15,988.9	$	—	$	—	$	8,749.7	$	7,239.2
Cost of sales		13,574.7		—		—		7,351.8		6,222.9
Gross profit		2,414.2		—		—		1,397.9		1,016.3
Selling, general and administrative expenses		1,869.8		—		18.5		1,037.3		814.0
Depreciation		70.0		—		1.2		39.3		29.5
Operating income		474.4		—		(19.7)		321.3		172.8
Floor plan interest expense		(45.6)		—		(3.4)		(27.9)		(14.3)
Other interest expense		(79.2)		—		(54.1)		(6.6)		(18.5)
Equity in earnings of affiliates		70.9		—		68.2		—		2.7
Equity in earnings of subsidiaries		—		(428.6)		428.6		—		—
Income from continuing operations before income taxes		420.5		(428.6)		419.6		286.8		142.7
Income taxes		(136.0)		139.0		(136.0)		(109.8)		(29.2)
Income from continuing operations		284.5		(289.6)		283.6		177.0		113.5
Loss from discontinued operations, net of tax		(0.3)		0.3		(0.3)		(0.3)		—
Net income		284.2		(289.3)		283.3		176.7		113.5
Other comprehensive income, net of tax		101.9		(93.0)		101.9		—		93.0
Comprehensive income		386.1		(382.3)		385.2		176.7		206.5
Less: Comprehensive income attributable to non-controlling interests		3.8		(2.8)		2.8		—		3.8
Comprehensive income attributable to Penske Automotive Group common stockholders	$	382.3	$	(379.5)	$	382.4	$	176.7	$	202.7

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2018


			Penske
	Total		Automotive		Guarantor		Non-Guarantor
	Company		Group		Subsidiaries		Subsidiaries
Net cash provided by (used in) continuing operating activities	$	535.9	$	16.1	$	356.2	$	163.6
Investing activities:
Purchase of equipment and improvements		(188.5)		(2.3)		(95.1)		(91.1)
Proceeds from sale of dealerships		58.4		—		55.9		2.5
Proceeds from sale-leaseback transactions		10.7		—		—		10.7
Acquisitions, net		(168.6)		—		—		(168.6)
Other		(3.5)		(2.4)		—		(1.1)
Net cash (used in) provided by continuing investing activities		(291.5)		(4.7)		(39.2)		(247.6)
Financing activities:
Net borrowings (repayments) of long-term debt		(41.0)		(172.0)		41.6		89.4
Net (repayments) borrowings of floor plan notes payable — non-trade		(59.6)		(23.3)		(50.1)		13.8
Repurchases of common stock		(55.8)		(55.8)		—		—
Dividends		(89.7)		(89.7)		—		—
Other		(6.2)		(0.3)		(5.9)		—
Distributions from (to) parent		—		329.7		(314.3)		(15.4)
Net cash (used in) provided by continuing financing activities		(252.3)		(11.4)		(328.7)		87.8
Net cash provided by discontinued operations		0.3		—		0.3		—
Effect of exchange rate changes on cash and cash equivalents		(0.5)		—		—		(0.5)
Net change in cash and cash equivalents		(8.1)		(0.0)		(11.4)		3.3
Cash and cash equivalents, beginning of period		45.7		—		14.8		30.9
Cash and cash equivalents, end of period	$	37.6	$	(0.0)	$	3.4	$	34.2

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CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2017


			Penske
	Total		Automotive		Guarantor		Non-Guarantor
	Company		Group		Subsidiaries		Subsidiaries
Net cash provided by (used in) continuing operating activities	$	466.8	$	(34.5)	$	359.5	$	141.8
Investing activities:
Purchase of equipment and improvements		(180.1)		(2.4)		(80.0)		(97.7)
Proceeds from sale of dealerships		9.0		—		9.0		—
Acquisition of additional ownership interest in Penske Truck Leasing		(239.1)		(239.1)		—		—
Acquisitions, net		(449.7)		—		(316.9)		(132.8)
Other		4.3		4.6		—		(0.3)
Net cash (used in) provided by continuing investing activities		(855.6)		(236.9)		(387.9)		(230.8)
Financing activities:
Issuance of 3.75% senior subordinated notes		300.0		300.0		—		—
Net borrowings (repayments) of long-term debt		50.3		(24.0)		8.6		65.7
Net borrowings of floor plan notes payable — non-trade		155.2		63.7		43.2		48.3
Payment of debt issuance costs		(4.0)		(4.0)		—		—
Repurchases of common stock		(18.5)		(18.5)		—		—
Dividends		(80.1)		(80.1)		—		—
Other		(5.8)		(5.8)		—		—
Distributions from (to) parent		—		40.1		(35.5)		(4.6)
Net cash provided by continuing financing activities		397.1		271.4		16.3		109.4
Net cash provided by discontinued operations		2.7		—		2.7		—
Effect of exchange rate changes on cash and cash equivalents		2.2		—		—		2.2
Net change in cash and cash equivalents		13.2		—		(9.4)		22.6
Cash and cash equivalents, beginning of period		24.0		—		9.4		14.6
Cash and cash equivalents, end of period	$	37.2	$	—	$	—	$	37.2

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those discussed in “Forward-Looking Statements.” We have acquired and initiated a number of businesses during the periods presented and addressed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Our financial statements include the results of operations of those businesses from the date acquired or when they commenced operations.

Overview

During the nine months ended September 30, 2018, our business generated $17.3 billion in total revenue, which is comprised of $15.9 billion from retail automotive dealerships, $1.0 billion from retail commercial truck dealerships and $429.3 million from commercial vehicle distribution and other operations.

We operate fourteen stand-alone used vehicle dealerships in the U.S. and the U.K. We acquired CarSense in the U.S. and CarShop in the U.K. in the first quarter of 2017 and acquired The Car People in the U.K. in January 2018. Our CarSense operations in the U.S. consist of five locations operating in the Philadelphia and Pittsburgh, Pennsylvania market areas, including southern New Jersey. Our CarShop operations in the U.K. consist of five retail locations and a vehicle preparation center operating principally throughout Southern England. The Car People operations in the U.K. consist of four retail locations operating across Northern England, which complement CarShop’s Southern England locations. For the three and nine months ended September 30, 2018, these stand-alone used vehicle dealerships retailed 18,568 and 56,073 units, and generated $329.7 million and $1.0 billion in revenue, respectively.

Retail automotive dealerships represented 91.7% of our total revenues and 89.7% of our total gross profit in the nine months ended September 30, 2018.

This business represented 5.9% of our total revenues and 6.0% of our total gross profit in the nine months ended September 30, 2018.

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Commercial Vehicle Distribution. We are the exclusive importer and distributor of Western Star heavy-duty trucks (a Daimler brand), MAN heavy and medium duty trucks and buses (a VW Group brand), and Dennis Eagle refuse collection vehicles, together with associated parts, across Australia, New Zealand and portions of the Pacific. This business, known as Penske Commercial Vehicles Australia (“PCV Australia”), distributes commercial vehicles and parts to a network of more than 70 dealership locations, including eight company-owned retail commercial vehicle dealerships.

These businesses represented 2.4% of our total revenues and 4.3% of our total gross profit in the nine months ended September 30, 2018.

Outlook

Retail Automotive Dealership. For the nine months ended September 30, 2018, U.S. light vehicle sales increased 0.5%, as compared to the same period last year, to 12.9 million units, with an increase of 8.3% in sales of trucks, crossovers and sport utility vehicles and a decrease of 13.2% in sales of passenger cars. We believe the sales of trucks, crossovers and sport utility vehicles will continue to outperform passenger car sales, largely due to consumer preference and OEM product offerings. We believe the U.S. market for new light vehicle sales remains strong, but has plateaued and may be impacted in future periods by several different factors including, but not limited to, consumer confidence, the level of unemployment, the level of OEM incentives, increasing lease returns, interest rates, strong credit availability, the age of vehicles on the road, vehicle innovation, tariffs, and tax reform, although actual sales may differ materially. We also expect to see strength across the used vehicle market as the number of lease returns increases providing customers with an additional supply of affordable late model, low mileage vehicles from which to choose.

For the nine months ended September 30, 2018, U.K. new vehicle registrations decreased 7.5%, as compared to the same period last year, to 1.9 million registrations. We believe the year over year decline is largely due to a temporary shortage of product availability from new fuel economy testing and emissions standards applicable to new vehicles sold in Europe effective September 2018, partially offset by a pull forward of demand prior to the effective date of the new testing procedures. The new fuel economy testing and Co2 emissions legislation, known as “Worldwide Harmonised Light Vehicle Testing Procedure” (WLTP), requires more extensive vehicle testing and has impacted the availability of vehicles for sale for certain manufacturers. Premium/luxury unit sales, which account for approximately 86% of our U.K. new unit sales, continue to outperform the overall market, declining 5.7% in the first nine months of 2018. U.K. sales are also being negatively affected by the uncertainty of residual values and potentially higher taxes on diesel powered vehicles, 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. Sales of diesel powered vehicles

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experienced a 31.3% decline, while non-diesel vehicles experienced a 10.3% increase in sales during the nine months ended September 30, 2018. The March 2019 planned exit from the European Union (“Brexit”) may also be causing and may continue to cause economic and political uncertainty, potentially impacting the economic environment, which may lead to further declines in new vehicle registrations in future periods. Since no country has previously left the European Union, the outcome of any future negotiations between the U.K. and the European Union is uncertain and may affect the timing, terms of trade, and the level of new vehicle registrations in those markets.

Retail Commercial Truck Dealership. For the nine months ended September 30, 2018, North American sales of Class 5-8 heavy and medium duty trucks, the principal vehicles for our PTG business, increased 16.8% from the same period last year to 424,321 units. The Class 5-7 medium-duty truck market increased 6.8% to 198,360 units, and Class 8 heavy-duty trucks, the largest North American market, increased 27.3% to 225,961 units from the same period last year. Generally strong economic conditions, improved freight metrics, and increased utilization are expected to continue to positively impact the truck market with stronger Class 8 retail unit sales in North America expected throughout the remainder of 2018 when compared to last year.

Commercial Vehicle Distribution. Our PCV Australia distribution business and the on-highway portion of our PPS business each operate principally in the Australian and New Zealand heavy and medium-duty truck markets. For the nine months ended September 30, 2018, the Australian heavy-duty truck market reported sales of 10,361 units, representing an increase of 25.4% from the same period last year, while the New Zealand market reported sales of 2,674 units, representing an increase of 7.6% from the same period last year. The brands we represent in Australia hold a 6.6% market share in the Australian heavy-duty truck market, and a 4.2% market share in New Zealand. The Australian heavy-duty commercial vehicle market has been experiencing increasing industry sales recently largely due to improvements in overall market conditions. We expect the heavy and medium-duty truck and bus markets in Australia and New Zealand to continue to grow throughout the remainder of 2018, and also expect continued new order growth and engine repowers from the off-highway engine distribution business, in consideration of the improving market conditions in these countries.

Penske Truck Leasing. We expect PTL to benefit from continued strong demand for its full-service truck leasing, truck rental and contract maintenance, and logistics services resulting from continued positive economic conditions in the United States and customers’ desire to increase efficiency and lower costs by outsourcing non-core responsibilities such as fleet ownership. As a global logistics services provider, we also expect PTL to experience increased demand for its logistics supply chain solutions based primarily on optimizing the use of drivers, trucks, warehouses, and other services within the supply chain. As a result of recent improvements in the truck market, we have seen freight growth and improved conditions within PTL’s commercial truck rental business, an increase in the utilization rate of its fleet, and stabilization of used truck prices. We anticipate these improvements will continue throughout the remainder of 2018.

As described in “Forward-Looking Statements,” there are a number of factors that could cause actual results to differ materially from our expectations.

Operating Overview

Automotive and commercial truck dealerships represent the majority of our results of operations. New and used vehicle revenues typically include sales to retail customers, to fleet customers, and to leasing companies providing consumer leasing. We generate finance and insurance revenues from sales of third-party extended service contracts, sales of third-party insurance policies, commissions relating to the sale of finance and lease contracts to third parties, and the sales of certain other products. Service and parts revenues include fees paid by customers for repair, maintenance and collision services, and the sale of replacement parts and other aftermarket accessories, as well as warranty repairs that are reimbursed directly by various OEMs.

Our gross profit tends to vary with the mix of revenues we derive from the sale of new vehicles, used vehicles, finance and insurance products, and service and parts transactions. Our gross profit varies across product lines, with vehicle sales usually resulting in lower gross profit margins and our other revenues resulting in higher gross profit margins. Factors such as inventory and vehicle availability, customer demand, consumer confidence, unemployment,

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general economic conditions, seasonality, weather, credit availability, fuel prices, and manufacturers’ advertising and incentives also impact the mix of our revenues, and therefore influence our gross profit margin.

The results of our commercial vehicle distribution business in Australia and New Zealand are principally driven by the number and types of products and vehicles ordered by our customers.

Aggregate revenue and gross profit increased $134.2 million and $30.0 million, or 2.4% and 3.6%, respectively, during the three months ended September 30, 2018 and increased $1,356.9 million and $192.6 million, or 8.5% and 8.0%, respectively, during the nine months ended September 30, 2018, compared to the same periods in 2017. The increases are largely attributable to same-store increases in the new and used Retail Automotive and Retail Commercial Truck segments, finance and insurance, and service and parts revenue and gross profit.

As our various exchange rates fluctuate, our revenue and results of operations as reported in U.S. Dollars fluctuate. For example, if the British Pound were to weaken against the U.S. Dollar, our U.K. results of operations would translate into less U.S. Dollar reported results. Foreign currency average rate fluctuations decreased revenue and gross profit by $26.2 million and $4.7 million, respectively, for the three months ended September 30, 2018, and increased revenue and gross profit by $429.3 million and $56.0 million, respectively, for the nine months ended September 30, 2018. Foreign currency average rate fluctuations decreased earnings per share from continuing operations by approximately $0.01 per share for the three months ended September 30, 2018 and increased earnings per share from continuing operations by approximately $0.08 per share for the nine months ended September 30, 2018. Excluding the impact of foreign currency average rate fluctuations, revenue and gross profit increased 2.9% and 4.2%, respectively, for the three months ended September 30, 2018, and increased 5.8% and 5.7%, respectively, for the nine months ended September 30, 2018.

Our selling expenses consist of advertising and compensation for sales personnel, including commissions and related bonuses. General and administrative expenses include compensation for administration, finance, legal and general management personnel, rent, insurance, utilities and other expenses. As the majority of our selling expenses are variable, and we believe a significant portion of our general and administrative expenses are subject to our control, we believe our expenses can be adjusted over time to reflect economic trends.

Floor plan interest expense relates to financing incurred in connection with the acquisition of new and used vehicle inventories that is secured by those vehicles. Other interest expense consists of interest charges on all of our interest-bearing debt, other than interest relating to floor plan financing, and includes interest relating to our retail commercial truck dealership and commercial vehicle distribution operations. The cost of our variable rate indebtedness is based on the prime rate, defined London Interbank Offered Rate (“LIBOR”), the Bank of England Base Rate, the Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, the Australian Bank Bill Swap Rate, or the New Zealand Bank Bill Benchmark Rate.

Equity in earnings of affiliates represents our share of the earnings from our investments in joint ventures and other non-consolidated investments, including PTL.

The future success of our business is dependent upon, among other things, general economic and industry conditions; our ability to consummate and integrate acquisitions; the level of vehicle sales in the markets where we operate; our ability to increase sales of higher margin products, especially service and parts sales; our ability to realize returns on our significant capital investment in new and upgraded dealership facilities; the success of our distribution of commercial vehicles, engines, and power systems; and the return realized from our investments in various joint ventures and other non-consolidated investments. See “Forward-Looking Statements” below.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires the application of accounting policies that often involve making estimates and employing judgments. Such judgments influence the assets, liabilities, revenues and expenses recognized in our financial statements. Management, on an ongoing basis, reviews these estimates and assumptions. Management may determine

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that modifications in assumptions and estimates are required, which may result in a material change in our results of operations or financial position.

The accounting policies and estimates that we believe to be most dependent upon the use of estimates and assumptions are: revenue recognition, goodwill and other indefinite-lived intangible assets, investments, self-insurance reserves, and income taxes. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2017 annual report on Form 10-K for additional detail and discussion of these critical accounting policies and estimates. There have been no material changes in critical accounting policies and estimates as described in our most recent annual report.

Refer to Part I, Item 1, Note 2 of the Notes to our Consolidated Condensed Financial Statements for disclosures regarding estimates and judgments related to revenue recognition. Refer to “Income Taxes” within Part I, Item 1, Note 1 of the Notes to our Consolidated Condensed Financial Statements for disclosures regarding estimates and judgments related to income taxes.

Results of Operations

The following tables present comparative financial data relating to our operating performance in the aggregate and on a “same-store” basis. Dealership results are included in same-store comparisons when we have consolidated the acquired entity during the entirety of both periods being compared. As an example, if a dealership were acquired on January 15, 2016, the results of the acquired entity would be included in annual same-store comparisons beginning with the year ended December 31, 2018 and in quarterly same-store comparisons beginning with the quarter ended June 30, 2017.

The results for the three and nine months ended September 30, 2018 include a tax benefit of $11.6 million, or $0.14 per share, recorded in the third quarter of 2018 for final adjustments to our provisional estimates per the U.S. Tax Cuts and Jobs Act and related Staff Accounting Bulletin No. 118 (discussed in “Income Taxes” within Part I, Item 1, Note 1 ). The results for the nine months ended September 30, 2018 also include a net benefit totaling $1.0 million after tax, or $0.01 per share, consisting of a $6.4 million net gain related to several retail automotive dealership actions including the sale of five locations and the termination of several franchises during the first quarter of 2018, partially offset by valuation adjustments on certain properties totaling $5.4 million.

Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017

Retail Automotive Dealership New Vehicle Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
New Vehicle Data	2018			2017			Change			% Change
New retail unit sales		58,933			64,365			(5,432)		(8.4)	%
Same-store new retail unit sales		58,463			62,591			(4,128)		(6.6)	%
New retail sales revenue	$	2,350.2		$	2,480.8		$	(130.6)		(5.3)	%
Same-store new retail sales revenue	$	2,324.3		$	2,426.9		$	(102.6)		(4.2)	%
New retail sales revenue per unit	$	39,880		$	38,542		$	1,338		3.5	%
Same-store new retail sales revenue per unit	$	39,757		$	38,774		$	983		2.5	%
Gross profit — new	$	179.8		$	185.2		$	(5.4)		(2.9)	%
Same-store gross profit — new	$	177.2		$	181.5		$	(4.3)		(2.4)	%
Average gross profit per new vehicle retailed	$	3,050		$	2,877		$	173		6.0	%
Same-store average gross profit per new vehicle retailed	$	3,030		$	2,900		$	130		4.5	%
Gross margin % — new		7.7	%		7.5	%		0.2	%	2.7	%
Same-store gross margin % — new		7.6	%		7.5	%		0.1	%	1.3	%

Units

Retail unit sales of new vehicles decreased from 2017 to 2018 due to a 4,128 unit, or 6.6%, decrease in same-store new retail unit sales, coupled with a 1,304 unit decrease from net dealership divestitures. Same-store units decreased

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3.3% in the U.S. primarily due to a decrease in premium brand sales, coupled with a decrease in volume foreign and domestic brand sales. Same-store units decreased 11.6% internationally primarily due to a temporary shortage of product availability resulting from the new “Worldwide Harmonised Light Vehicle Testing Procedure” (WLTP) fuel economy testing and emissions standards applicable to new vehicles sold in Europe beginning September 2018.

Revenues

New vehicle retail sales revenue decreased from 2017 to 2018 due to a $102.6 million, or 4.2%, decrease in same-store revenues, coupled with a $28.0 million decrease from net dealership divestitures. Excluding $5.8 million of unfavorable foreign currency fluctuations, same-store new retail revenue decreased 4.0%. The same-store revenue decrease is due to a decrease in same-store unit sales, which decreased revenue by $160.1 million, partially offset by a $983 per unit increase in comparative average selling prices (offset by a $99 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased revenue by $57.5 million.

Gross Profit

Retail gross profit from new vehicle sales decreased from 2017 to 2018 due to a $4.3 million, or 2.4%, decrease in same-store gross profit, coupled with a $1.1 million decrease from net dealership divestitures. Excluding $0.4 million of unfavorable foreign currency fluctuations, same-store gross profit decreased 2.1%. The decrease in same-store gross profit is due to a decrease in same-store new retail unit sales, which decreased gross profit by $11.9 million, partially offset by a $130 per unit increase in the average gross profit per new vehicle retailed (offset by an $8 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased gross profit by $7.6 million.

Retail Automotive Dealership Used Vehicle Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
Used Vehicle Data	2018			2017			Change			% Change
Used retail unit sales		72,000			65,892			6,108		9.3	%
Same-store used retail unit sales		65,336			63,986			1,350		2.1	%
Used retail sales revenue	$	1,825.2		$	1,669.5		$	155.7		9.3	%
Same-store used retail sales revenue	$	1,729.5		$	1,630.8		$	98.7		6.1	%
Used retail sales revenue per unit	$	25,350		$	25,337		$	13		0.1	%
Same-store used retail sales revenue per unit	$	26,471		$	25,487		$	984		3.9	%
Gross profit — used	$	105.3		$	94.5		$	10.8		11.4	%
Same-store gross profit — used	$	98.3		$	92.3		$	6.0		6.5	%
Average gross profit per used vehicle retailed	$	1,462		$	1,434		$	28		2.0	%
Same-store average gross profit per used vehicle retailed	$	1,504		$	1,442		$	62		4.3	%
Gross margin % — used		5.8	%		5.7	%		0.1	%	1.8	%
Same-store gross margin % — used		5.7	%		5.7	%		—	%	—	%

Units

Retail unit sales of used vehicles increased from 2017 to 2018 due to a 4,758 unit increase from net dealership acquisitions, coupled with a 1,350 unit, or 2.1%, increase in same-store used retail unit sales. Same-store units increased 6.0% internationally and decreased 1.5% in the U.S. Overall, used units increased 24.7% internationally and decreased 4.8% in the U.S. The decrease of 4.8% is primarily due to the divestiture of franchised dealerships in the U.S. The increase internationally is primarily due to our acquisitions of stand-alone used vehicle dealerships in the U.K. Same-store retail units for our U.S. and U.K stand-alone used vehicle dealerships increased 1.5% and 6.0%, respectively.

Revenues

Used vehicle retail sales revenue increased from 2017 to 2018 due to a $98.7 million, or 6.1%, increase in same-store revenues, coupled with a $57.0 million increase from net dealership acquisitions. Excluding $4.3 million of unfavorable foreign currency fluctuations, same-store used retail revenue increased 6.3%. The same-store revenue increase is

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primarily due to a $984 per unit increase in comparative average selling prices (offset by a $66 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased revenue by $63.0 million, coupled with an increase in same-store used retail unit sales, which increased revenue by $35.7 million. The increase in used retail sales revenue per unit was partially offset by lower selling prices from our stand-alone used vehicle dealerships, which reduced used retail sales revenue per unit by $3,667. The average sales price per unit for our stand-alone used vehicle dealerships is $14,800 compared to $29,017 at our franchised dealerships.

Gross Profit

Retail gross profit from used vehicle sales increased from 2017 to 2018 due to a $6.0 million, or 6.5%, increase in same-store gross profit, coupled with a $4.8 million increase from net dealership acquisitions. Excluding $0.2 million of unfavorable foreign currency fluctuations, same-store gross profit increased 6.7%. The increase in same-store gross profit is due to a $62 per unit increase in average gross profit per used vehicle retailed (offset by a $4 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased gross profit by $4.0 million, coupled with an increase in same-store used retail unit sales, which increased gross profit by $2.0 million. The increase in used average gross profit per unit was partially offset by the impact of lower average selling prices for our stand-alone used vehicle dealerships, which reduced used average gross profit per unit by $145. The average gross profit per unit for our stand-alone used vehicle dealerships is $1,045 compared to $1,607 at our franchised dealerships.

Retail Automotive Dealership Finance and Insurance Data

(In millions, except unit and per unit amounts)


					2018 vs. 2017
Finance and Insurance Data	2018		2017		Change		% Change
Total retail unit sales		130,933		130,257		676	0.5	%
Total same-store retail unit sales		123,799		126,577		(2,778)	(2.2)	%
Finance and insurance revenue	$	158.5	$	152.0	$	6.5	4.3	%
Same-store finance and insurance revenue	$	154.1	$	148.9	$	5.2	3.5	%
Finance and insurance revenue per unit	$	1,210	$	1,167	$	43	3.7	%
Same-store finance and insurance revenue per unit	$	1,244	$	1,176	$	68	5.8	%

Finance and insurance revenue increased from 2017 to 2018 due to a $5.2 million, or 3.5%, increase in same-store revenues, coupled with a $1.3 million increase from net dealership acquisitions. Excluding $0.4 million of unfavorable foreign currency fluctuations, same-store finance and insurance revenue increased 3.8%. The same-store revenue increase is due a $68 per unit increase in finance and insurance revenue per unit (offset by a $4 per unit decrease attributable to unfavorable foreign currency fluctuations), which increased revenue by $8.4 million, offset by a decrease in same-store retail unit sales, which decreased revenue by $3.2 million. Finance and insurance revenue per unit was partially offset by the impact of lower per unit amounts from our stand-alone used vehicle dealerships, which reduced average finance and insurance revenue per unit by $35. We believe the increase in same-store finance and insurance revenue per unit, particularly in the U.S., is primarily due to our efforts to increase finance and insurance revenue, which include additional training, adding resources to target underperforming locations, product penetration, and changes to product portfolios.

Retail Automotive Dealership Service and Parts Data

(In millions)


							2018 vs. 2017
Service and Parts Data	2018			2017			Change			% Change
Service and parts revenue	$	523.8		$	520.9		$	2.9		0.6	%
Same-store service and parts revenue	$	520.8		$	512.1		$	8.7		1.7	%
Gross profit — service and parts	$	313.2		$	308.0		$	5.2		1.7	%
Same-store service and parts gross profit	$	308.1		$	302.0		$	6.1		2.0	%
Gross margin % — service and parts		59.8	%		59.1	%		0.7	%	1.2	%
Same-store service and parts gross margin %		59.2	%		59.0	%		0.2	%	0.3	%

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Revenues

Service and parts revenue increased from 2017 to 2018, with an increase of 4.5% internationally, offset by a decrease of 1.3% in the U.S due to net dealership divestitures. The overall increase in service and parts revenue is due to an $8.7 million, or 1.7%, increase in same-store revenues during the period, offset by a $5.8 million decrease from net dealership divestitures. Excluding $0.9 million of unfavorable foreign currency fluctuations, same-store service and parts revenue increased 1.9%. The increase in same-store revenue is due to a $15.8 million, or 4.6%, increase in customer pay revenue, partially offset by a $6.3 million, or 4.8%, decrease in warranty revenue, and a $0.8 million, or 2.1%, decrease in vehicle preparation and body shop revenue.

Gross Profit

Service and parts gross profit increased from 2017 to 2018 due to a $6.1 million, or 2.0%, increase in same-store gross profit during the period, offset by a $0.9 million decrease from net dealership divestitures. Excluding $0.5 million of unfavorable foreign currency fluctuations, same-store gross profit increased 2.2%. The same-store gross profit increase is due to the increase in same-store revenues, which increased gross profit by $5.1 million, coupled with a 0.2% increase in gross margin, which increased gross profit by $1.0 million. The same-store gross profit increase is due to an $8.7 million, or 5.4%, increase in customer pay gross profit, offset by a $2.3 million, or 3.3%, decrease in warranty gross profit, and a $0.3 million, or 0.4%, decrease in vehicle preparation and body shop gross profit.

Retail Commercial Truck Dealership Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
New Commercial Truck Data	2018			2017			Change			% Change
New retail unit sales		2,431			1,757			674		38.4	%
Same-store new retail unit sales		2,393			1,757			636		36.2	%
New retail sales revenue	$	249.4		$	184.3		$	65.1		35.3	%
Same-store new retail sales revenue	$	243.2		$	184.3		$	58.9		32.0	%
New retail sales revenue per unit	$	102,610		$	104,874		$	(2,264)		(2.2)	%
Same-store new retail sales revenue per unit	$	101,629		$	104,874		$	(3,245)		(3.1)	%
Gross profit — new	$	12.0		$	7.9		$	4.1		51.9	%
Same-store gross profit — new	$	11.7		$	7.9		$	3.8		48.1	%
Average gross profit per new truck retailed	$	4,952		$	4,479		$	473		10.6	%
Same-store average gross profit per new truck retailed	$	4,898		$	4,479		$	419		9.4	%
Gross margin % — new		4.8	%		4.3	%		0.5	%	11.6	%
Same-store gross margin % — new		4.8	%		4.3	%		0.5	%	11.6	%

Units

Retail unit sales of new trucks increased from 2017 to 2018 due to a 636 unit increase in same-store retail unit sales, coupled with a 38 unit increase from net dealership acquisitions. Same-store new truck units increased 36.2% from 2017 to 2018, largely due to the 28.1% increase in the North American Class 8 heavy-duty truck market during the three months ended September 30, 2018.

Revenues

New commercial truck retail sales revenue increased from 2017 to 2018 due to a $58.9 million increase in same-store revenues, coupled with a $6.2 million increase from net dealership acquisitions. The same-store revenue increase is due to an increase in same-store new retail unit sales, which increased revenue by $64.6 million, partially offset by a $3,245 per unit decrease in comparative average selling prices, which decreased revenue by $5.7 million.

Gross Profit

New commercial truck retail gross profit increased from 2017 to 2018 due to a $3.8 million increase in same-store gross profit, coupled with a $0.3 million increase from net dealership acquisitions. The increase in same-store gross

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profit is due to an increase in same-store new retail unit sales, which increased gross profit by $3.1 million, coupled with a $419 per unit increase in average gross profit per new truck retailed, which increased gross profit by $0.7 million.


							2018 vs. 2017
Used Commercial Truck Data	2018			2017			Change			% Change
Used retail unit sales		579			464			115		24.8	%
Same-store used retail unit sales		578			464			114		24.6	%
Used retail sales revenue	$	32.5		$	25.7		$	6.8		26.5	%
Same-store used retail sales revenue	$	32.5		$	25.7		$	6.8		26.5	%
Used retail sales revenue per unit	$	56,214		$	55,387		$	827		1.5	%
Same-store used retail sales revenue per unit	$	56,270		$	55,387		$	883		1.6	%
Gross profit — used	$	4.0		$	2.6		$	1.4		53.8	%
Same-store gross profit — used	$	4.0		$	2.6		$	1.4		53.8	%
Average gross profit per used truck retailed	$	6,986		$	5,500		$	1,486		27.0	%
Same-store average gross profit per used truck retailed	$	6,995		$	5,500		$	1,495		27.2	%
Gross margin % — used		12.3	%		10.1	%		2.2	%	21.8	%
Same-store gross margin % — used		12.3	%		10.1	%		2.2	%	21.8	%

Units

Retail unit sales of used trucks increased from 2017 to 2018 primarily due to a 114 unit increase in same-store retail unit sales. The increase from 2017 to 2018 is primarily due to a more stable used truck pricing environment due in part to the strong new truck environment driven by the strength of the U.S. economy, higher utilization rates, and our ability to proactively manage our used truck inventory through the purchase and sale of more desirable trucks.

Revenues

Used commercial truck retail sales revenue increased from 2017 to 2018 due to a $6.8 million increase in same-store revenues. The same-store revenue increase is due to the increase in same-store used retail unit sales, which increased revenue by $6.4 million, coupled with an $883 per unit increase in comparative average selling prices, which increased revenue by $0.4 million.

Gross Profit

Used commercial truck retail gross profit increased from 2017 to 2018 due to a $1.4 million increase in same-store gross profit resulting from higher used truck retail unit sales.


							2018 vs. 2017
Service and Parts Data	2018			2017			Change			% Change
Service and parts revenue	$	93.1		$	83.3		$	9.8		11.8	%
Same-store service and parts revenue	$	91.8		$	83.3		$	8.5		10.2	%
Gross profit — service and parts	$	36.4		$	31.7		$	4.7		14.8	%
Same-store service and parts gross profit	$	35.8		$	31.7		$	4.1		12.9	%
Gross margin % — service and parts		39.1	%		38.1	%		1.0	%	2.6	%
Same-store service and parts gross margin %		39.0	%		38.1	%		0.9	%	2.4	%

Revenues

Service and parts revenue increased from 2017 to 2018 due to an $8.5 million increase in same-store revenues, coupled with a $1.3 million increase from net dealership acquisitions. Customer pay work represents approximately 85% of PTG’s service and parts revenue, largely due to the significant amount of retail sales of parts and accessories. The increase in same-store revenue is due to a $7.2 million, or 10.2%, increase in customer pay revenue, and a $1.3 million, or 13.0%, increase in warranty revenue.

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Gross Profit

Service and parts gross profit increased from 2017 to 2018 due to a $4.1 million increase in same-store gross profit, coupled with a $0.6 million increase from net dealership acquisitions. The same-store gross profit increase is due to the increase in same-store revenues, which increased gross profit by $3.3 million, coupled with a 0.9% increase in gross margin, which increased gross profit by $0.8 million. The same-store gross profit increase is due to a $3.1 million, or 13.1%, increase in customer pay gross profit and a $1.0 million, or 21.3%, increase in warranty gross profit.

Commercial Vehicle Distribution Data

(In millions, except unit amounts)


					2018 vs. 2017
Penske Commercial Vehicles Australia Data	2018		2017		Change		% Change
Vehicle and parts unit sales		292		348		(56)	(16.1)	%
Sales revenue	$	50.4	$	70.7	$	(20.3)	(28.7)	%
Gross profit	$	10.8	$	10.2	$	0.6	5.9	%

The decline in units and revenue from 2017 to 2018 is largely attributable to increased efforts to integrate PCV Australia operations with PPS locations now selling PCV Australia brands, which includes an additional 165 units distributed to PPS. In addition, the weakening of the Australian Dollar versus the U.S. Dollar, has contributed to a decrease in revenue. The increase in gross profit from 2017 to 2018 is primarily due to an increase in parts sales due to stronger demand.


					2018 vs. 2017
Penske Power Systems Data	2018		2017		Change		% Change
Sales revenue	$	73.3	$	67.6	$	5.7	8.4	%
Gross profit	$	21.7	$	23.5	$	(1.8)	(7.7)	%

The increase in revenue of PPS from 2017 to 2018 is primarily attributable to continued new order growth when compared to the same period last year, timing of completion of projects and delivery of products, and improving economic conditions which have led to an increase in mining repowers, military and marine market sales, and engine and parts sales. Increased efforts to integrate PCV Australia operations with PPS locations now selling PCV Australia brands also contributed to increased revenues. The decrease in gross profit is partially due to timing of completion of higher margin services throughout the year.

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Selling, General and Administrative Data

(In millions)


							2018 vs. 2017
Selling, General and Administrative Data	2018			2017			Change			% Change
Personnel expense	$	382.0		$	366.1		$	15.9		4.3	%
Advertising expense	$	28.5		$	29.4		$	(0.9)		(3.1)	%
Rent & related expense	$	84.2		$	84.6		$	(0.4)		(0.5)	%
Other expense	$	168.1		$	166.0		$	2.1		1.3	%
Total SG&A expenses	$	662.8		$	646.1		$	16.7		2.6	%
Same-store SG&A expenses	$	646.5		$	631.3		$	15.2		2.4	%

Personnel expense as % of gross profit		44.8	%		44.5	%		0.3	%	0.7	%
Advertising expense as % of gross profit		3.3	%		3.6	%		(0.3)	%	(8.3)	%
Rent & related expense as % of gross profit		9.9	%		10.3	%		(0.4)	%	(3.9)	%
Other expense as % of gross profit		19.7	%		20.1	%		(0.4)	%	(2.0)	%
Total SG&A expenses as % of gross profit		77.7	%		78.5	%		(0.8)	%	(1.0)	%
Same-store SG&A expenses as % of same-store gross profit		77.8	%		78.2	%		(0.4)	%	(0.5)	%

Selling, general and administrative expenses (“SG&A”) increased from 2017 to 2018 due to a $15.2 million, or 2.4%, increase in same-store SG&A, coupled with a $1.5 million increase from net acquisitions. Excluding the $3.6 million decrease related to foreign currency fluctuations, same-store SG&A increased 3.0%. The increase in SG&A is primarily due to an increase in variable personnel expenses as a result of the 3.6% increase in gross profit compared to the prior year. SG&A as a percentage of gross profit was 77.7%, a decrease of 80 basis points compared to 78.5% in the prior year. SG&A expenses as a percentage of total revenue was 11.7% in each of the three months ended September 30, 2018 and 2017.

Depreciation

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Depreciation	$	25.9	$	24.3	$	1.6	6.6	%

Depreciation increased from 2017 to 2018 due to a $1.9 million, or 8.1%, increase in same-store depreciation, offset by a $0.3 million decrease from net dealership divestitures. The overall same-store increase is primarily related to our ongoing facility improvements and expansion programs.

Floor Plan Interest Expense

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Floor plan interest expense	$	20.2	$	16.4	$	3.8	23.2	%

Floor plan interest expense increased from 2017 to 2018 due to a $3.9 million, or 24.2%, increase in same-store floor plan interest expense, offset by a $0.1 million decrease from net dealership divestitures. The overall increase is primarily due to increases in applicable rates.

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Other Interest Expense

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Other interest expense	$	28.3	$	27.8	$	0.5	1.8	%

Other interest expense increased from 2017 to 2018 primarily due to the issuance of our $300.0 million 3.75% senior subordinated notes in August 2017, increases in applicable rates, as well as an increase in outstanding revolver borrowings under the U.K. credit agreements and the Australia capital loan agreement. This increase was partially offset by a decrease in outstanding revolver borrowings under the U.S. credit agreement.

Equity in Earnings of Affiliates

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Equity in earnings of affiliates	$	41.7	$	30.9	$	10.8	35.0	%

Equity in earnings of affiliates increased from 2017 to 2018 due to an increase in our ownership percentage in PTL from 23.4% to 28.9% in September 2017, coupled with a 13.7% increase in PTL earnings. Equity in earnings of affiliates from PTL increased by $10.6 million from 2017 to 2018. Equity in earnings of affiliates also increased due to an increase in earnings from our retail automotive joint ventures, offset by a decrease in earnings due to certain non-automotive investments that were sold in 2017.

Income Taxes

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Income taxes	$	27.1	$	44.7	$	(17.6)	(39.4)	%

Income taxes decreased from 2017 to 2018 primarily due to a reduction in our effective tax rate as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”), which permanently reduced the U.S. corporate income tax rate from 35% to 21% effective in 2018. Our effective tax rate was 17.3% during the three months ended September 30, 2018 compared to 32.2% during the three months ended September 30, 2017. The decrease in the effective tax rate is partially due to a tax benefit of $11.6 million for final adjustments to our provisional estimates per the U.S. Tax Cuts and Jobs Act and related Staff Accounting Bulletin No. 118 (discussed in “Income Taxes” within Part I, Item 1, Note 1 ). The decrease in income taxes was partially offset by an $18.2 million increase in our pretax income compared to the prior year.

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Nine Months Ended September 30, 2018 Compared to Nine Months Ended September 30, 2017

Retail Automotive Dealership New Vehicle Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
New Vehicle Data	2018			2017			Change			% Change
New retail unit sales		179,266			187,377			(8,111)		(4.3)	%
Same-store new retail unit sales		174,763			179,632			(4,869)		(2.7)	%
New retail sales revenue	$	7,325.6		$	7,189.9		$	135.7		1.9	%
Same-store new retail sales revenue	$	7,070.3		$	6,901.2		$	169.1		2.5	%
New retail sales revenue per unit	$	40,865		$	38,371		$	2,494		6.5	%
Same-store new retail sales revenue per unit	$	40,457		$	38,419		$	2,038		5.3	%
Gross profit — new	$	552.8		$	552.6		$	0.2		—	%
Same-store gross profit — new	$	528.9		$	529.8		$	(0.9)		(0.2)	%
Average gross profit per new vehicle retailed	$	3,084		$	2,949		$	135		4.6	%
Same-store average gross profit per new vehicle retailed	$	3,027		$	2,949		$	78		2.6	%
Gross margin % — new		7.5	%		7.7	%		(0.2)	%	(2.6)	%
Same-store gross margin % — new		7.5	%		7.7	%		(0.2)	%	(2.6)	%

Units

Retail unit sales of new vehicles decreased from 2017 to 2018 due to a 4,869 unit, or 2.7%, decrease in same-store new retail unit sales, coupled with a 3,242 unit decrease from net dealership divestitures. New units decreased 5.2% in the U.S. and 3.0% internationally. Same-store units decreased 1.8% in the U.S. primarily due to a decrease in premium brand sales, offset by an increase in domestic and volume foreign brand sales. Same-store units decreased 4.0% internationally primarily due to a temporary shortage of product availability resulting from the new “Worldwide Harmonised Light Vehicle Testing Procedure” (WLTP) fuel economy testing and emissions standards applicable to new vehicles sold in Europe beginning September 2018.

Revenues

New vehicle retail sales revenue increased from 2017 to 2018 due to a $169.1 million, or 2.5%, increase in same-store revenues, offset by a $33.4 million decrease from net dealership divestitures. Excluding $163.9 million of favorable foreign currency fluctuations, same-store new retail revenue increased 0.1%. The same-store revenue increase is due to a $2,038 per unit increase in comparative average selling prices (including a $938 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $356.2 million, partially offset by a decrease in same-store new retail unit sales, which decreased revenue by $187.1 million.

Gross Profit

Retail gross profit from new vehicle sales increased from 2017 to 2018 due to a $1.1 million increase from net dealership acquisitions, offset by a $0.9 million, or 0.2%, decrease in same-store gross profit. Excluding $14.9 million of favorable foreign currency fluctuations, same-store gross profit decreased 3.0%. The decrease in same-store gross profit is due to a decrease in same-store new retail unit sales, which decreased gross profit by $14.4 million, partially offset by a $78 per unit increase in the average gross profit per new vehicle retailed (including an $86 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by $13.5 million.

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Retail Automotive Dealership Used Vehicle Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
Used Vehicle Data	2018			2017			Change			% Change
Used retail unit sales		218,371			194,384			23,987		12.3	%
Same-store used retail unit sales		158,547			155,676			2,871		1.8	%
Used retail sales revenue	$	5,588.9		$	4,850.6		$	738.3		15.2	%
Same-store used retail sales revenue	$	4,617.4		$	4,242.7		$	374.7		8.8	%
Used retail sales revenue per unit	$	25,593		$	24,954		$	639		2.6	%
Same-store used retail sales revenue per unit	$	29,123		$	27,254		$	1,869		6.9	%
Gross profit — used	$	327.5		$	282.4		$	45.1		16.0	%
Same-store gross profit — used	$	256.9		$	234.3		$	22.6		9.6	%
Average gross profit per used vehicle retailed	$	1,499		$	1,453		$	46		3.2	%
Same-store average gross profit per used vehicle retailed	$	1,620		$	1,505		$	115		7.6	%
Gross margin % — used		5.9	%		5.8	%		0.1	%	1.7	%
Same-store gross margin % — used		5.6	%		5.5	%		0.1	%	1.8	%

Units

Retail unit sales of used vehicles increased from 2017 to 2018 due to a 21,116 unit increase from net dealership acquisitions, coupled with a 2,871 unit, or 1.8%, increase in same-store used retail unit sales. Used units increased 28.2% internationally and decreased 1.9% in the U.S. The decrease of 1.9% is due to the divestiture of franchised dealerships in the U.S. The increase internationally is primarily due to our acquisitions of stand-alone used vehicle dealerships in the U.K. Same-store units increased 3.6% internationally and 0.4% in the U.S.

Revenues

Used vehicle retail sales revenue increased from 2017 to 2018 due to a $374.7 million, or 8.8%, increase in same-store revenues, coupled with a $363.6 million increase from net dealership acquisitions. Excluding $138.6 million of favorable foreign currency fluctuations, same-store used retail revenue increased 5.6%. The same-store revenue increase is primarily due to a $1,869 per unit increase in comparative average selling prices (including an $874 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $291.0 million, coupled with an increase in same-store used retail unit sales, which increased revenue by $83.7 million. The increase in used retail sales revenue per unit was partially offset by lower selling prices from our stand-alone used vehicle dealerships, which reduced used retail sales revenue per unit by $3,659. The average sales price per unit for our stand-alone used vehicle dealerships is $15,004 compared to $29,252 at our franchised dealerships.

Gross Profit

Retail gross profit from used vehicle sales increased from 2017 to 2018 due to a $22.6 million, or 9.6%, increase in same-store gross profit, coupled with a $22.5 million increase from net dealership acquisitions. Excluding $7.2 million of favorable foreign currency fluctuations, same-store gross profit increased 6.6%. The increase in same-store gross profit is due to a $115 per unit increase in average gross profit per used vehicle retailed (including a $45 per unit increase attributable to favorable foreign currency fluctuations), which increased gross profit by $17.9 million, coupled with an increase in same-store used retail unit sales, which increased gross profit by $4.7 million. The increase in used average gross profit per unit was partially offset by the impact of lower average selling prices for our stand-alone used vehicle dealerships, which reduced used average gross profit per unit by $130. The average gross profit per unit for our stand-alone used vehicle dealerships is $1,124 compared to $1,629 at our franchised dealerships.

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Retail Automotive Dealership Finance and Insurance Data

(In millions, except unit and per unit amounts)


					2018 vs. 2017
Finance and Insurance Data	2018		2017		Change		% Change
Total retail unit sales		397,637		381,761		15,876	4.2	%
Total same-store retail unit sales		333,310		335,308		(1,998)	(0.6)	%
Finance and insurance revenue	$	482.2	$	436.6	$	45.6	10.4	%
Same-store finance and insurance revenue	$	413.1	$	386.1	$	27.0	7.0	%
Finance and insurance revenue per unit	$	1,212	$	1,144	$	68	5.9	%
Same-store finance and insurance revenue per unit	$	1,240	$	1,151	$	89	7.7	%

Finance and insurance revenue increased from 2017 to 2018 due to a $27.0 million, or 7.0%, increase in same-store revenues, coupled with an $18.6 million increase from net dealership acquisitions. Excluding $9.7 million of favorable foreign currency fluctuations, same-store finance and insurance revenue increased 4.5%. The same-store revenue increase is due to an $89 per unit increase in comparative average selling prices (including a $30 per unit increase attributable to favorable foreign currency fluctuations), which increased revenue by $29.3 million, partially offset by the decrease in same-store retail unit sales, which decreased revenue by $2.3 million. Finance and insurance revenue per unit was partially offset by the impact of lower per unit amounts from our stand-alone used vehicle dealerships, which reduced average finance and insurance revenue per unit by $25. We believe the increase in same-store finance and insurance revenue per unit, particularly in the U.S., is primarily due to our efforts to increase finance and insurance revenue, which include additional training, adding resources to target underperforming locations, product penetration, and changes to product portfolios.

Retail Automotive Dealership Service and Parts Data

(In millions)


							2018 vs. 2017
Service and Parts Data	2018			2017			Change			% Change
Service and parts revenue	$	1,615.1		$	1,540.1		$	75.0		4.9	%
Same-store service and parts revenue	$	1,552.7		$	1,474.8		$	77.9		5.3	%
Gross profit — service and parts	$	959.5		$	911.4		$	48.1		5.3	%
Same-store service and parts gross profit	$	904.9		$	863.8		$	41.1		4.8	%
Gross margin % — service and parts		59.4	%		59.2	%		0.2	%	0.3	%
Same-store service and parts gross margin %		58.3	%		58.6	%		(0.3)	%	(0.5)	%

Revenues

Service and parts revenue increased from 2017 to 2018, with an increase of 14.9% internationally and 0.3% in the U.S. The overall increase in service and parts revenue is due to a $77.9 million, or 5.3%, increase in same-store revenues, offset by a $2.9 million decrease from net dealership divestitures during the period. Excluding $31.8 million of favorable foreign currency fluctuations, same-store service and parts revenue increased 3.1%. The increase in same-store revenue is due to a $77.7 million, or 7.9%, increase in customer pay revenue, and a $1.8 million, or 1.6%, increase in vehicle preparation and body shop revenue, partially offset by a $1.6 million, or 0.4%, decrease in warranty revenue.

Gross Profit

Service and parts gross profit increased from 2017 to 2018 due to a $41.1 million, or 4.8%, increase in same-store gross profit, coupled with a $7.0 million increase from net dealership acquisitions during the period. Excluding $17.4 million of favorable foreign currency fluctuations, same-store gross profit increased 2.7%. The same-store gross profit increase is due to an increase in same-store revenues, which increased gross profit by $45.4 million, partially offset by a 0.3% decrease in gross margin, which decreased gross profit by $4.3 million. The same-store gross profit increase is due to a $35.6 million, or 7.7%, increase in customer pay gross profit, a $2.9 million, or 1.5%, increase in warranty gross profit, and a $2.6 million, or 1.3%, increase in vehicle preparation and body shop gross profit.

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Retail Commercial Truck Dealership Data

(In millions, except unit and per unit amounts)


							2018 vs. 2017
New Commercial Truck Data	2018			2017			Change			% Change
New retail unit sales		6,107			4,060			2,047		50.4	%
Same-store new retail unit sales		6,039			4,060			1,979		48.7	%
New retail sales revenue	$	630.5		$	411.5		$	219.0		53.2	%
Same-store new retail sales revenue	$	620.7		$	411.5		$	209.2		50.8	%
New retail sales revenue per unit	$	103,257		$	101,332		$	1,925		1.9	%
Same-store new retail sales revenue per unit	$	102,786		$	101,332		$	1,454		1.4	%
Gross profit — new	$	28.2		$	17.4		$	10.8		62.1	%
Same-store gross profit — new	$	27.6		$	17.4		$	10.2		58.6	%
Average gross profit per new truck retailed	$	4,620		$	4,286		$	334		7.8	%
Same-store average gross profit per new truck retailed	$	4,572		$	4,286		$	286		6.7	%
Gross margin % — new		4.5	%		4.2	%		0.3	%	7.1	%
Same-store gross margin % — new		4.4	%		4.2	%		0.2	%	4.8	%

Units

Retail unit sales of new trucks increased from 2017 to 2018 primarily due to a 1,979 unit increase in same-store retail unit sales, coupled with a 68 unit increase from net dealership acquisitions. Same-store new truck units increased 48.7% from 2017 to 2018, largely due to the 27.3% increase in the North American Class 8 heavy-duty truck market during the nine months ended September 30, 2018.

Revenues

New commercial truck retail sales revenue increased from 2017 to 2018 due to a $209.2 million increase in same-store revenues, coupled with a $9.8 million increase from net dealership acquisitions. The same-store revenue increase is due to the increase in same-store new retail unit sales, which increased revenue by $203.4 million, coupled with a $1,454 per unit increase in comparative average selling prices, which increased revenue by $5.8 million.

Gross Profit

New commercial truck retail gross profit increased from 2017 to 2018 due to a $10.2 million increase in same-store gross profit, coupled with a $0.6 million increase from net dealership acquisitions. The increase in same-store gross profit is due to the increase in same-store new retail unit sales, which increased gross profit by $9.0 million, coupled with a $286 per unit increase in average gross profit per new truck retailed, which increased gross profit by $1.2 million.

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							2018 vs. 2017
Used Commercial Truck Data	2018			2017			Change			% Change
Used retail unit sales		1,516			1,230			286		23.3	%
Same-store used retail unit sales		1,514			1,230			284		23.1	%
Used retail sales revenue	$	86.3		$	67.9		$	18.4		27.1	%
Same-store used retail sales revenue	$	86.2		$	67.9		$	18.3		27.0	%
Used retail sales revenue per unit	$	56,943		$	55,158		$	1,785		3.2	%
Same-store used retail sales revenue per unit	$	56,962		$	55,158		$	1,804		3.3	%
Gross profit — used	$	9.8		$	6.1		$	3.7		60.7	%
Same-store gross profit — used	$	9.8		$	6.1		$	3.7		60.7	%
Average gross profit per used truck retailed	$	6,476		$	4,912		$	1,564		31.8	%
Same-store average gross profit per used truck retailed	$	6,471			4,912		$	1,559		31.7	%
Gross margin % — used		11.4	%		9.0	%		2.4	%	26.7	%
Same-store gross margin % — used		11.4	%		9.0	%		2.4	%	26.7	%

Units

Retail unit sales of used trucks increased from 2017 to 2018 due to a 284 unit increase in same-store retail unit sales, coupled with an increase from net dealership acquisitions. The increase from 2017 to 2018 is primarily due to a more stable used truck pricing environment due in part to the strong new truck environment driven by the strength of the U.S. economy, higher utilization rates, and our ability to proactively manage our used truck inventory through the purchase and sale of more desirable trucks.

Revenues

Used commercial truck retail sales revenue increased from 2017 to 2018 due to an $18.3 million increase in same-store revenues, coupled with a $0.1 million increase from net dealership acquisitions. The same-store revenue increase is due to the increase in same-store used retail unit sales, which increased revenue by $16.1 million, coupled with a $1,804 per unit increase in comparative average selling prices, which increased revenue by $2.2 million.

Gross Profit

Used commercial truck retail gross profit increased from 2017 to 2018 due to a $3.7 million increase in same-store gross profit. The increase in same-store gross profit is due to a $1,559 per unit increase in average gross profit per used truck retailed, which increased gross profit by $1.9 million, coupled with the increase in same-store used retail unit sales, which increased gross profit by $1.8 million.


							2018 vs. 2017
Service and Parts Data	2018			2017			Change			% Change
Service and parts revenue	$	275.7		$	244.6		$	31.1		12.7	%
Same-store service and parts revenue	$	272.7		$	244.6		$	28.1		11.5	%
Gross profit — service and parts	$	106.3		$	90.8		$	15.5		17.1	%
Same-store service and parts gross profit	$	104.9		$	90.8		$	14.1		15.5	%
Gross margin % — service and parts		38.6	%		37.1	%		1.5	%	4.0	%
Same-store service and parts gross margin %		38.5	%		37.1	%		1.4	%	3.8	%

Revenues

Service and parts revenue increased from 2017 to 2018 due to a $28.1 million increase in same-store revenues, coupled with a $3.0 million increase from net dealership acquisitions. Customer pay work represents approximately 85.3% of PTG’s service and parts revenue, largely due to the significant amount of retail sales of parts and accessories. The increase in same-store revenue is due to a $23.9 million, or 11.5%, increase in customer pay revenue, and a $4.4 million, or 15.3%, increase in warranty revenue, partially offset by a $0.2 million, or 2.3%, decrease in body shop revenue.

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Gross Profit

Service and parts gross profit increased from 2017 to 2018 due to a $14.1 million increase in same-store gross profit, coupled with a $1.4 million increase from net dealership acquisitions. The same-store gross profit increase is due to the increase in same-store revenues, which increased gross profit by $10.8 million, coupled with a 1.4% increase in gross margin, which increased gross profit by $3.3 million. The same-store gross profit increase is due to a $10.7 million, or 15.7%, increase in customer pay gross profit, a $2.9 million, or 21.6%, increase in warranty gross profit, and a $0.5 million, or 5.2%, increase in body shop gross profit.

Commercial Vehicle Distribution Data

(In millions, except unit amounts)


					2018 vs. 2017
Penske Commercial Vehicles Australia Data	2018		2017		Change		% Change
Vehicle and parts unit sales		1,071		1,013		58	5.7	%
Sales revenue	$	169.6	$	191.6	$	(22.0)	(11.5)	%
Gross profit	$	37.8	$	32.2	$	5.6	17.4	%

The increase in units for PCV Australia is primarily due to an improved truck and bus market in Australia and improved bus sales in New Zealand in 2018 compared to 2017. The decline in revenue from 2017 to 2018 is primarily attributable to increased efforts to integrate PCV Australia retail operations into PPS locations now selling PCV Australia brands, which includes an additional 165 units distributed to PPS. The increase in gross profit from 2017 to 2018 is primarily due to an increase in parts sales due to stronger demand.


					2018 vs. 2017
Penske Power Systems Data	2018		2017		Change		% Change
Sales revenue	$	256.8	$	171.8	$	85.0	49.5	%
Gross profit	$	73.4	$	62.0	$	11.4	18.4	%

The increase in revenue and gross profit of PPS from 2017 to 2018 is primarily attributable to continued new order growth when compared to the same period last year, timing of completion of projects and delivery of products, and improving economic conditions which have led to an increase in mining repowers, military and marine market sales, and engine and parts sales. Increased efforts to integrate PCV Australia operations with PPS locations now selling PCV Australia brands also contributed to increased revenues and gross profit.

Selling, General and Administrative Data

(In millions)


							2018 vs. 2017
Selling, General and Administrative Data	2018			2017			Change			% Change
Personnel expense	$	1,162.0		$	1,073.3		$	88.7		8.3	%
Advertising expense	$	87.7		$	87.5		$	0.2		0.2	%
Rent & related expense	$	253.0		$	239.8		$	13.2		5.5	%
Other expense	$	498.6		$	469.2		$	29.4		6.3	%
Total SG&A expenses	$	2,001.3		$	1,869.8		$	131.5		7.0	%
Same store SG&A expenses	$	1,834.8		$	1,738.3		$	96.5		5.6	%

Personnel expense as % of gross profit		44.6	%		44.5	%		0.1	%	0.2	%
Advertising expense as % of gross profit		3.4	%		3.6	%		(0.2)	%	(5.6)	%
Rent & related expense as % of gross profit		9.7	%		9.9	%		(0.2)	%	(2.0)	%
Other expense as % of gross profit		19.1	%		19.5	%		(0.4)	%	(2.1)	%
Total SG&A expenses as % of gross profit		76.8	%		77.5	%		(0.7)	%	(0.9)	%
Same store SG&A expenses as % of same store gross profit		77.1	%		77.5	%		(0.4)	%	(0.5)	%

Selling, general and administrative expenses (“SG&A”) increased from 2017 to 2018 due to a $96.5 million, or 5.6%, increase in same-store SG&A, coupled with a $35.0 million increase from net acquisitions. Excluding the $39.0 million

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increase related to foreign currency fluctuations, same-store SG&A increased 3.3%. The increase in SG&A is primarily due to an increase in variable personnel expenses as a result of the 8.0% increase in gross profit compared to the prior year. SG&A as a percentage of gross profit was 76.8%, a decrease of 70 basis points compared to 77.5% in the prior year. SG&A expenses as a percentage of total revenue was 11.5% and 11.7% in the nine months ended September 30, 2018 and 2017, respectively.

Depreciation

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Depreciation	$	77.2	$	70.0	$	7.2	10.3	%

Depreciation increased from 2017 to 2018 due to a $6.9 million, or 10.4%, increase in same-store depreciation, coupled with a $0.3 million increase from net acquisitions. The overall same-store increase is primarily related to our ongoing facility improvements and expansion programs.

Floor Plan Interest Expense

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Floor plan interest expense	$	59.0	$	45.6	$	13.4	29.4	%

Floor plan interest expense increased from 2017 to 2018 due to a $12.5 million, or 28.9%, increase in same-store floor plan interest expense, coupled with a $0.9 million increase from net dealership acquisitions. The overall increase is primarily due to increases in applicable rates.

Other Interest Expense

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Other interest expense	$	86.7	$	79.2	$	7.5	9.5	%

Equity in Earnings of Affiliates

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Equity in earnings of affiliates	$	95.0	$	70.9	$	24.1	34.0	%

Equity in earnings of affiliates increased from 2017 to 2018 primarily due to an increase in our ownership percentage in PTL from 23.4% to 28.9% in September 2017, coupled with a 10.8% increase in PTL earnings. Equity in earnings of affiliates from PTL increased by $24.8 million from 2017 to 2018. Equity in earnings of affiliates also increased due to an increase in earnings from our retail automotive joint ventures, partially offset by a decrease in earnings due to certain non-automotive investments that were sold in 2017.

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Income Taxes

(In millions)


					2018 vs. 2017
	2018		2017		Change		% Change
Income taxes	$	104.7	$	136.0	$	(31.3)	(23.0)	%

Income taxes decreased from 2017 to 2018 primarily due to a reduction in our effective tax rate as a result of the enactment of the U.S. Tax Cuts and Jobs Act (the “Act”), which permanently reduced the U.S. corporate income tax rate from 35% to 21% effective in 2018. Our effective tax rate was 21.9% during the nine months ended September 30, 2018 compared to 32.3% during the nine months ended September 30, 2017. The decrease in the effective tax rate is partially due to a tax benefit of $11.6 million for final adjustments to our provisional estimates per the U.S. Tax Cuts and Jobs Act and related Staff Accounting Bulletin No. 118 (discussed in “Income Taxes” within Part I, Item 1, Note 1 ). The decrease in income taxes was partially offset by a $57.1 million increase in our pre-tax income compared to the prior year.

Liquidity and Capital Resources

Our cash requirements are primarily for working capital, inventory financing, the acquisition of new businesses, the improvement and expansion of existing facilities, the purchase or construction of new facilities, debt service and repayments, dividends and potential repurchases of our outstanding securities under the program discussed below. Historically, these cash requirements have been met through cash flow from operations, borrowings under our credit agreements and floor plan arrangements, the issuance of debt securities, sale-leaseback transactions, mortgages, and dividends and distributions from joint venture investments.

We have historically expanded our operations through organic growth and the acquisition of dealerships and other businesses. We believe that cash flow from operations, dividends and distributions from our joint venture investments, and our existing capital resources, including the liquidity provided by our credit agreements and floor plan financing arrangements, will be sufficient to fund our existing operations and current commitments for at least the next twelve months. In the event we pursue significant acquisitions or other expansion opportunities, pursue significant repurchases of our outstanding securities, or refinance or repay existing debt, we may need to raise additional capital either through the public or private issuance of equity or debt securities or through additional borrowings, which sources of funds may not necessarily be available on terms acceptable to us, if at all. In addition, our liquidity could be negatively impacted in the event we fail to comply with the covenants under our various financing and operating agreements or in the event our floor plan financing is withdrawn.

As of September 30, 2018, we had working capital of $40.3 million, including $37.6 million of cash available to fund our operations and capital commitments. In addition, we had $700.0 million, £76.0 million ($99.0 million), and AU $42.0 million ($30.3 million) available for borrowing under our U.S. credit agreement, U.K. credit agreement, and Australian working capital loan agreement, respectively.

Securities Repurchases

From time to time, our Board of Directors has authorized securities repurchase programs pursuant to which we may, as market conditions warrant, purchase our outstanding common stock or debt on the open market, in privately negotiated transactions, via a tender offer, or through a pre-arranged trading plan. We have historically funded any such repurchases using cash flow from operations, borrowings under our U.S. credit agreement, and borrowings under our U.S. floor plan arrangements. The decision to make repurchases will be based on factors such as the market price of the relevant security versus our view of its intrinsic value, the potential impact of such repurchases on our capital structure, and our consideration of any alternative uses of our capital, such as for acquisitions and strategic investments in our current businesses, in addition to any then-existing limits imposed by our finance agreements and securities trading policy. As of September 30, 2018, we had $150.0 million in repurchase authorization under the securities repurchase program. Refer to the disclosures provided in Part I, Item 1, Note 10 of the Notes to our Consolidated Condensed Financial Statements for a summary of shares repurchased during the nine months ended September 30, 2018.

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Dividends

We paid the following cash dividends on our common stock in 2017 and 2018:

Per Share Dividends


2017

First Quarter	$	0.30
Second Quarter		0.31
Third Quarter		0.32
Fourth Quarter		0.33


2018

First Quarter	$	0.34
Second Quarter		0.35
Third Quarter		0.36

We also announced a cash dividend of $0.37 per share payable on December 4, 2018 to shareholders of record on November 12, 2018. Future quarterly or other cash dividends will depend upon a variety of factors considered relevant by our Board of Directors, which may include our earnings, capital requirements, restrictions relating to any then-existing indebtedness, financial condition and other factors.

Vehicle Financing

Refer to the disclosures provided in Part I, Item 1, Note 6 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of financing for the vehicles we purchase, including discussion of our floor plan and other revolving arrangements.

Long-Term Debt Obligations

As of September 30, 2018, we had the following long-term debt obligations outstanding:


	September 30,
(In millions)	2018
U.S. credit agreement — revolving credit line	$	—
U.K. credit agreement — revolving credit line		108.2
U.K. credit agreement — overdraft line of credit		1.2
3.75% senior subordinated notes due 2020		297.5
5.75% senior subordinated notes due 2022		546.6
5.375% senior subordinated notes due 2024		297.5
5.50% senior subordinated notes due 2026		494.9
Australia capital loan agreement		34.9
Australia working capital loan agreement		5.8
Mortgage facilities		243.0
Other		56.4
Total long-term debt	$	2,086.0

As of September 30, 2018, we were in compliance with all covenants under our credit agreements and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part I, Item 1, Note 8 of the Notes to our Consolidated Condensed Financial Statements for a detailed description of our long-term debt obligations.

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Short-Term Borrowings

We have four principal sources of short-term borrowings: the revolving portion of the U.S. credit agreement, the revolving portion of the U.K. credit agreement, our Australian working capital loan agreement and the floor plan agreements that we utilize to finance our vehicle inventories. We are also able to access availability under the floor plan agreements to fund our cash needs, including payments made relating to our higher interest rate revolving credit agreements.

During the nine months ended September 30, 2018, outstanding revolving commitments varied between $0.0 million and $315.0 million under the U.S. credit agreement, between £5.0 million and £140.0 million ($6.5 million and $182.4 million) under the U.K. credit agreement’s revolving credit line (excluding the overdraft facility), and between AU $0.0 million and AU $17.6 million ($0.0 million and $12.7 million) under the Australia working capital loan agreement. The amounts outstanding under our floor plan agreements varied based on the timing of the receipt and expenditure of cash in our operations, driven principally by the levels of our vehicle inventories.

PTL Dividends

We currently hold a 28.9% ownership interest in Penske Truck Leasing. In September 2017, we increased our ownership interest in PTL from 23.4% to 28.9% as a result of our acquisition of an additional 5.5% ownership interest, as discussed previously. We receive pro rata cash distributions relating to this investment, typically in April, May, August and November of each year. During the nine months ended September 30, 2018 and 2017, we received $42.9 million and $29.2 million, respectively, of pro rata cash distributions relating to this investment. We currently expect to continue to receive future distributions from PTL quarterly, subject to its financial performance.

Operating Leases

As of September 30, 2018, we were in compliance with all covenants under these leases, and we believe we will remain in compliance with such covenants for the next twelve months. Refer to the disclosures provided in Part I, Item 1, Note 9 of the Notes to our Consolidated Condensed Financial Statements for a description of our operating leases.

Sale/Leaseback Arrangements

We have in the past and may in the future enter into sale-leaseback transactions to finance certain property acquisitions and capital expenditures, pursuant to which we sell property and/or leasehold improvements to third parties and agree to lease those assets back for a certain period of time. Such sales generate proceeds that vary from period to period.

Off-Balance Sheet Arrangements

Refer to the disclosures provided in Part I, Item 1, Note 9 of the Notes to our Consolidated Condensed Financial Statements for a description of our off-balance sheet arrangements, which include lease obligations and a repurchase commitment related to our floor plan credit agreement with Mercedes Benz Financial Services Australia.

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Cash Flows

The following table summarizes the changes in our cash provided by (used in) operating, investing, and financing activities. The major components of these changes are discussed below.


	Nine Months Ended September 30,
(In millions)	2018		2017
Net cash provided by continuing operating activities	$	535.9	$	466.8
Net cash used in continuing investing activities		(291.5)		(855.6)
Net cash (used in) provided by continuing financing activities		(252.3)		397.1
Net cash provided by discontinued operations		0.3		2.7
Effect of exchange rate changes on cash and cash equivalents		(0.5)		2.2
Net change in cash and cash equivalents	$	(8.1)	$	13.2

Cash Flows from Continuing Operating Activities

Cash flows from continuing operating activities includes net income, as adjusted for non-cash items and the effects of changes in working capital.

We finance substantially all of the commercial vehicles we purchase for distribution, new vehicles for retail sale, and a portion of our used vehicle inventories for retail sale, under floor plan and other revolving arrangements with various lenders, including the captive finance companies associated with automotive manufacturers. We retain the right to select which, if any, financing source to utilize in connection with the procurement of vehicle inventories. Many vehicle manufacturers provide vehicle financing for the dealers representing their brands; however, it is not a requirement that we utilize this financing. Historically, our floor plan finance source has been based on aggregate pricing considerations.

In accordance with generally accepted accounting principles relating to the statement of cash flows, we report all cash flows arising in connection with floor plan notes payable with the manufacturer of a particular new vehicle as an operating activity in our statement of cash flows, and all cash flows arising in connection with floor plan notes payable to a party other than the manufacturer of a particular new vehicle, all floor plan notes payable relating to pre-owned vehicles, and all floor plan notes payable related to our commercial vehicles in Australia and New Zealand, as a financing activity in our statement of cash flows. Currently, the majority of our non-trade vehicle financing is with other manufacturer captive lenders. To date, we have not experienced any material limitation with respect to the amount or availability of financing from any institution providing us vehicle financing.

We believe that changes in aggregate floor plan liabilities are typically linked to changes in vehicle inventory, and therefore, are an integral part of understanding changes in our working capital and operating cash flow. As a result, we prepare the following reconciliation to highlight our operating cash flows with all changes in vehicle floor plan being classified as an operating activity for informational purposes:


	Nine Months Ended September 30,
(In millions)	2018		2017
Net cash from continuing operating activities as reported	$	535.9	$	466.8
Floor plan notes payable — non-trade as reported		(59.6)		155.2
Net cash from continuing operating activities including all floor plan notes payable	$	476.3	$	622.0

Cash Flows from Continuing Investing Activities

Cash flows from continuing investing activities consist primarily of cash used for capital expenditures, proceeds from the sale of dealerships, and net expenditures for acquisitions and other investments. Capital expenditures were $188.5 million and $180.1 million during the nine months ended September 30, 2018 and 2017, respectively. Capital expenditures relate primarily to improvements to our existing dealership facilities, the construction of new facilities, the acquisition of the property or buildings associated with existing leased facilities, and the acquisition of land for future development. We currently expect to finance our retail automotive segment and retail commercial truck segment capital

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expenditures with operating cash flows or borrowings under our U.S. or U.K. credit agreements. Proceeds from the sale of dealerships were $58.4 million and $9.0 million during the nine months ended September 30, 2018 and 2017, respectively. Cash used in acquisitions and other investments, net of cash acquired, was $168.6 million and $449.7 million during the nine months ended September 30, 2018 and 2017, respectively, and included cash used to repay sellers’ floor plan liabilities in such business acquisitions of $25.8 million and $101.6 million, respectively.

Cash Flows from Continuing Financing Activities

Cash flows from continuing financing activities include net borrowings or repayments of long-term debt, net borrowings or repayments of floor plan notes payable non-trade, repurchases of common stock, and dividends.

We had net repayments of long-term debt of $41.0 million and net borrowings $50.3 million during the nine months ended September 30, 2018 and 2017, respectively. We had net repayments of floor plan notes payable non-trade of $59.6 million and net borrowings of $155.2 million during the nine months ended September 30, 2018 and 2017, respectively. We repurchased common stock for a total of $55.8 million and $18.5 million during the nine months ended September 30, 2018 and 2017, respectively. We also paid cash dividends to our stockholders of $89.7 million and $80.1 million during the nine months ended September 30, 2018 and 2017, respectively.

Cash Flows from Discontinued Operations

Cash flows relating to discontinued operations are not currently considered, nor are they expected to be, material to our liquidity or our capital resources. Management does not believe that there are any material past, present or upcoming cash transactions relating to discontinued operations.

Related Party Transactions

Stockholders Agreement

Several of our directors and officers are affiliated with Penske Corporation or related entities. Roger S. Penske, our Chair of the Board and Chief Executive Officer, is also Chair of the Board and Chief Executive Officer of Penske Corporation, and through entities affiliated with Penske Corporation, our largest stockholder owning approximately 42% of our outstanding common stock. Mitsui & Co., Ltd. and Mitsui & Co. (USA), Inc. (collectively, “Mitsui”) own approximately 16% of our outstanding common stock. Mitsui, Penske Corporation and certain other affiliates of Penske Corporation are parties to a stockholders agreement pursuant to which the Penske affiliated companies agreed to vote their shares for up to two directors who are representatives of Mitsui. In turn, Mitsui agreed to vote their shares for up to fourteen directors voted for by the Penske affiliated companies. This agreement terminates in March 2030, upon the mutual consent of the parties, or when either party no longer owns any of our common stock.

Other Related Party Interests and Transactions

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. Roger S. Penske, Jr., one of our directors, is the son of our chair and is also a director of Penske Corporation. Kanji Sasaki, one of our directors and officers, is also an employee of Mitsui & Co.

We sometimes pay to and/or receive fees from Penske Corporation, its subsidiaries, and its affiliates, for services rendered in the ordinary course of business or to reimburse payments made to third parties on each other’s behalf. These transactions are reviewed periodically by our Audit Committee and reflect the provider’s cost or an amount mutually agreed upon by both parties.

We own a 28.9% interest in PTL. PTL is owned 41.1% by Penske Corporation, 28.9% by us, and 30.0% by Mitsui. We have also entered into other joint ventures with certain related parties as more fully discussed below.

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Joint Venture Relationships

We are party to a number of joint ventures pursuant to which we own and operate automotive dealerships together with other investors. We may provide these dealerships with working capital and other debt financing at costs that are based on our incremental borrowing rate. As of September 30, 2018, our retail automotive joint venture relationships included:


Location	Dealerships	Ownership Interest
Fairfield, Connecticut	Audi, Mercedes-Benz, Sprinter, Porsche	80.00	% (A)
Greenwich, Connecticut	Mercedes-Benz	80.00	% (A)
Northern Italy	BMW, MINI, Maserati, Porsche, Audi, Land Rover, Volvo, Mercedes-Benz, smart, Lamborghini	84.00	% (A)
Aachen, Germany	Audi, Maserati, SEAT, Skoda, Volkswagen	75.35	% (A) (C)
Frankfurt, Germany	Lexus, Toyota, Volkswagen	50.00	% (B)
Barcelona, Spain	BMW, MINI	50.00	% (B)
Tokyo, Japan	BMW, MINI, Rolls-Royce, Ferrari, ALPINA	49.00	% (B)

(A)

Entity is consolidated in our financial statements.

(B)

Entity is accounted for using the equity method of accounting.

(C)

In February 2018, we acquired an additional 7.4% ownership interest in this joint venture and now own 75.4%. We previously owned 68%.

Additionally, we are party to non-automotive joint ventures representing our investments in PTL (28.9%) and Penske Commercial Leasing Australia (28%) that are accounted for under the equity method.

Cyclicality

Unit sales of motor vehicles, particularly new vehicles, have been cyclical historically, fluctuating with general economic cycles. During economic downturns, the automotive and truck retailing industry tends to experience periods of decline and recession similar to those experienced by the general economy. We believe that the industry is influenced by general economic conditions and particularly by consumer confidence, the level of personal discretionary spending, fuel prices, interest rates, and credit availability.

Seasonality

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.

Commercial Vehicle Distribution . Our commercial vehicle distribution business generally experiences higher sales volumes during the second quarter of the year, which is primarily attributable to commercial vehicle customers completing annual capital expenditures before their fiscal year-end, which is typically June 30 in Australia.

Effects of Inflation

We believe that inflation rates over the last few years have not had a significant impact on revenues or profitability. We do not expect inflation to have any near-term material effects on the sale of our products and services; however, we cannot be sure there will be no such effect in the future. We finance substantially all of our inventory through various revolving floor plan arrangements with interest rates that vary based on various benchmarks. Such rates have historically increased during periods of increasing inflation.

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Forward-Looking Statements

Certain statements and information set forth herein, as well as other written or oral statements made from time to time by us or by our authorized officers on our behalf, constitute “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995. Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “goal,” “plan,” “seek,” “project,” “continue,” “will,” “would,” and variations of such words and similar expressions are intended to identify such forward-looking statements. We intend for our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we set forth this statement in order to comply with such safe harbor provisions. You should note that our forward-looking statements speak only as of the date of this report or when made and we undertake no duty or obligation to update or revise our forward-looking statements, whether as a result of new information, future events, or otherwise. Forward-looking statements include, without limitation, statements with respect to:

our future financial and operating performance;

future acquisitions and dispositions;

future potential capital expenditures and securities repurchases;

our ability to realize cost savings and synergies;

our ability to respond to economic cycles;

trends in the automotive retail industry and commercial vehicles industries and in the general economy in the various countries in which we operate;

our ability to access the remaining availability under our credit agreements;

our liquidity;

performance of joint ventures, including PTL;

future foreign exchange rates;

the outcome of various legal proceedings;

results of self-insurance plans;

trends affecting our future financial condition or results of operations; and

our business strategy.

Forward-looking statements involve known and unknown risks and uncertainties and are not assurances of future performance. Actual results may differ materially from anticipated results due to a variety of factors, including the factors identified in our 2017 annual report on Form 10-K filed February 22, 2018 and our second quarter Form 10-Q filed on July 27, 2018. Important factors that could cause actual results to differ materially from our expectations include the following:

our business and the automotive retail and commercial vehicles industries in general are susceptible to adverse economic conditions, including changes in interest rates, foreign exchange rates, customer demand, customer confidence, fuel prices, unemployment rates and credit availability;

the political and economic outcome of Brexit in the U.K.;

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Increased tariffs, import product restrictions, and foreign trade risks that may impair our ability to sell foreign vehicles profitably, including any eventual tariffs resulting from the recent threats from the Trump Administration to add 25% tariffs on foreign vehicles or parts and the results of a determination whether the importation of foreign vehicles or parts adversely impacts national security;

the number of new and used vehicles sold in our markets;

the effect on our businesses of the trend of electrification of vehicle engines, new mobility technologies such as shared vehicle services, such as Uber and Lyft, and the eventual availability of driverless vehicles;

vehicle manufacturers exercise significant control over our operations, and we depend on them and the continuation of our franchise and distribution agreements in order to operate our business;

we depend on the success, popularity and availability of the brands we sell, and adverse conditions affecting one or more vehicle manufacturers, including the adverse impact on the vehicle and parts supply chain due to natural disasters or other disruptions that interrupt the supply of vehicles and parts to us (including any disruptions resulting from the new fuel economy testing and Co2 emissions legislation in the United Kingdom and Europe discussed in Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations), may negatively impact our revenues and profitability;

we are subject to the risk that a substantial number of our new or used inventory may be unavailable due to recall or other reasons;

the success of our commercial vehicle distribution operations and engine and power systems distribution operations depends upon continued availability of the vehicles, engines, power systems, and other parts we distribute, demand for those vehicles, engines, power systems, and parts and general economic conditions in those markets;

a restructuring of any significant vehicle manufacturer or supplier;

our operations may be affected by severe weather, such as the recent hurricanes in Puerto Rico, Florida and Texas, or other periodic business interruptions;

we have substantial risk of loss not covered by insurance;

we may not be able to satisfy our capital requirements for acquisitions, facility renovation projects, financing the purchase of our inventory, or refinancing of our debt when it becomes due;

our level of indebtedness may limit our ability to obtain financing generally and may require that a significant portion of our cash flow be used for debt service;

non-compliance with the financial ratios and other covenants under our credit agreements and operating leases;

higher interest rates may significantly increase our variable rate interest costs and, because many customers finance their vehicle purchases, decrease vehicle sales;

our operations outside of the U.S. subject our profitability to fluctuations relating to changes in foreign currency values, which have most recently occurred as a result of the June 2016 U.K. referendum for Brexit;

with respect to PTL, changes in the financial health of its customers, labor strikes or work stoppages by its employees, a reduction in PTL’s asset utilization rates, continued availability from truck manufacturers and suppliers of vehicles and parts for its fleet, changes in values of used trucks which affects PTL’s profitability on

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truck sales, compliance costs in regards to its trucking fleet and truck drivers, its ability to retain qualified drivers and technicians, conditions in the capital markets to assure PTL’s continued availability of capital to purchase trucks, the effect of changes in lease accounting rules on PTL customers’ purchase/lease decisions, and industry competition, each of which could impact distributions to us;

we are dependent on continued security and availability of our information technology systems and we may be subject to fines, penalties, and other costs under applicable privacy laws if we do not maintain our confidential customer and employee information properly;

if we lose key personnel, especially our Chief Executive Officer, or are unable to attract additional qualified personnel;

new or enhanced regulations relating to automobile dealerships including those that may be issued by the Consumer Finance Protection Bureau in the U.S. or the Financial Conduct Authority in the U.K. restricting automotive financing;

changes in tax, financial or regulatory rules or requirements;

we could be subject to legal and administrative proceedings which, if the outcomes are adverse to us, could have a material adverse effect on our business;

if state dealer laws in the U.S. are repealed or weakened, our automotive dealerships may be subject to increased competition and may be more susceptible to termination, non-renewal or renegotiation of their franchise agreements;

some of our directors and officers may have conflicts of interest with respect to certain related party transactions and other business interests; and

shares of our common stock eligible for future sale may cause the market price of our common stock to drop significantly, even if our business is doing well.

We urge you to carefully consider these risk factors in evaluating all forward-looking statements regarding our business. Readers of this report are cautioned not to place undue reliance on the forward-looking statements contained in this report. All forward-looking statements attributable to us are qualified in their entirety by this cautionary statement. Except to the extent required by the federal securities laws and the Securities and Exchange Commission’s rules and regulations, we have no intention or obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rates. We are exposed to market risk from changes in the interest rates on a significant portion of our outstanding debt. Outstanding revolving balances under our credit agreements bear interest at variable rates based on a margin over defined LIBOR, the Bank of England Base Rate, or the Australian Bank Bill Swap Rate. Based on the amount outstanding under these facilities as of September 30, 2018, a 100 basis point change in interest rates would result in an approximate $1.1 million change to our annual other interest expense. Similarly, amounts outstanding under floor plan financing arrangements bear interest at a variable rate based on a margin over the prime rate, defined LIBOR, the Finance House Base Rate, the Euro Interbank Offered Rate, the Canadian Prime Rate, the Australian Bank Bill Swap Rate, or the New Zealand Bank Bill Benchmark Rate.

Based on an average of the aggregate amounts outstanding under our floor plan financing arrangements subject to variable interest payments during the trailing twelve months ended September 30, 2018, a 100 basis point change in interest rates would result in an approximate $35.5 million change to our annual floor plan interest expense.

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We evaluate our exposure to interest rate fluctuations and follow established policies and procedures to implement strategies designed to manage the amount of variable rate indebtedness outstanding at any point in time in an effort to mitigate the effect of interest rate fluctuations on our earnings and cash flows. These policies include:

the maintenance of our overall debt portfolio with targeted fixed and variable rate components;

the use of authorized derivative instruments;

the prohibition of using derivatives for trading or other speculative purposes; and

the prohibition of highly leveraged derivatives or derivatives which we are unable to reliably value, or for which we are unable to obtain a market quotation.

Interest rate fluctuations affect the fair market value of our fixed rate debt, mortgages, and certain seller financed promissory notes, but with respect to such fixed rate debt instruments, do not impact our earnings or cash flows.

Foreign Currency Exchange Rates. As of September 30, 2018, we had consolidated operations in the U.K., Germany, Italy, Canada, Australia and New Zealand. In each of these markets, the local currency is the functional currency. In the event we change our intent with respect to the investment in any of our international operations, we would expect to implement strategies designed to manage those risks in an effort to mitigate the effect of foreign currency fluctuations on our earnings and cash flows. A ten percent change in average exchange rates versus the U.S. Dollar would have resulted in an approximate $793.8 million change to our revenues for the nine months ended September 30, 2018.

We purchase certain of our new vehicles, parts and other products from non-U.S. manufacturers. Although we purchase the majority of our inventories in the local functional currency, our business is subject to certain risks, including, but not limited to, differing economic conditions, changes in political climate, differing tax structures, changes in tax and tariff rates, other regulations and restrictions and foreign exchange rate volatility which may influence such manufacturers’ ability to provide their products at competitive prices in the local jurisdictions. Our future results could be materially and adversely impacted by changes in these or other factors.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the principal executive and financial officers, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our principal executive and financial officers, to allow timely discussions regarding required disclosure.

Based upon this evaluation, our principal executive and financial officers concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. In addition, we maintain internal controls designed to provide us with the information required for accounting and financial reporting purposes. There were no changes in our internal control over financial reporting that occurred during the most recent quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are involved in litigation which may relate to claims brought by governmental authorities, customers, vendors, or employees, including class action claims and purported class action claims. We are not a party to any legal proceedings, including class action lawsuits, that individually or in the aggregate, are reasonably expected to have a material adverse effect on us. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material adverse effect.

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Item 6. Exhibits

EXHIBIT INDEX


Exhibit
No.		Description

4.1		Third Supplemental Indenture dated as of October 24, 2018, regarding our 5.75% senior subordinated notes due 2022, dated as of August 28, 2012 by and among us, the subsidiary guarantors named therein and the Bank of New York Mellon Trust Company, N.A., as Trustee.

4.2		Sixth Supplemental Indenture to 2014 Indenture, dated as of October 24, 2018, adding additional guarantors.

12		Computation of Ratio of Earnings to Fixed Charges.

31.1		Rule 13(a)-14(a)/15(d)-14(a) Certification.

31.2		Rule 13(a)-14(a)/15(d)-14(a) Certification.

32		Section 1350 Certification.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF		XBRL Taxonomy Extension Definition Linkbase.

101.LAB		XBRL Taxonomy Extension Label Linkbase.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	PENSKE AUTOMOTIVE GROUP, INC.

	By:	/s/ Roger S. Penske
		Roger S. Penske
Date: October 26, 2018		Chief Executive Officer

	By:	/s/ J.D. Carlson
		J.D. Carlson
Date: October 26, 2018		Chief Financial Officer

EXHIBIT 4.1

THIRD SUPPLEMENTAL INDENTURE

Third Supplemental Indenture (this “ Supplemental Indenture ”), dated as of October 24, 2018, among Penske Automotive Group, Inc., a Delaware corporation (the “Company”), the guarantors set forth on the signature page hereto (each a “Guarantor” and collectively, the “Guarantors”) and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture (as defined below).

WHEREAS, the Company and the other Guarantors party thereto have heretofore executed and delivered an Indenture, dated as of August 28, 2012, a First Supplemental Indenture, dated as of April 27, 2016 and a Second Supplemental Indenture, dated as of July 13, 2016 (as amended, supplemented or otherwise modified from time to time, the “ Indenture ”), providing for the issuance by the Company of its 5.75% Senior Subordinated Notes due 2022 (the “ Securities ”);

WHEREAS, the Indenture provides that under certain circumstances a Future Guarantor shall execute and deliver to the Trustee a supplemental indenture pursuant to which such Future Guarantor shall, subject to Article Fourteen of the Indenture, unconditionally guarantee the Securities on the terms and conditions set forth therein (the “ Guarantee ”);

WHEREAS, pursuant to Section 901 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture; and

WHEREAS, all acts and requirements necessary to make this Supplemental Indenture a legal, valid and binding obligation of the Company and the Guarantors have been done.

NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the Company, the Guarantors and the Trustee mutually covenant and agree as follows for the equal and ratable benefit of the Holders.

ARTICLE 1
DEFINITIONS

Section 1.1 Defined Terms . As used in this Supplemental Indenture, terms defined in the Indenture or in the preamble or recitals hereto are used herein as therein defined. The words “herein,” “hereof” and “hereby” and other words of similar import used in this Supplemental Indenture refer to this Supplemental Indenture as a whole and not to any particular section hereof.

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ARTICLE 2
AGREEMENT TO GUARANTEE

Section 2.1 Agreement to be Bound . The Guarantors hereby become a party to the Indenture as a Guarantor and as such shall have all of the rights and be subject to all of the obligations and agreements of a Guarantor under the Indenture.

Section 2.2 Guarantee . The Guarantors agree, on a joint and several basis with all the existing Guarantors, to fully, unconditionally and irrevocably Guarantee to each Holder of the Securities and the Trustee the Indenture Obligations pursuant to Article Fourteen of the Indenture.

ARTICLE 3
MISCELLANEOUS

Section 3.1 Execution and Delivery . The Guarantors agree that the Guarantee shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of the Guarantee.

Section 3.2 Benefits Acknowledged . The Guarantors’ Guarantee is subject to the terms and conditions set forth in the Indenture. The Guarantors acknowledge that they shall receive direct and indirect benefits from the financing arrangements contemplated by the Indenture and this Supplemental Indenture and that the guarantee and waivers made by it pursuant to this Guarantee and this Supplemental Indenture are knowingly made in contemplation of such benefits.

Section 3.3 Ratification of Indenture; Supplemental Indentures Part of Indenture . Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby.

Section 3.4 Severability . In case any provision in this Supplemental Indenture shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and such provision shall be ineffective only to the extent of such invalidity, illegality or unenforceability.

Section 3.5 Guarantors May Consolidate, Etc., on Certain Terms . The Guarantors may not sell or otherwise dispose of all or substantially all of its assets to, or consolidate with or merge with or into, any Person other than as set forth Section 801(b) of the Indenture.

Section 3.6 Release . The Guarantors’ Guarantee shall be released as set forth in Section 1314 of the Indenture.

Section 3.7 Governing Law . THIS SUPPLEMENTAL INDENTURE, THE INDENTURE, THE SECURITIES AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW

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YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.

Section 3.8 Counterparts . This Supplemental Indenture may be executed in any number of counterparts, each of which shall be deemed an original; but all such counterparts shall together constitute but one and the same instrument. The exchange of copies of this Supplemental Indenture and of signature pages by facsimile or .pdf transmission shall constitute effective execution and delivery of this Supplemental Indenture for all purposes and may be used in lieu of the original Indenture. Signatures of parties hereto transmitted by facsimile or .pdf shall be deemed to be their original signatures for all purposes.

Section 3.9 Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.

Section 3.10 Trustee . The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this Supplemental Indenture or for or in respect of the recitals contained herein, all of which recitals are made solely by the Guarantors and the Company.

IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written.


	PENSKE AUTOMOTIVE GROUP, INC.


	By:	/s/ J.D. Carlson
		Name: J.D. Carlson
		Title: EVP & CFO

		PAG ACQUISITION 56, LLC
		PAG AUSTIN L1, LLC
		PAG ACQUISITION 58, LLC
		PAG ACQUISITION 59, LLC
		PAG ACQUISITION 60, LLC
		PAG ACQUISITION 61, LLC
		PAG ACQUISITION 62, LLC
		PAG ACQUISITION 63, LLC
		PAG ACQUISITION 64, LLC
		PAG ACQUISITION 65, LLC
		PAG ACQUISITION 66, LLC
		PAG DELAWARE CS, LLC
		PAG MARYLAND CS, LLC
		PAG VIRGINIA CS, LLC


	By:	/s/ J.D. Carlson
		Name: J.D. Carlson
		Title: Treasurer or Assistant Treasurer

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	THE BANK OF NEW YORK Mellon TRUST COMPANY, N.A., as trustee

	By:	/s/ R. Tarnas
		Name: R. Tarnas
		Title: Vice President

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EXHIBIT 4.2

SIXTH SUPPLEMENTAL INDENTURE

Sixth Supplemental Indenture (this “ Supplemental Indenture ”), dated as of October 24, 2018, among Penske Automotive Group, Inc., a Delaware corporation (the “Company”), the guarantors set forth on the signature page hereto (each a “Guarantor” and collectively, the “Guarantors”) and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). All capitalized terms used but not defined herein shall have the meanings ascribed to them in the Indenture (as defined below).

WHEREAS, the Company and the other Guarantors party thereto have heretofore executed and delivered an Indenture, a First Supplemental Indenture, dated as of November 21, 2014, a Second Supplemental Indenture, dated as of April 27, 2016, a Third Supplemental Indenture, dated as of May 25, 2016, a Fourth Supplemental Indenture dated as of July 13, 2016, and a Fifth Supplemental Indenture, dated as of August 15, 2017 (as amended, supplemented or otherwise modified from time to time, the “ Indenture ”), providing for the issuance by the Company of its 5.375% Senior Subordinated Notes due 2024, its 5.50% Senior Subordinated Notes due 2026 and its 3.75% Senior Subordinated Notes due 2020 (the “ Securities ”);

WHEREAS, pursuant to Section 9.1 of the Indenture, the Trustee is authorized to execute and deliver this Supplemental Indenture; and

WHEREAS, all acts and requirements necessary to make this Supplemental Indenture a legal, valid and binding obligation of the Company and the Guarantors have been done.

ARTICLE 1
DEFINITIONS

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ARTICLE 2
AGREEMENT TO GUARANTEE

ARTICLE 3
MISCELLANEOUS

Section 3.1 Execution and Delivery . The Guarantors agree that the Guarantee shall remain in full force and effect notwithstanding any failure to endorse on each Security a notation of the Guarantee.

Section 3.6 Release . The Guarantors’ Guarantee shall be released as set forth in Section 1314 of the Indenture.

Section 3.7 Governing Law . THIS SUPPLEMENTAL INDENTURE, THE INDENTURE, THE SECURITIES AND THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PRINCIPLES THEREOF.

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Section 3.9 Effect of Headings . The Section headings herein are for convenience only and shall not affect the construction hereof.

IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed and attested, all as of the date first above written.


	PENSKE AUTOMOTIVE GROUP, INC.


	By:	/s/ J.D. Carlson
		Name: J.D. Carlson
		Title: EVP & CFO


		PAG ACQUISITION 56, LLC
		PAG AUSTIN L1, LLC
		PAG ACQUISITION 58, LLC
		PAG ACQUISITION 59, LLC
		PAG ACQUISITION 60, LLC
		PAG ACQUISITION 61, LLC
		PAG ACQUISITION 62, LLC
		PAG ACQUISITION 63, LLC
		PAG ACQUISITION 64, LLC
		PAG ACQUISITION 65, LLC
		PAG ACQUISITION 66, LLC
		PAG DELAWARE CS, LLC
		PAG MARYLAND CS, LLC
		PAG VIRGINIA CS, LLC


	By:	/s/ J.D. Carlson
		Name: J.D. Carlson
		Title: Assistant Treasurer

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	THE BANK OF NEW YORK Mellon TRUST COMPANY, N.A., as trustee

	By:	/s/ R. Tarnas
		Name: R. Tarnas
		Title: Vice President

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Exhibit 12

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES


	Three Months Ended				Nine Months Ended
	September 30,				September 30,				Year Ended December 31,
	2018		2017		2018		2017		2017		2016		2015		2014		2013
Income from continuing operations before income taxes	$	157.1	$	138.9	$	477.6	$	420.5	$	548.2	$	508.1	$	491.9	$	457.9	$	371.8
Less undistributed earnings of equity method investments		(41.7)		(30.9)		(95.0)		(70.9)		(107.6)		(69.5)		(39.3)		(40.8)		(30.7)
Plus distributed earnings of equity method investments		17.5		11.9		44.8		31.2		54.6		23.2		16.1		15.5		10.8
Plus amortization of capitalized interest		0.2		0.2		0.6		0.6		0.8		0.8		0.8		0.8		0.8
Income from continuing operations before undistributed earnings of equity method investments, amortization of capitalized interest, and taxes	$	133.1	$	120.1	$	428.0	$	381.4	$	496.0	$	462.6	$	469.5	$	433.4	$	352.7
Plus:
Fixed charges:
Other interest expense (includes amortization of debt issuance costs)	$	28.3	$	27.8	$	86.7	$	79.2	$	107.4	$	85.4	$	69.4	$	52.8	$	45.3
Floor plan interest expense		20.2		16.4		59.0		45.6		63.4		50.9		44.5		46.5		43.5
Capitalized interest		0.3		0.4		1.2		1.0		1.6		1.6		0.8		0.8		0.7
Interest factor in rental expense		19.3		19.6		57.9		55.5		74.4		68.2		66.6		63.1		57.3
Total fixed charges	$	68.1	$	64.2	$	204.8	$	181.3	$	246.8	$	206.1	$	181.3	$	163.2	$	146.8
Less:
Capitalized interest	$	0.3	$	0.4	$	1.2	$	1.0	$	1.6	$	1.6	$	0.8	$	0.8	$	0.7
Earnings	$	200.9	$	183.9	$	631.6	$	561.7	$	741.2	$	667.1	$	650.0	$	595.8	$	498.8
Ratio of earnings to fixed charges		3.0		2.9		3.1		3.1		3.0		3.2		3.6		3.7		3.4

Exhibit 31.1

CERTIFICATION

I, Roger S. Penske, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Penske Automotive Group, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

		/s/ Roger S. Penske
		Roger S. Penske
		Chief Executive Officer

October 26, 2018

Exhibit 31.2

CERTIFICATION

I, J.D. Carlson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Penske Automotive Group, Inc.;

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	/s/ J.D. Carlson
	J.D. Carlson
	Chief Financial Officer

October 26, 2018

Exhibit 32

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of Penske Automotive Group, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we, Roger S. Penske and J.D. Carlson, Principal Executive Officer and Principal Financial Officer, respectively, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


	/s/ Roger S. Penske
	Roger S. Penske
	Chief Executive Officer

October 26, 2018


	/s/ J.D. Carlson
	J.D. Carlson
	Chief Financial Officer


October 26, 2018

A signed original of this written statement required by Section 906 has been provided to Penske Automotive Group, Inc. and will be retained by Penske Automotive Group, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.