Penske Automotive Group, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; comparative periods ended June 30, 2014. Financial statements are unaudited. PAG operates automotive and commercial truck dealerships primarily in the United States and Western Europe and distributes commercial vehicles, engines, power systems, parts and services primarily in Australia and New Zealand.
Business Context
- As of June 30, 2015, PAG operated 326 automotive retail franchises and retailed or wholesaled more than 255,000 vehicles during the first six months.
- Retail automotive represented 93% of six-month revenue and 91% of gross profit.
- Retail Commercial Truck became a new reportable segment following PAG’s acquisition of control of Premier Truck Group. PAG acquired an additional 5% of PTG on July 1, 2015, increasing ownership to 96%.
- PAG acquired one U.S. automotive franchise and two commercial truck dealerships during the first six months and disposed of two San Francisco automotive franchises.
Key Financial Metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenue | $4,904.4 million | $4,370.5 million | $9,375.5 million | $8,385.7 million |
| Gross profit | $729.6 million | $654.8 million | $1,418.3 million | $1,268.8 million |
| Operating income | $159.1 million | $135.8 million | $294.7 million | $256.5 million |
| Net income attributable to PAG stockholders | $94.0 million | $72.9 million | $169.2 million | $140.4 million |
| Diluted EPS | $1.04 | $0.81 | $1.87 | $1.55 |
| Gross margin | 14.9% | 15.0% | 15.1% | 15.1% |
| Operating margin | 3.2% | 3.1% | 3.1% | 3.1% |
Cash Flow, Liquidity and Capitalization
- Cash from continuing operating activities was $270.1 million in the first six months, compared with $207.3 million in the prior-year period. Including non-trade floor plan borrowings as operating cash flow, the comparable figures were $392.4 million and $239.7 million.
- Continuing investing cash outflow was $169.3 million, including $82.9 million of capital expenditures and $86.4 million for acquisitions.
- Continuing financing cash outflow was $136.5 million, including $194.6 million of net long-term debt repayments, $22.0 million of share repurchases and $40.7 million of dividends.
- Cash and cash equivalents were $36.7 million at June 30, 2015, versus $36.3 million at December 31, 2014. Working capital was $43.4 million.
- Available borrowing capacity was $622.0 million under the U.S. credit agreement, £145.9 million under the U.K. credit agreement and AU $28.0 million under the Australian working capital facility.
- Total long-term debt was $1,162.0 million, including $300.0 million of 5.375% senior subordinated notes due 2024, $550.0 million of 5.75% notes due 2022 and $169.4 million of mortgage facilities. Net long-term debt was $1,130.8 million.
- Floor plan notes payable totaled $3,047.7 million, comprising $2,004.9 million of trade floor plan debt and $1,042.8 million of non-trade floor plan debt.
- Management stated that PAG was in compliance with credit and lease covenants and expected available resources to fund operations and commitments for at least the next twelve months.
Material Changes Versus Prior Comparable Period
- Six-month revenue increased $989.8 million, or 11.8%, and gross profit increased $149.5 million, or 11.8%. Management attributed the increases to same-store growth and acquisitions, including PTG and Penske Power Systems.
- Excluding foreign currency effects, six-month revenue and gross profit increased 16.5% and 16.3%, respectively. Foreign currency movements reduced six-month revenue by $392.6 million, gross profit by $56.8 million and continuing-operations EPS by approximately $0.10.
- Retail automotive new-vehicle units increased 6.4% and used-vehicle units increased 7.8% in the first six months. However, average gross profit per used vehicle declined 9.2%, and used-vehicle gross margin fell to 6.5% from 7.2%.
- Service and parts revenue increased 5.1% for the six months, with gross margin improving to 59.9% from 59.5%. Finance and insurance revenue increased 7.7%.
- Retail Commercial Truck generated $434.6 million of six-month revenue and $71.1 million of gross profit. Commercial Vehicle Distribution and Other revenue was $227.3 million, compared with $210.0 million in the prior-year period.
- SG&A increased 10.9%, primarily due to acquisitions and personnel costs, but SG&A as a percentage of gross profit improved to 76.6% from 77.2%.
- Other interest expense increased 31.9% to $32.7 million, primarily because of the 2014 issuance of the $300.0 million senior subordinated notes and acquisition-related borrowings. Floor plan interest expense declined 7.0% after interest-rate swaps expired.
- The car rental business was divested in February 2015. Nissan and Infiniti of San Francisco were disposed of in June 2015. Discontinued operations produced a six-month after-tax loss of $1.6 million versus a $7.3 million loss in the prior-year period.
- The U.S. credit agreement was amended in May 2015, increasing revolving capacity from $450.0 million to $700.0 million, extending maturity to September 2018 and eliminating the term loan.
Guidance, Outlook, Risks and Unusual Items
- Management expected U.S. and U.K. new-vehicle markets to remain strong during the remainder of 2015 and anticipated continued strength in North American medium- and heavy-duty truck markets.
- Management expected Australian commercial vehicle markets to remain below historical levels because of difficult economic conditions and lower commodity prices, while parts distribution was viewed as more resilient.
- Key risks include economic cycles, interest rates, foreign exchange movements, vehicle demand, manufacturer and franchise relationships, inventory recalls or supply disruptions, acquisition integration, credit availability, covenant compliance and access to floor plan financing.
- A 100-basis-point change in interest rates was estimated to affect annual other interest expense by approximately $1.0 million and annual floor plan interest expense by approximately $25.0 million.
- A 10% change in average exchange rates against the U.S. dollar would have changed six-month revenue by approximately $364.1 million.
- PAG had $24.5 million of letters of credit and $15.3 million of surety bonds outstanding. It also had contingent obligations relating to leases, PTL debt indemnification and an Australian floor plan guarantee.
- Management reported no litigation reasonably expected to have a material adverse effect, while noting that unfavorable outcomes could nevertheless materially affect results, liquidity or financial condition.
- PAG adopted the revised discontinued-operations guidance effective January 1, 2015 and was assessing the future impact of the new revenue-recognition standard, whose effective date was deferred to 2018.
Investor Verification Checklist
- Verify the sustainability of same-store sales growth and the deterioration in used-vehicle gross profit per unit.
- Assess the effect of currency movements, particularly the weaker British pound, on reported revenue, margins and earnings.
- Monitor PTG’s integration, performance and the impact of PAG’s July 1, 2015 increase in ownership to 96%.
- Review floor plan financing availability, variable-rate exposure and compliance with credit agreement and lease covenants.
- Evaluate acquisition spending, capital expenditures, dividends and share repurchases relative to operating cash flow.
- Review contingent obligations, including the PTL debt indemnification, lease guarantees, letters of credit and surety bonds.
- Confirm the treatment and remaining assets and liabilities of discontinued operations and held-for-sale businesses.
- Consider manufacturer franchise and distribution agreements, recalls, supply constraints, regulatory changes and potential litigation outcomes.