Penske Automotive Group, Inc. — Q1 2015 Form 10-Q Summary
Business Context and Reporting Period
Quarter ended March 31, 2015; financial statements are unaudited. Penske Automotive Group operates automotive and commercial truck dealerships principally in the United States and Western Europe and distributes commercial vehicles, engines, power systems, parts and related services principally in Australia and New Zealand. The company operated 328 automotive retail franchises and employed approximately 22,000 people worldwide.
The quarter includes the newly consolidated retail commercial truck dealership business, including PCV US, and Penske Power Systems, acquired in late 2014. The company also acquired one U.S. automotive franchise and two retail commercial truck dealerships during the quarter.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Total revenue | $4,471.1 million | $4,015.2 million | +11.4% |
| Gross profit | $688.7 million | $614.0 million | +12.2% |
| Operating income | $135.6 million | $120.7 million | +12.3% |
| Income from continuing operations | $77.1 million | $67.6 million | +14.1% |
| Net income attributable to PAG stockholders | $75.2 million | $67.5 million | +11.4% |
| Diluted EPS | $0.83 | $0.75 | +$0.08 |
| Gross margin | 15.4% | 15.3% | Improved modestly |
| Operating margin | 3.0% | 3.0% | Broadly stable |
Revenue consisted of $4,175.0 million from retail automotive dealerships, $192.7 million from retail commercial truck dealerships and $103.4 million from commercial vehicle distribution and other operations. Retail automotive represented approximately 93% of total revenue and 91% of gross profit.
- Retail automotive new vehicle unit sales increased 6.6%; same-store sales increased 5.1%.
- Retail automotive used vehicle unit sales increased 6.7%; however, used vehicle gross profit declined 2.3% and gross margin fell to 6.6% from 7.2%.
- Finance and insurance revenue increased 6.3% to $111.1 million.
- Service and parts revenue increased 5.3% to $437.3 million, with gross margin improving to 59.5% from 59.2%.
- Retail commercial truck dealerships generated $32.8 million of gross profit on $192.7 million of revenue.
- Commercial vehicle distribution and other segment revenue was $103.7 million and segment income was $5.4 million, compared with $7.8 million of segment income in the prior-year period.
Cash Flow, Liquidity and Capital Structure
- Cash provided by continuing operating activities was $193.6 million, compared with $132.5 million in Q1 2014. Including non-trade floor plan borrowings as operating cash flow, the company reported $294.6 million versus $139.3 million.
- Continuing investing activities used $120.0 million, including $33.6 million of capital expenditures and $86.4 million for acquisitions.
- Continuing financing activities used $73.4 million, including $139.3 million of net long-term debt repayments, $14.0 million of share repurchases and $19.9 million of dividends, partly offset by $101.0 million of non-trade floor plan borrowings.
- Cash and cash equivalents increased to $66.8 million from $36.3 million at December 31, 2014. Reported working capital was $55.7 million.
- Long-term debt totaled $1,208.6 million, including $850.0 million of senior subordinated notes and $170.5 million of mortgage facilities. Floor plan notes payable totaled $2,937.3 million, including $1,021.5 million classified as non-trade.
- Available borrowing capacity at March 31 was reported as $450.0 million under the U.S. credit agreement, £73.0 million under the U.K. agreement and AU$28.0 million under the Australian working capital facility.
- Management stated that operating cash flow, investment distributions and existing credit and floor plan resources should fund operations and commitments for at least the next twelve months, subject to covenant compliance and financing availability.
Material Changes Versus the Prior Comparable Period
- Consolidation of PCV US and the addition of Penske Power Systems contributed materially to the year-over-year revenue and profit increases.
- Foreign currency translation was a significant headwind. The British pound weakened 8.5% against the U.S. dollar; management estimated that currency movements reduced revenue by $184.7 million, gross profit by $27.0 million and continuing-operations EPS by approximately $0.05.
- Excluding foreign currency effects, revenue and gross profit increased approximately 16.0% and 16.6%, respectively.
- Floor plan interest expense declined 9.0% to $10.1 million, primarily because interest rate swaps expired. Other interest expense increased 31.5% to $16.3 million, primarily because of the $300.0 million senior subordinated notes issued in November 2014 and acquired PCV US borrowings.
- SG&A increased 12.0% to $534.5 million, largely from acquisitions and higher personnel costs, while SG&A as a percentage of gross profit improved slightly to 77.6% from 77.7%.
- Accumulated other comprehensive loss increased to $107.8 million from $53.3 million, primarily due to a $52.8 million foreign currency translation loss.
- The company divested its car rental business in February 2015. Discontinued operations produced a $1.2 million net loss in Q1 2015, compared with $0.3 million of income in Q1 2014.
- The U.S. credit agreement was amended on May 1, 2015, after quarter-end, increasing revolving capacity from $450.0 million to $700.0 million, extending maturity to September 30, 2018 and eliminating the term loan.
Guidance, Outlook, Risks and Unusual Items
Management did not provide formal earnings guidance. It expected continued growth in U.S. and U.K. new vehicle markets and continued strength in North American medium- and heavy-duty truck markets. The Australian commercial vehicle market was expected to remain weak because of difficult macroeconomic conditions and lower commodity prices, while parts distribution was expected to remain comparatively resilient.
- Key operating sensitivities include vehicle unit demand, consumer confidence, interest rates, credit availability, fuel prices, unemployment, seasonality, weather and manufacturers’ incentives and product availability.
- The company is exposed to variable-rate debt and floor plan financing. Management estimated that a 100-basis-point rate change would affect annual other interest expense by approximately $1.4 million and annual floor plan interest expense by approximately $23.0 million based on disclosed balances and averages.
- A 10% change in average foreign exchange rates against the U.S. dollar would have changed Q1 2015 revenue by approximately $176.5 million.
- Credit agreements, leases and debt instruments contain financial covenants and restrictions; a breach could result in remedies including acceleration of borrowings. The company reported compliance as of March 31, 2015.
- The company had $22.9 million of letters of credit and $14.3 million of surety bonds outstanding. It also has contingent obligations related to leases, PTL debt indemnification and a limited parent guarantee supporting an Australian floor plan facility.
- Management reported no legal proceedings reasonably expected to have a material adverse effect, while noting that adverse outcomes remain possible.
Most Important Facts for Investors to Verify
- Whether acquisition-related growth and reported revenue increases translate into sustainable same-store earnings growth after currency effects.
- Trends in used-vehicle gross profit per unit and margin, which weakened materially year over year.
- Execution and profitability of PCV US, Penske Power Systems and other recent acquisitions.
- Actual availability and covenant headroom under the amended U.S. and U.K. credit agreements, including the post-quarter-end U.S. capacity increase.
- Exposure to variable interest rates, floor plan financing requirements and foreign currency movements.
- Progress of the $136.0 million remaining share-repurchase authorization and the sustainability of the $0.22 per-share quarterly dividend.
- Potential obligations from leases, litigation, self-insurance, PTL indemnification and other guarantees or contingencies.