Penske Automotive Group, Inc. — Q1 2013 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2013, compared with the same period in 2012. PAG operated 342 retail franchises, including 174 in the U.S. and 168 internationally, primarily in the U.K. The company also operated Hertz rental locations and held a 9.0% equity-method investment in Penske Truck Leasing.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $3.400 billion | $3.156 billion | +7.7% |
| Gross profit | $533.0 million | $493.9 million | +7.9% |
| Operating income | $105.2 million | $94.2 million | +11.7% |
| Net income attributable to PAG | $57.7 million | $46.8 million | +23.2% |
| Diluted EPS | $0.64 | $0.52 | +23.1% |
| Cash from continuing operating activities | $103.1 million | $125.2 million | Down $22.1 million |
- Gross margin was approximately 15.7%, compared with 15.6% in the prior-year quarter. Operating margin was approximately 3.1%, compared with 3.0%.
- Retail gross margin declined from 16.8% to 16.3%, primarily because of lower new- and used-vehicle margins. Service and parts gross margin improved from 57.8% to 58.4%.
- New vehicle revenue increased 12.9% and used vehicle revenue increased 7.4%. Finance and insurance revenue increased 11.5%, while service and parts revenue increased 6.8%.
- Cash and cash equivalents were $31.6 million at March 31, 2013, compared with $43.8 million at December 31, 2012. Continuing investing activities used $89.8 million, including $68.4 million of capital expenditures and $27.2 million for acquisitions. Continuing financing activities used $31.4 million.
- Inventory was $2.024 billion. Floor plan notes payable totaled $2.169 billion, consisting of $1.425 billion of trade floor plan debt and $744.2 million of non-trade floor plan debt.
- Long-term debt was $891.7 million, including $550.0 million of 5.75% senior subordinated notes due 2022. Total liabilities were $4.109 billion and total equity was $1.306 billion.
- Available borrowing capacity was reported at $365.0 million under the U.S. credit agreement and £108.0 million, or approximately $164.2 million, under the U.K. credit agreement.
Material changes versus the prior comparable period
- New retail unit sales rose 9.7%, and same-store new retail unit sales rose 6.9%. Used retail unit sales rose 10.2%, with same-store sales up 6.6%.
- Aggregate SG&A increased 6.9% to $413.3 million, but SG&A as a percentage of gross profit improved to 77.5% from 78.3%.
- Floor plan interest expense increased 7.6% to $10.2 million because of higher floor plan borrowings. Other interest expense declined 2.9% to $11.8 million due primarily to acquisition-debt repayments.
- Equity in earnings of affiliates declined 47.7% to $2.3 million, primarily reflecting lower earnings from PTL and other non-automotive joint ventures.
- PAG sold 50% of its Italian automotive retail joint venture and deconsolidated the investment, retaining a 35% interest accounted for under the equity method. Foreign currency translation reduced accumulated other comprehensive income by $37.2 million.
- Discontinued operations contributed $0.8 million after tax in Q1 2013 versus a $3.1 million loss in Q1 2012.
- The company repurchased 410,000 shares for $12.7 million at an average price of $30.93 per share and paid $12.7 million of dividends, including a quarterly dividend of $0.14 per share.
Outlook, risks, contingencies, and unusual items
- Management stated that U.S. and U.K. automotive markets had improved and expected continued growth based on stronger demand, aging vehicles, consumer credit availability, and new-model introductions. The filing does not provide formal earnings or revenue guidance.
- Management believes operating cash flow, joint-venture distributions, and existing credit and floor plan facilities will fund operations and commitments for at least the next twelve months. Significant acquisitions, expansion, repurchases, or debt refinancing could require additional capital.
- Interest-rate exposure remains significant. A 100-basis-point change was estimated to affect annual other interest expense by approximately $1.2 million and annual floor plan interest expense by approximately $15.3 million based on the filing’s assumptions. Interest-rate swaps fixed the LIBOR component of $400 million of floor plan debt through December 2014.
- Key risks include economic and consumer-demand cycles, vehicle availability and manufacturer relationships, interest rates, foreign exchange, credit availability, franchise renewals, regulatory changes affecting automotive financing, litigation, self-insurance exposure, and covenant compliance.
- The company reported compliance with its U.S. and U.K. credit agreements and operating-lease covenants as of March 31, 2013. It had $0.5 million of letters of credit and $9.0 million of surety bonds outstanding.
- PAG agreed to indemnify GECC for 9.0% of specified principal and interest obligations related to PTL’s $700 million Holdings Bonds. The expected 2019 principal exposure was approximately $63.1 million, before related interest, fees, and other amounts.
- Management stated that no pending legal proceedings were reasonably expected to have a material adverse effect, but acknowledged that unfavorable outcomes could materially affect results, financial condition, or cash flows.
Important facts for investors to verify
- Whether vehicle volumes continue to grow without further erosion in new- and used-vehicle gross profit per unit.
- The sustainability of higher-margin finance and insurance and service-and-parts growth.
- Floor plan debt levels, variable-rate exposure, swap maturities, and compliance with credit-agreement covenants.
- Cash conversion, inventory growth, capital expenditures, acquisition spending, and availability under revolving credit facilities.
- The financial contribution and future distributions from PTL and other equity-method investments.
- The effects of foreign currency movements, the Italian joint-venture deconsolidation, and the classification of discontinued operations.
- Potential obligations relating to leases, subleased properties, self-insurance, litigation, and the PTL bond indemnity.