PENSKE AUTOMOTIVE GROUP, INC. annual report, FY2023

Penske Automotive Group, Inc. — Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K, not a standalone fourth-quarter filing. Comparisons are primarily with fiscal 2022.

Business context

Penske Automotive Group is a diversified international transportation services company operating 336 franchised automotive dealerships, 19 CarShop used-vehicle dealerships, 44 commercial truck locations, and commercial vehicle, engine, and power-systems distribution operations in Australia and New Zealand. The company also owns 28.9% of Penske Transportation Solutions, accounted for under the equity method. PAG employed approximately 28,000 people at year-end.

Retail automotive represented 85.4% of consolidated revenue and 84.6% of gross profit.
Retail commercial truck represented 12.5% of revenue and 12.0% of gross profit.
Penske Australia and other operations represented 2.1% of revenue and 3.4% of gross profit.
PAG recorded $289.5 million of equity earnings from its PTS investment in 2023.

Financial performance and key metrics

Metric	2023	2022	Change
Total revenue	$29.527 billion	$27.815 billion	+6.2%
Gross profit	$4.934 billion	$4.839 billion	+2.0%
Gross margin	16.7%	17.4%	Down 0.7 percentage points
Operating income	$1.352 billion	$1.488 billion	−9.2%
Income from continuing operations	$1.059 billion	$1.386 billion	−23.6%
Net income attributable to PAG	$1.053 billion	$1.380 billion	−23.7%
Diluted EPS	$15.50	$18.55	−16.4%
Cash flow from continuing operations	$1.094 billion	$1.459 billion	−25.1%

Retail automotive revenue increased 6.4% to $25.209 billion, retail commercial truck revenue increased 4.0% to $3.684 billion, and commercial vehicle distribution revenue increased 9.5% to $634.0 million. Service and parts revenue was a key contributor, increasing 12.7% in retail automotive and 6.5% in retail commercial truck operations.

New automotive retail unit sales excluding agency units increased 6.0%; average gross profit per vehicle declined 11.0% to $5,967.
Used automotive retail unit sales declined 1.9%; average gross profit per vehicle declined 18.8% to $1,685.
Retail automotive service and parts gross profit increased 11.6% to $1.606 billion, with a 58.7% gross margin.
PTS equity earnings declined 40.6% to $293.7 million, primarily due to lower rental utilization, a $211 million decline in vehicle-sale gains, and higher interest and maintenance costs.
SG&A increased 5.5% to $3.401 billion, and SG&A as a percentage of gross profit increased to 68.9% from 66.6%.
Floor-plan interest expense increased 154.0% to $133.1 million; the weighted-average floor-plan borrowing rate rose to 4.5% from 1.9%.

Cash flow, liquidity, debt, and capital allocation

Cash and cash equivalents were $96.4 million at December 31, 2023, compared with $106.5 million at year-end 2022.
Cash flow from continuing operations was $1.094 billion; cash flow including all floor-plan notes payable as an operating activity was $1.140 billion.
Capital expenditures were $375.3 million, up from $282.5 million in 2022. Acquisition spending was $214.9 million, down from $393.4 million.
Total long-term debt was $1.629 billion, including $547.7 million of 3.50% senior subordinated notes due 2025 and $495.8 million of 3.75% notes due 2029.
Floor-plan notes payable totaled $3.772 billion, consisting of $2.256 billion of trade floor-plan debt and $1.516 billion of non-trade floor-plan debt.
Future operating lease commitments were estimated at $5.3 billion, including reasonably certain renewal periods.
Available borrowing capacity at year-end included $1.2 billion under the U.S. credit agreement, £200.0 million under the U.K. agreement, CAD$42.0 million under the Canadian agreement, AU$8.0 million under the Australian agreement, and $242.3 million under the revolving mortgage facility.
The company reported compliance with its debt and lease covenants and stated that existing liquidity should fund operations and current commitments for at least the next twelve months.
PAG paid $189.1 million in dividends and repurchased 2.8086 million shares for $382.2 million during 2023. Remaining repurchase authorization was $215.5 million at year-end.
Quarterly dividends increased from $0.57 per share at the end of 2022 to $0.79 per share at the end of 2023. A $0.87 per-share dividend was declared for payment on March 1, 2024.

Material changes versus the prior comparable period

Revenue grew, but profitability declined as vehicle availability improved and high-margin new- and used-vehicle gross profits compressed.
The company began transitioning certain European dealerships, including Mercedes-Benz U.K. dealerships, to an agency model. PAG now records a facilitation fee rather than the full vehicle selling price, with no related cost of sale. This affects reported revenue, vehicle unit metrics, and comparability.
New vehicle inventory days increased to 39 from 25, while used vehicle days declined to 48 from 53.
Used-vehicle affordability challenges, higher interest rates, and limited supplies of newer used vehicles reduced used-unit volumes and margins.
PTS earnings and distributions weakened materially. PAG received $168.8 million of PTS distributions in 2023 versus $356.6 million in 2022.
The company recorded a $40.7 million non-cash goodwill impairment charge related to its International Used Vehicle Dealerships reporting unit, reducing EPS by approximately $0.60.
PAG acquired automotive franchises in the United States and Italy and commercial truck dealerships and service centers in Canada. In January 2024, it acquired the 16-franchise Rybrook Group in the U.K. and two U.S. dealerships.
Shares outstanding declined, with year-end issued and outstanding shares falling to 67.1 million from 69.7 million.

Guidance, outlook, risks, and unusual items

Management did not provide a specific numerical earnings or revenue forecast. It expects continued opportunities for acquisitions and further capital investment in premium automotive and commercial truck dealerships. Management expects new vehicle availability to improve, but cautions that higher availability may continue to reduce vehicle gross profit per unit. It also expects commercial truck replacement demand in 2024, while noting that a weak freight market could affect truck sales and service demand.

Key demand risks include inflation, higher interest rates, vehicle affordability, reduced consumer spending, credit availability, unemployment, and economic or geopolitical disruption.
Agency selling models, direct manufacturer sales, online competitors, and electric-vehicle manufacturers operating outside traditional franchise systems could pressure dealership economics.
Electric-vehicle adoption may create service opportunities but could reduce maintenance revenue per vehicle because EVs generally require less physical maintenance.
The company is exposed to variable interest rates. A 100-basis-point change was estimated to affect annual other interest expense by approximately $5.1 million and floor-plan interest expense by approximately $29.2 million.
Foreign currency exposure is significant; a 10% change in average exchange rates versus the U.S. dollar would have changed 2023 revenue by approximately $1.23 billion.
Regulatory matters include the delayed FTC CARS Rule, the U.K. Financial Conduct Authority investigation into discretionary commission arrangements, emissions and zero-emission vehicle mandates, privacy requirements, and environmental compliance.
The company faces cybersecurity, data privacy, supply-chain, recall, franchise-renewal, insurance, lease, and environmental risks. Management reported no cybersecurity incident that materially affected the business to date.
A Delaware stockholder action relating to prior repurchase programs was dismissed as moot in February 2024 after a voting agreement was entered into; PAG agreed to pay $995,000 in attorneys’ fees and expenses.
Penske Corporation and Mitsui together beneficially own approximately 71% of PAG’s common stock, creating significant ownership concentration and related-party governance risks.

Important facts for investors to verify

Reconcile reported revenue and unit trends after the European agency-model transition, particularly for Mercedes-Benz U.K. operations.
Track new- and used-vehicle gross profit per unit, inventory days, affordability, and the effect of interest rates on finance and insurance revenue.
Assess whether PTS rental utilization, used-vehicle sale gains, interest expense, maintenance costs, earnings, and distributions recover.
Review the $3.772 billion of floor-plan debt, $1.629 billion of long-term debt, 2025 note maturity, variable-rate exposure, and covenant headroom.
Evaluate cash flow after capital expenditures, acquisitions, dividends, and share repurchases rather than relying solely on reported operating cash flow.
Monitor the FCA commission investigation, FTC CARS Rule litigation, emissions mandates, franchise agreements, and related potential compliance or remediation costs.
Review assumptions supporting the $40.7 million goodwill impairment and the sensitivity of remaining goodwill and franchise-related intangible assets to margins, growth, and discount rates.
Consider the effect of majority ownership, the January 2024 voting agreement, related-party transactions, and potential future share sales on governance and valuation.