Penske Automotive Group, Inc. — Fiscal 2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed February 28, 2013. The filing is an annual Form 10-K, not a standalone quarterly filing. Fourth-quarter 2012 revenue was $3.371 billion and diluted EPS was $0.54.
Business Context
Penske Automotive Group is a global automotive retailer operating 344 franchises as of December 31, 2012, including 173 in the U.S. and 171 primarily in the U.K. The company retailed and wholesaled more than 402,000 vehicles during 2012. Approximately 64% of revenue was generated in the U.S. and Puerto Rico and 36% internationally. Premium brands represented approximately 70% of retail revenue, and the company held a 9.0% equity-method interest in Penske Truck Leasing Co., L.P. (“PTL”).
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $13.164 billion | $11.127 billion | 18.3% |
| Gross profit | $2.013 billion | $1.762 billion | 14.3% |
| Gross margin | 15.3% | 15.8% | Down approximately 0.5 percentage points |
| Operating income | $364.9 million | $295.6 million | 23.4% |
| Income from continuing operations attributable to common stockholders | $193.0 million | $174.8 million | 10.4% |
| Net income attributable to common stockholders | $185.5 million | $176.9 million | 4.9% |
| Diluted EPS | $2.05 | $1.94 | 5.7% |
| Cash flow from continuing operations | $327.9 million | $133.3 million | 146.1% |
| Capital expenditures | $161.3 million | $132.0 million | 22.2% |
| Cash and cash equivalents | $43.8 million | $27.2 million | Increase of $16.6 million |
| Floor plan notes payable | $2.125 billion | $1.635 billion | 30.0% |
| Debt excluding floor plan notes | $937.5 million | $850.2 million | 10.3% |
Approximate 2012 operating margin was 2.8% and net margin attributable to common stockholders was 1.4%. Service and parts generated 12% of retail revenue but 42% of retail gross profit, highlighting its importance to profitability. Service and parts gross margin increased to 58.3% from 57.4%.
Material Changes Versus 2011
- New retail vehicle sales increased 21.3% to 180,764 units; same-store new units increased 12.9%. New vehicle gross profit per unit declined 3.6% to $3,037.
- Used retail vehicle sales increased 19.8% to 145,580 units; same-store used units increased 11.6%. Used gross profit per unit declined 6.5% to $1,953.
- Finance and insurance revenue increased 19.2% to $322.6 million, while service and parts revenue increased 8.8% to $1.447 billion.
- Retail gross margin declined from 16.8% to 16.3%, principally because vehicle sales represented a larger share of revenue and vehicle margins were lower.
- SG&A increased 12.3% to $1.594 billion, but declined to 79.2% of gross profit from 80.5%.
- Floor plan interest expense increased 42.5% to $38.8 million, reflecting higher borrowings and the impact of interest-rate swaps. Other interest expense increased 6.0% to $46.9 million.
- Cash flow from continuing operations improved substantially, but investing cash outflow increased to $401.1 million due to acquisitions and higher capital expenditures.
- The company acquired or was awarded 34 franchises, including operations in Northern Ireland, Northern Italy and Wisconsin, and disposed of or classified as discontinued operations 26 franchises.
- Discontinued operations produced a $7.5 million net loss in 2012 versus $2.1 million of income in 2011.
Debt, Liquidity and Capital Allocation
- In August and September 2012, the company issued $550 million of 5.75% senior subordinated notes due 2022 and used proceeds to redeem all $375 million of 7.75% notes, repay credit-agreement borrowings and reduce certain floor plan borrowings.
- The 2012 refinancing generated a $17.8 million pretax debt-redemption charge, consisting primarily of a redemption premium and the write-off of deferred financing costs.
- The company redeemed or settled its remaining 3.5% convertible notes during 2012.
- At December 31, 2012, available borrowing capacity was $325 million under the U.S. credit agreement and £77.1 million, or approximately $125.3 million, under the U.K. credit agreement.
- Working capital was $79.5 million, including $43.8 million of cash. Management stated that existing resources, operating cash flow and available credit were expected to fund operations and commitments for at least the next twelve months.
- The company paid $41.5 million of dividends and repurchased 405,631 shares for $9.8 million during 2012. The quarterly dividend increased to $0.14 per share payable March 1, 2013.
- Contractual obligations totaled approximately $8.232 billion, including $2.125 billion of floor plan notes payable, $937.5 million of long-term debt, $4.833 billion of operating lease commitments and $322.6 million of scheduled interest payments.
Guidance, Outlook, Risks and Unusual Items
Management expected continued improvement in the U.S. automotive market and continued resilience in U.K. premium-brand sales during 2013. The outlook was based on vehicle demand, an aging vehicle population, lower consumer credit costs, new model introductions and improved inventory availability. No formal numerical company earnings guidance is provided in the filing.
- Results are sensitive to vehicle unit sales, consumer confidence, credit availability, interest rates, fuel prices, unemployment, foreign exchange rates and general economic conditions.
- Manufacturers control key aspects of dealership operations and may terminate or decline to renew franchise agreements. European operations generally lack the franchise-law protections available in the U.S.
- The business is highly leveraged through floor plan financing, variable-rate debt, long-term debt and substantial operating leases. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $2.2 million and floor plan interest expense by approximately $14.3 million.
- International operations expose reported results to currency movements; a 10% change in average exchange rates versus the U.S. dollar would have changed 2012 revenue by approximately $476 million.
- The company remains liable for approximately $194.6 million of lease payments if certain subtenants or purchasers fail to perform. It also has potential indemnification exposure related to PTL financing, including 9% of specified principal and interest obligations.
- Legal proceedings, environmental matters, self-insurance, cybersecurity, information-technology failures, manufacturer supply disruptions and regulatory changes could materially affect results, although no pending legal proceeding was considered reasonably expected to be material as of year-end.
- Goodwill and franchise-value testing resulted in no impairment charges in 2012. A review identified prior-period deferred-tax corrections, but management concluded the effect was not material.
Investor Verification Points
- Verify the sustainability of strong unit growth and whether declining new- and used-vehicle gross profit per unit continues.
- Assess the effect of higher floor plan balances, variable interest rates and the 2012 refinancing on future interest expense and leverage.
- Reconcile reported operating cash flow with changes in floor plan financing and inventory, including the company’s alternative cash-flow presentation.
- Review acquisition integration, franchise concentration and the performance of newly entered markets, including Northern Ireland, Northern Italy and Hertz rental operations.
- Evaluate the company’s $4.8 billion of lease commitments and approximately $194.6 million of contingent lease exposure.
- Monitor PTL distributions, the company’s indemnification obligations and the performance of other equity-method investments.
- Review manufacturer franchise renewal provisions, brand concentration and exposure to supply disruptions or changes in manufacturer policies.
- Confirm covenant compliance and available capacity under the U.S. and U.K. credit agreements, including restrictions on dividends, acquisitions and additional debt.