PENSKE AUTOMOTIVE GROUP, INC. annual report, FY2021

Penske Automotive Group, Inc. — 2021 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2021; it is an annual report rather than a quarterly filing. Penske Automotive Group operates automotive and commercial truck dealerships in the United States, the United Kingdom, Canada, Germany, Italy, and Japan; distributes commercial vehicles, engines, and power systems in Australia and New Zealand; and owns 28.9% of Penske Transportation Solutions (PTS).

At year-end, the company operated 320 franchised automotive dealerships, 23 CarShop used-vehicle dealerships, and 37 Premier Truck Group locations.
The company employed nearly 25,000 people and retailed or wholesaled more than 553,000 vehicles during 2021.
PTS manages a fleet exceeding 360,000 vehicles; PAG recorded $365.8 million of equity earnings from this investment.

Financial performance and key metrics

Metric	2021	2020	Change
Total revenue	$25.555 billion	$20.444 billion	+25.0%
Gross profit	$4.441 billion	$3.185 billion	+39.5%
Operating income	$1.356 billion	$704.5 million	+92.5%
Income from continuing operations	$1.191 billion	$544.9 million	+118.6%
Net income attributable to PAG	$1.188 billion	$543.6 million	+118.5%
Diluted EPS	$14.89	$6.74	+120.9%
Net cash from continuing operations	$1.292 billion	$1.202 billion	+7.5%

Gross margin was approximately 17.4%, compared with 15.6% in 2020. Operating margin was approximately 5.3%, compared with 3.4%; net margin attributable to PAG was approximately 4.6%, compared with 2.7%.
Revenue by operating business was $22.513 billion from retail automotive, $2.466 billion from retail commercial trucks, and $575.7 million from commercial vehicle distribution.
Retail automotive revenue increased 25.6%, supported by higher unit volumes and substantially higher vehicle gross profit per unit. New-vehicle gross profit per unit increased 46.2% to $5,351; used-vehicle gross profit per unit increased 51.3% to $2,520.
Retail automotive service and parts revenue increased 15.0% to $2.166 billion, with a 60.4% gross margin.
Equity earnings of affiliates increased to $374.5 million from $169.0 million, primarily because of stronger PTS results.

Cash flow, debt, liquidity, and capital allocation

Net cash from continuing operating activities was $1.292 billion. Including all floor-plan notes payable as operating cash flow for analytical purposes, operating cash flow was $1.331 billion.
Capital expenditures were $248.9 million, and cash used for acquisitions and other investments was $431.8 million.
Cash and cash equivalents were $100.7 million at December 31, 2021. Available borrowing capacity included $800.0 million under the U.S. credit agreement, $219.2 million under the U.K. facility, and $36.3 million under the Australian working-capital facility.
Total long-term debt was $1.474 billion, including $544.7 million of 3.50% senior subordinated notes due 2025 and $494.3 million of 3.75% senior subordinated notes due 2029. Floor-plan notes payable totaled $2.555 billion.
The company refinanced $500 million of 5.50% notes due 2026 with $500 million of 3.75% notes due 2029 and reduced long-term debt by approximately $216 million during 2021.
Total estimated future operating lease payments were $5.5 billion, with recognized operating lease liabilities of $2.473 billion.
The company repurchased 3.262 million shares for $293.5 million and paid $142.5 million in dividends during 2021. The annual dividend was increased each quarter, and the declared dividend payable March 1, 2022 was $0.47 per share.
Management stated that operating cash flow, PTS and other investment distributions, credit facilities, and floor-plan financing should fund existing operations and commitments for at least the next twelve months, subject to economic conditions and covenant compliance.

Material changes versus the prior comparable period

Revenue increased $5.111 billion and gross profit increased $1.256 billion, reflecting stronger demand, vehicle scarcity, improved pricing, acquisitions, and favorable foreign-currency translation.
New-vehicle inventory days declined to 17 from 50, while used-vehicle inventory days increased to 60 from 48. Supply constraints increased gross profit per vehicle but may reduce future volumes and margins if inventories normalize.
Retail automotive same-store new-vehicle unit sales increased 10.3%; same-store used-vehicle unit sales increased 11.7%.
Retail commercial truck revenue increased 19.6%, and commercial vehicle distribution revenue increased 26.8%.
SG&A increased 25.3% to $2.963 billion but declined to 66.7% of gross profit from 74.3%, reflecting operating leverage and cost controls.
Floor-plan interest expense declined 43.4% to $26.2 million, and other interest expense declined 38.2% to $68.6 million.
The company acquired Kansas City Freightliner, McCoy Freightliner, several U.S. automotive franchises, and the remaining 51% of the Nicole Group in Japan. The acquired businesses contributed $473.4 million of revenue and $27.5 million of pre-tax income from acquisition dates through year-end.

Guidance, outlook, risks, and unusual items

Management cited industry expectations for 2022 U.S. light-vehicle sales of 15.2 million to 15.5 million units and approximately 298,000 North American Class 8 heavy-duty truck sales.
Management expects vehicle and parts shortages to continue into 2022. It expects resilient commercial vehicle distribution and continued demand for PTS leasing, rental, maintenance, and logistics services.
When vehicle supply improves, management expects higher sales volumes but potentially lower new- and used-vehicle gross profit per unit.
Key risks include COVID-19, semiconductor and supply-chain disruptions, interest-rate increases, variable-rate debt, LIBOR transition, foreign-currency movements, manufacturer concentration and franchise renewals, direct-to-consumer and online competition, possible European agency sales models, vehicle electrification, cyberattacks, privacy regulation, environmental liabilities, and economic cyclicality.
Unusual 2021 items included a $10.8 million tax expense from the U.K. tax-rate revaluation, $17.0 million of debt redemption costs, and an $11.4 million loss on investment related to Nicole Group revaluation.
The company reported no legal proceedings reasonably expected to have a material effect, but adverse outcomes remain possible. It also reported $150.6 million of potential lease obligations related to properties occupied by subtenants, $29.2 million of letters of credit, and $21.9 million of surety bonds.
Goodwill impairment testing resulted in no impairment. The independent auditor issued an unqualified opinion, and management and the auditor concluded that internal control over financial reporting was effective; 2021 acquisitions were excluded from management’s control assessment.

Important facts for investors to verify

Whether elevated vehicle gross profit per unit persists after semiconductor and inventory constraints ease.
The effect of supply-chain conditions on new-vehicle volumes, used-vehicle availability, and service revenue.
PTS operating performance, cash distributions, leverage, and the contractual limits on future distributions.
Debt maturities, variable-rate exposure, LIBOR or alternative-rate transition, and compliance with credit and lease covenants.
The financial effect of acquisitions, including the Nicole Group consolidation and the Kansas City Freightliner and McCoy Freightliner operations.
Potential adoption of agency distribution models in the United Kingdom and Europe and the impact on revenue, inventory ownership, and margins.
Foreign-exchange sensitivity: management estimated that a 10% change in average exchange rates versus the U.S. dollar would have changed 2021 revenue by approximately $1.02 billion.
Future capital allocation among acquisitions, facility investment, dividends, debt reduction, and share repurchases.