Penske Automotive Group, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual Form 10-K; fourth-quarter data are included in the unaudited quarterly table. PAG operates automotive and commercial truck dealerships in the United States, Canada and Western Europe, distributes commercial vehicles and power systems in Australia and New Zealand, and holds a 28.9% equity-method interest in Penske Truck Leasing (PTL).
Business context and key metrics
- More than 26,000 employees; 343 retail automotive franchises and 20 Premier Truck Group locations at year-end.
- 2017 revenue was $21.39 billion, up 6.3% from $20.12 billion in 2016. Retail automotive contributed $19.82 billion, retail commercial truck $1.05 billion, and commercial vehicle distribution and other operations $514.6 million.
- Gross profit was $3.22 billion, up 8.6%, for a 15.1% gross margin versus 14.8% in 2016.
- Operating income was $611.4 million, up 6.3%, for an operating margin of approximately 2.9%.
- Income from continuing operations attributable to PAG common stockholders was $613.5 million, versus $343.9 million in 2016. Diluted EPS was $7.14 versus $4.00.
- 2017 results included a $243.4 million income-tax benefit from the U.S. Tax Cuts and Jobs Act. Excluding this unusual benefit, reported earnings and EPS would have been materially lower; the filing does not provide a single adjusted net-income or EPS figure.
- Net income attributable to common stockholders was $613.3 million, compared with $342.9 million in 2016. Net margin was approximately 2.9% versus 1.7%.
- Cash provided by continuing operating activities was $623.0 million, compared with $371.3 million in 2016; including all floor-plan financing changes, operating cash flow was $808.3 million.
- Capital expenditures were $247.0 million. Cash used in acquisitions and other investments was $449.7 million, and PAG paid $239.1 million to increase its PTL ownership.
- Cash and cash equivalents were $45.7 million at year-end, while working capital was $26.1 million. Available borrowing capacity was $528.0 million under the U.S. credit agreement, £125.0 million under the U.K. agreement and AU$50.0 million under the Australian working-capital agreement.
- Floor-plan notes payable totaled $3.76 billion and other debt totaled $2.16 billion. Total debt excluding floor-plan notes increased from $1.88 billion in 2016. Estimated operating-lease commitments totaled $5.12 billion.
- Debt included $300.0 million of 3.75% senior subordinated notes due 2020, issued in August 2017. Proceeds were used primarily to repay U.S. credit agreement and floor-plan borrowings.
Revenue mix and operating changes
| Measure | 2017 | 2016 | Change |
|---|---|---|---|
| Retail automotive revenue | $19.824 billion | $18.673 billion | +6.2% |
| Retail commercial truck revenue | $1.048 billion | $1.001 billion | +4.7% |
| Commercial vehicle distribution and other revenue | $514.6 million | $444.6 million | +15.8% |
| New automotive retail units | 248,774 | 249,695 | -0.4% |
| Used automotive retail units | 252,922 | 207,556 | +21.9% |
| Finance and insurance revenue | $581.8 million | $495.0 million | +17.5% |
| Automotive service and parts revenue | $2.058 billion | $1.949 billion | +5.6% |
- Same-store new automotive units declined 4.2%, and same-store used units declined 0.6%. Acquisitions drove much of the consolidated volume increase.
- Same-store used-vehicle gross profit declined 8.3%, with average gross profit per used vehicle down 7.8%. Service and parts remained the largest automotive gross-profit contributor, with a 59.3% gross margin.
- Premier Truck Group gross profit increased 16.0% to $165.8 million despite a 4.2% decline in new-truck unit sales, reflecting improved new-truck margins and substantially better used-truck results.
- Equity in earnings of affiliates increased 54.8% to $107.6 million, primarily because of the increased PTL ownership interest.
- Foreign-currency translation reduced 2017 revenue by $314.7 million and gross profit by $39.6 million. Excluding currency effects, management stated that revenue and gross profit increased 7.9% and 10.0%, respectively.
Fourth-quarter information
| Measure | Q4 2017 | Q4 2016 |
|---|---|---|
| Revenue | $5.398 billion | $4.888 billion |
| Gross profit | $808.3 million | $727.3 million |
| Net income attributable to PAG stockholders | $330.1 million | $82.6 million |
| Diluted EPS | $3.85 | $0.97 |
The unusually large fourth-quarter earnings increase primarily reflects the Tax Cuts and Jobs Act benefit recognized in 2017. The filing does not separately quantify the portion of the annual tax benefit recognized in the fourth quarter.
Material developments and capital allocation
- PAG acquired CarSense in the United States and CarShop in the United Kingdom during the first quarter; these stand-alone used-vehicle operations generated approximately $710 million of 2017 revenue.
- PAG acquired or was awarded 13 automotive franchises representing approximately $500 million of annualized revenue and disposed of 25 franchises representing approximately $270 million of annualized revenue.
- In September 2017, PAG increased its PTL interest from 23.4% to 28.9% for approximately $239.1 million. PTL distributed $52.4 million to PAG during 2017.
- In December 2017, PAG sold its 31% interest in Penske Vehicle Services to PTL for $19.2 million.
- PAG repurchased 302,000 shares for $12.7 million and paid $108.4 million of dividends. Quarterly dividends increased from $0.30 to $0.33 per share during 2017; a $0.34 dividend was declared for March 2018.
Outlook, risks and contingencies
- Management expects U.S. new-vehicle sales to remain generally plateaued, with trucks, crossovers and SUVs outperforming passenger cars. It expects used-vehicle demand to benefit from increasing lease returns.
- Management expects continued strength in North American Class 8 truck markets, Australian and New Zealand heavy-duty truck markets, and PTL leasing, rental and logistics demand.
- Key risks include economic cyclicality, interest-rate increases, vehicle demand and credit availability, manufacturer incentives and franchise renewals, foreign-exchange exposure, Brexit-related uncertainty, and dependence on premium vehicle brands.
- Variable-rate exposure is material: a 100-basis-point change was estimated to affect annual other interest expense by approximately $2.2 million and floor-plan interest expense by approximately $34.3 million.
- Hurricanes Maria, Irma and Harvey disrupted operations; storm-related losses, expenses and business interruption, net of expected insurance proceeds, were estimated at approximately $3.0 million in 2017.
- Management identified cybersecurity, privacy, recalls, environmental compliance, regulatory proceedings, labor matters and evolving electric, shared-mobility and autonomous-vehicle technologies as additional risks.
- No legal proceeding was expected to have a material effect individually or in the aggregate, but management stated that outcomes cannot be predicted with certainty. PAG also had $33.4 million of letters of credit and $25.9 million of surety bonds outstanding.
- PAG expects to adopt the new revenue-recognition standard in 2018, with an estimated after-tax cumulative reduction to retained earnings of approximately $6.0 million. Lease accounting adoption is expected in 2019 and will significantly increase reported assets and liabilities.
Most important facts for investors to verify
- Separate recurring operating performance from the $243.4 million Tax Cuts and Jobs Act tax benefit, particularly when assessing 2017 and Q4 earnings.
- Review same-store trends, especially declining new-vehicle units and used-vehicle gross profit, against acquisition-driven growth.
- Assess leverage and refinancing needs, including $3.76 billion of floor-plan debt, $2.16 billion of other debt, 2020 note maturities and $5.12 billion of lease commitments.
- Monitor liquidity, covenant compliance, variable-rate exposure and continued availability of floor-plan financing.
- Evaluate PTL’s earnings, distributions, debt, fleet utilization and the restrictions governing PAG’s access to PTL cash flows.
- Track Brexit, foreign-currency movements, manufacturer franchise agreements, recalls, regulatory changes and the effects of electrification and changing mobility models.