Penske Automotive Group, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. PAG operates automotive and commercial truck dealerships in the United States, Canada, and Western Europe; distributes commercial vehicles, engines, power systems, and related parts and services in Australia and New Zealand; and owns 28.9% of Penske Transportation Solutions.
The quarter was materially affected by the COVID-19 pandemic, including dealership closures, reduced customer demand, manufacturer production interruptions, employee furloughs, and increased health and safety costs. Most locations had reopened by June 30, 2020.
Key financial metrics
| Metric | Three months ended June 30, 2020 | Three months ended June 30, 2019 | Six months ended June 30, 2020 | Six months ended June 30, 2019 |
|---|---|---|---|---|
| Total revenue | $3,651.1 million | $5,755.8 million | $8,660.2 million | $11,320.2 million |
| Gross profit | $552.9 million | $867.8 million | $1,329.6 million | $1,719.3 million |
| Operating income | $71.4 million | $171.8 million | $177.8 million | $330.5 million |
| Net income attributable to PAG common stockholders | $45.1 million | $117.8 million | $96.8 million | $218.0 million |
| Diluted EPS | $0.56 | $1.42 | $1.20 | $2.61 |
| Gross margin | 15.1% | 15.1% | 15.4% | 15.2% |
| Operating margin | 2.0% | 3.0% | 2.1% | 2.9% |
| Net margin attributable to PAG common stockholders | 1.2% | 2.0% | 1.1% | 1.9% |
Six-month revenue comprised $7,570.1 million from retail automotive dealerships, $890.6 million from retail commercial truck dealerships, and $199.5 million from commercial vehicle distribution and other operations. Equity in earnings of affiliates was $44.4 million, including $43.5 million from Penske Transportation Solutions, compared with $66.3 million in the prior-year period.
Net cash provided by continuing operating activities was $784.4 million for the six months, versus $304.6 million in 2019. Including all changes in non-trade floor plan notes payable as operating activity, adjusted operating cash flow was $474.5 million versus $311.4 million. Investing cash flow was a use of $47.8 million, including $76.8 million of capital expenditures. Financing cash flow was a use of $605.2 million.
Cash and cash equivalents were $159.3 million at June 30, 2020, compared with $28.1 million at December 31, 2019. Total long-term debt was $2,137.4 million, including $299.9 million of 3.75% senior subordinated notes due August 15, 2020, and $417.0 million of mortgage facilities. Floor plan notes payable totaled $3,241.5 million, consisting of $1,957.4 million of trade floor plan notes and $1,284.1 million of non-trade floor plan notes.
PAG reported approximately $1 billion of additional revolving credit availability, including $700.0 million under the U.S. credit agreement, $200.9 million under the U.K. facility, and $34.5 million under the Australian working capital facility. The U.S. credit agreement was amended in July 2020 to add $100 million of capacity effective August 1, 2020.
Material changes versus the prior comparable period
- Second-quarter revenue declined 36.6% and gross profit declined 36.3%; six-month revenue declined 23.5% and gross profit declined 22.7%.
- Retail automotive revenue declined 39.3% in the quarter and 26.4% for the six months. Second-quarter same-store new vehicle units declined 42.8% and used vehicle units declined 39.9%.
- Retail automotive service and parts revenue declined 37.3% in the quarter and 22.7% for the six months. Six-month service and parts gross margin decreased to 58.8% from 59.4%.
- Retail commercial truck revenue declined 6.5% in the quarter but increased 17.3% for the six months, primarily because of the Warner Trucks acquisition completed in the third quarter of 2019. Same-store new truck units declined 52.2% in the quarter and 31.4% for the six months.
- Used commercial truck gross profit was negative $2.9 million in the quarter and negative $5.3 million for the six months, compared with positive gross profit in 2019, reflecting oversupply of used trucks and greater new-truck availability.
- Commercial vehicle distribution revenue declined 25.8% in the quarter and 27.1% for the six months, primarily due to weaker Australian and New Zealand heavy-duty truck markets.
- SG&A declined 32.2% in the quarter and 18.0% for the six months, but SG&A as a percentage of gross profit increased to 82.0% and 82.4%, respectively, from 77.1% and 77.7%.
- Government assistance reduced second-quarter SG&A by approximately $55.9 million, including $49.5 million of U.K. wage assistance and $6.4 million of U.S. and other assistance and tax credits.
- Floor plan interest expense declined 44.3% in the quarter and 31.3% for the six months, primarily because of lower borrowings and interest rates. Equity earnings of affiliates declined 33.0% for the six months.
- The company suspended its cash dividend in May 2020. It paid $0.42 per share for the first quarter, but no second-quarter dividend. It repurchased $29.4 million of common stock during the six months, with no program repurchases during the second quarter.
Guidance, outlook, commentary, risks, and unusual items
Management did not provide quantitative earnings or revenue guidance. It stated that it expects COVID-19-related disruption to continue negatively affecting the global economy and its businesses, while noting that June operating trends improved as restrictions eased. Management cannot predict the duration, scope, or severity of the pandemic’s effects.
- As of July 1, approximately 14% of PAG’s workforce remained furloughed, following more than 15,000 furloughs and an approximately 2,000-employee workforce reduction. Capital expenditures were postponed by an estimated $150 million.
- Management expected to repay the $300 million notes due August 15, 2020 using availability under the undrawn U.S. credit agreement. PAG stated that it was in compliance with its debt and operating lease covenants and expected to remain compliant for the next twelve months.
- Risks include renewed COVID-19 restrictions, vehicle and parts supply disruptions, uncertain customer demand, manufacturer and lender capacity, workforce availability, liquidity and refinancing risk, covenant compliance, variable interest rates, foreign exchange movements, Brexit, tariffs, franchise agreements, technology systems, litigation, and regulatory changes.
- PAG entered into a five-year interest-rate swap fixing the LIBOR portion of $300 million of U.S. floating-rate floor plan debt at 0.5875% through April 2025. A 100-basis-point interest-rate change was estimated to affect annual floor plan interest expense by approximately $36.1 million.
- Total undiscounted operating lease obligations were $5.3 billion at June 30, 2020, with recognized operating lease liabilities of $2.3 billion.
- No legal proceeding was identified as reasonably expected to have a material adverse effect, although management cautioned that outcomes cannot be predicted with certainty. PAG had $49.0 million of letters of credit and $21.7 million of surety bonds outstanding.
Most important facts for investors to verify
- Whether the June recovery in same-store sales continued or reflected temporary pent-up demand.
- Repayment or refinancing of the $300 million notes due August 15, 2020 and subsequent revolver utilization.
- Compliance with debt, floor plan, and operating lease covenants under prolonged pandemic conditions.
- The sustainability of government assistance and cost reductions supporting second-quarter SG&A.
- Future dividend policy and any resumption of common-stock repurchases.
- Used vehicle and used commercial truck inventory levels, pricing, and gross-profit trends.
- Performance and distributions from the 28.9%-owned Penske Transportation Solutions investment.
- Exposure to foreign exchange, Brexit, LIBOR transition, manufacturer production constraints, and renewed COVID-19 closures.