Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2022. Penske Automotive Group is a diversified international transportation services company operating automotive dealerships, commercial truck dealerships, commercial vehicle distribution and power-systems businesses, and a 28.9% equity-method investment in Penske Transportation Solutions. At September 30, 2022, the company operated 340 franchised automotive dealerships, 21 used-vehicle dealerships and 39 Premier Truck Group locations.
Financial performance and key metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $6,920.7 million | $6,497.3 million | $20,803.0 million | $19,258.6 million |
| Gross profit | $1,186.9 million | $1,165.7 million | $3,655.6 million | $3,261.6 million |
| Operating income | $362.7 million | $377.8 million | $1,152.3 million | $1,000.1 million |
| Net income attributable to PAG | $340.1 million | $355.1 million | $1,082.0 million | $876.5 million |
| Diluted EPS | $4.61 | $4.47 | $14.31 | $10.92 |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $1,208.2 million | $1,330.4 million |
- Q3 revenue increased 6.5%; nine-month revenue increased 8.0%.
- Q3 gross profit increased 1.8%, while nine-month gross profit increased 12.1%. Gross margin was approximately 17.2% in Q3 and 17.6% for the nine-month period.
- Q3 operating income declined 4.0%, producing an operating margin of approximately 5.2%. Nine-month operating income increased 15.2%, with an operating margin of approximately 5.5%.
- Q3 net income attributable to PAG declined 4.2%, while nine-month net income increased 23.4%. Q3 diluted EPS increased despite lower earnings because weighted-average diluted shares declined to 73.8 million from 79.5 million.
- Equity in earnings of affiliates increased to $136.2 million in Q3 and $393.8 million for nine months, including $390.6 million of nine-month earnings from Penske Transportation Solutions versus $274.5 million in the prior-year period.
- Q3 floor-plan interest expense increased 130.0% to $13.8 million; nine-month expense increased 29.5% to $30.3 million, primarily due to higher rates and greater balances.
- At September 30, 2022, cash and cash equivalents were $92.3 million. Total debt, including current maturities, was $1,637.9 million, and floor-plan notes payable totaled $2,596.2 million.
- Available borrowing capacity included $800.0 million under the U.S. credit agreement, $180.9 million under the U.K. agreement, $26.2 million under the Australian working-capital facility and $66.8 million under the revolving mortgage facility.
- Capital expenditures were $195.7 million and acquisitions used $393.4 million during the first nine months. The company repurchased $584.8 million of common stock and paid $113.6 million in dividends.
Material changes versus the prior comparable period
- Retail automotive revenue increased 4.4% in Q3 and 4.4% for nine months, but results reflected lower same-store unit volumes. Nine-month same-store new-vehicle units declined 15.9% and used-vehicle units declined 5.0%.
- Automotive new-vehicle profitability improved substantially because constrained inventory supported higher selling prices and gross profit per unit. Nine-month new-vehicle gross profit increased 23.5%, while gross margin expanded to 12.6% from 9.9%.
- Used-vehicle profitability weakened. Nine-month used-vehicle gross profit declined 11.0%, average gross profit per unit declined 10.1% and gross margin fell to 6.3% from 7.7%.
- Retail commercial truck revenue increased 45.2% in Q3 and 45.2% for nine months, supported by acquisitions, higher new-truck volumes and pricing. However, nine-month used-truck gross margin fell to 6.9% from 16.9%.
- Service and parts revenue increased 11.7% in automotive and 44.6% in commercial trucks for the nine-month period, supported by acquisitions and customers retaining older vehicles amid constrained new-vehicle supply.
- SG&A increased 10.9% for nine months, primarily from acquisitions and inflationary personnel, rent and other costs. SG&A as a percentage of gross profit improved to 65.9% from 66.6%.
- Foreign-currency movements reduced nine-month revenue by $629.2 million, gross profit by $87.4 million and continuing-operations EPS by approximately $0.30.
- The company acquired 19 retail automotive franchises and TEAM Truck Centres during the first nine months of 2022. It also transitioned to 100% ownership of a prior Japanese joint venture, affecting comparability of equity earnings.
- Penske Transportation Solutions adopted ASC 842 on January 1, 2022, resulting in a $121.6 million after-tax reduction to PAG retained earnings.
Guidance, outlook, risks and unusual items
The filing does not provide formal numerical earnings or revenue guidance. Management expects resilient performance from Penske Transportation Solutions through the remainder of 2022, citing strong demand and profitability in commercial rental trucks, full-service leasing and used-truck remarketing. Management expects vehicle and commercial-truck inventories and parts disruptions to remain constrained until component supply improves. A recovery in supply could increase volumes but reduce new- and used-vehicle gross profit per unit.
- Principal risks include supply-chain disruptions, semiconductor and component shortages, the war in Ukraine, inflation and vehicle affordability, higher interest rates, foreign-currency volatility, economic cyclicality and reduced consumer demand.
- The U.K. Mercedes-Benz dealerships are expected to transition to an agency model beginning in 2023. The model is expected to reduce inventory ownership and change revenue economics for new vehicles; its broader effect remains uncertain.
- Electric-vehicle adoption and proposed emissions regulations may create new service opportunities but could reduce maintenance demand and alter dealership economics.
- The company has approximately $5.2 billion of undiscounted operating-lease obligations and is subject to lease financial-ratio requirements.
- The company reported no legal proceedings reasonably expected to have a material adverse effect, but unfavorable litigation outcomes remain possible. It had $27.6 million of letters of credit and $21.5 million of surety bonds outstanding.
- Management stated that liquidity should be sufficient for existing operations and commitments for at least the next twelve months, subject to risks including acquisitions, repurchases, refinancing needs, covenant compliance and availability of floor-plan financing.
- The company was in compliance with its credit and lease covenants at September 30, 2022. A 100-basis-point rate change would have affected annual other interest expense by approximately $1.4 million and annual floor-plan interest expense by approximately $20.1 million based on stated exposures.
Important facts for investors to verify
- Whether constrained new-vehicle supply continues to support gross profit per unit or reverses as inventory normalizes.
- The sustainability of used-vehicle margins, which deteriorated materially during the period.
- The contribution, cash distributions and leverage implications of Penske Transportation Solutions and other equity-method investments.
- Foreign-exchange effects, particularly the impact of the British pound and other international currencies on reported revenue, earnings and equity.
- The financial and reporting impact of the 2023 U.K. Mercedes-Benz agency-model transition.
- Interest-rate exposure, floor-plan financing availability and compliance with credit and lease covenants.
- Capital allocation following $584.8 million of share repurchases, $393.4 million of acquisitions and the announced $0.57 per-share dividend payable December 1, 2022.