Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
International transportation services company operating automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe, plus commercial vehicle, engine, and power-systems distribution businesses in Australia and New Zealand. The filing covers the quarter and nine months ended September 30, 2016; financial statements are unaudited.
- Operated 349 automotive retail franchises and retailed or wholesaled more than 419,000 vehicles during the first nine months.
- Retail automotive generated 92.7% of nine-month revenue; retail commercial truck generated 5.1%; commercial vehicle distribution and other operations generated 2.1%.
- Acquired 13 automotive franchises, five commercial truck dealerships, an additional 8% of a German dealership joint venture, and an additional 14.4% of Penske Truck Leasing, increasing ownership to 23.4%.
Financial Performance and Key Metrics
| Metric | Q3 2016 | Q3 2015 | Change |
|---|
| Total revenue | $5,152.0 million | $4,960.1 million | +3.9% |
| Gross profit | $744.2 million | $729.2 million | +2.1% |
| Operating income | $141.5 million | $146.0 million | -3.1% |
| Net income attributable to common stockholders | $87.5 million | $86.6 million | +1.0% |
| Diluted EPS | $1.03 | $0.96 | +$0.07 |
| Gross margin | 14.4% | 14.7% | Down approximately 30 bps |
| Operating margin | 2.7% | 2.9% | Down approximately 20 bps |
| Metric | Nine months 2016 | Nine months 2015 | Change |
|---|
| Total revenue | $15,230.7 million | $14,363.6 million | +6.0% |
| Gross profit | $2,239.3 million | $2,150.4 million | +4.1% |
| Operating income | $449.7 million | $440.4 million | +2.1% |
| Net income attributable to common stockholders | $260.3 million | $255.8 million | +1.8% |
| Diluted EPS | $3.02 | $2.84 | +$0.18 |
| Cash flow from continuing operations | $457.2 million | $373.4 million | +$83.8 million |
| Capital expenditures | $171.7 million | $151.1 million | +$20.6 million |
- Nine-month gross margin was approximately 14.7% and operating margin approximately 3.0%; net margin attributable to common stockholders was approximately 1.7%.
- Equity in earnings of affiliates increased to $43.1 million from $29.7 million, principally reflecting the larger PTL investment and earnings from the Japan investment.
- Cash and cash equivalents were $89.4 million at September 30, 2016, compared with $62.4 million at December 31, 2015.
- Working capital was $173.0 million. Reported borrowing availability included $495.0 million under the U.S. credit agreement, £92.0 million under the U.K. facility, and AU$15.8 million under the Australian facility.
- Long-term debt totaled $1,877.6 million, including current maturities of $44.1 million. Floor plan notes payable totaled $3,218.3 million, consisting of $2,073.2 million of trade floor plan debt and $1,145.1 million of non-trade floor plan debt.
- Common-stock repurchases totaled $173.6 million, and dividends paid totaled $70.3 million during the first nine months. The quarterly dividend increased to $0.28 per share, and a $0.29 per-share dividend was announced for December 2016.
Material Changes Versus the Prior Comparable Period
- Revenue and gross profit increased, largely due to dealership acquisitions and higher finance and insurance, service, and parts activity. Excluding foreign-exchange effects, management reported revenue growth of 9.6% and gross-profit growth of 7.2% for the first nine months.
- The British pound weakened materially following the Brexit referendum. Currency translation reduced nine-month revenue by approximately $514.5 million, gross profit by $66.9 million, and continuing-operations EPS by approximately $0.13.
- Same-store new-vehicle and used-vehicle gross profit declined, reflecting lower per-unit margins. Same-store service and parts revenue increased, but margins declined because of business mix and the consolidation of a lower-margin German joint venture.
- Retail commercial truck results weakened on a same-store basis because of softer freight demand, excess Class 8 fleet capacity, lower used-truck demand, and weaker used-truck pricing. Service operations remained comparatively resilient.
- Other interest expense increased to $61.8 million from $49.0 million for the nine-month period, primarily due to the $500.0 million issuance of 5.50% senior subordinated notes in May 2016 and higher revolver borrowings.
- Cash used in investing activities increased to $785.7 million, mainly because of the $498.5 million acquisition of the additional PTL interest, $106.0 million of acquisitions, and $171.7 million of capital expenditures.
- Shares outstanding declined to 85.2 million from 89.5 million at year-end 2015, primarily due to repurchases.
Outlook, Commentary, Risks, and Unusual Items
- No formal numerical earnings or revenue guidance is provided. Management expects U.S. light-vehicle sales to remain near current levels, supported by employment, credit availability, low interest rates, leasing, and vehicle age.
- Management expects U.K. vehicle demand to remain supported by market conditions but cautions that Brexit may affect economic conditions, trade terms, currency, and registrations.
- North American Class 8 truck sales are expected to decline through 2017 because of softer freight demand and excess fleet capacity. Used-truck prices and volumes may remain pressured, while service demand may benefit from customers retaining equipment longer.
- Management expects Australian commercial-vehicle markets to remain below historical levels because of macroeconomic and commodity-price conditions, while parts distribution and off-highway engine demand should be more resilient.
- Management believes operating cash flow, distributions from joint ventures, existing cash, credit facilities, and floor-plan financing are sufficient to fund operations and current commitments for at least the next twelve months.
- Interest-rate sensitivity is material: a 100-basis-point change would affect estimated annual other interest expense by approximately $2.9 million and annual floor-plan interest expense by approximately $32.5 million.
- Legal proceedings, lease obligations, indemnification related to PTL debt, letters of credit of $33.1 million, and surety bonds of $12.6 million remain contingencies. No legal matter was identified as reasonably expected to have a material adverse effect, although outcomes are uncertain.
- The company was in compliance with its credit and lease covenants at September 30, 2016, and management expected continued compliance over the following twelve months.
- Subsequent to quarter-end, the company increased its ownership in an Italian joint venture to 84% and funded the acquisition of six Italian franchises.
- Disclosure controls and procedures were assessed as effective, with no material changes to internal control over financial reporting during the quarter.
Most Important Facts for Investors to Verify
- Whether sustained foreign-exchange weakness, particularly in the British pound, continues to reduce reported revenue, profit, and EPS.
- Whether new- and used-vehicle per-unit margins stabilize after the reported declines.
- The trajectory of Class 8 truck demand, used-truck prices, and PTG service and parts performance.
- Post-acquisition returns and cash distributions from the enlarged 23.4% PTL investment, including related-party governance and transfer restrictions.
- Debt-service capacity, variable-rate exposure, floor-plan availability, and compliance with financial covenants.
- Whether U.S., U.K., Australian, and New Zealand market conditions support management’s outlook.
- Potential effects of Brexit, currency movements, manufacturer incentives, franchise agreements, recalls, litigation, lease guarantees, and other contingent obligations.
