Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2021, compared with the same periods in 2020. PAG operates automotive and commercial truck dealerships in the U.S., U.K., Canada, Germany, and Italy; distributes commercial vehicles, engines, and power systems primarily in Australia and New Zealand; and owns 28.9% of Penske Transportation Solutions (PTS).
- As of June 30, 2021, PAG operated 305 retail automotive dealerships, 35 Premier Truck Group locations, and multiple Penske Australia distribution and service locations.
- Six-month revenue mix: retail automotive $11.4 billion, retail commercial truck $1.1 billion, and commercial vehicle distribution $296.8 million.
- PTS is accounted for under the equity method and contributed $156.2 million of equity earnings during the first six months of 2021.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $7,987.5 million | $3,651.1 million | $12,761.3 million | $8,660.2 million |
| Gross profit | $1,182.7 million | $552.9 million | $2,095.9 million | $1,329.6 million |
| Operating income | $402.7 million | $71.4 million | $622.3 million | $177.8 million |
| Income from continuing operations | $340.3 million | $44.7 million | $523.4 million | $96.1 million |
| Net income attributable to PAG stockholders | $338.9 million | $45.1 million | $521.4 million | $96.8 million |
| Diluted EPS | $4.20 | $0.56 | $6.46 | $1.20 |
| Operating cash flow | Not separately provided | Not separately provided | $916.7 million | $784.4 million |
- Q2 revenue increased 91.4% and gross profit increased 113.9%; six-month revenue increased 47.4% and gross profit increased 57.6%.
- Approximate gross margins were 16.9% in Q2 2021 versus 15.1% in Q2 2020, and 16.4% for the first six months of 2021 versus 15.4% in the prior-year period.
- Approximate operating margins were 5.8% in Q2 2021 versus 2.0% in Q2 2020, and 4.9% for the first six months versus 2.1%.
- Approximate net margins attributable to PAG stockholders were 4.9% in Q2 2021 versus 1.2% in Q2 2020, and 4.1% for the first six months versus 1.1%.
- Q2 included a $17.0 million pretax debt redemption charge, or $12.6 million after tax and approximately $0.16 per share. The company also recorded an $8.8 million tax expense, or approximately $0.11 per share, from the U.K. corporate tax-rate change.
- Cash and cash equivalents were $165.2 million at June 30, 2021, compared with $49.5 million at December 31, 2020.
- Total assets were $13.3 billion and total equity was $3.8 billion at June 30, 2021. Inventories declined to $2.9 billion from $3.4 billion at year-end 2020, primarily reflecting lower new-vehicle inventory.
Liquidity, debt, and capital allocation
- Total long-term debt was $1.5 billion at June 30, 2021, including $544.0 million of 3.50% notes due 2025, $493.9 million of 3.75% notes due 2029, $398.9 million of mortgage facilities, and other debt.
- PAG issued $500.0 million of 3.75% senior subordinated notes due 2029 and used the proceeds to redeem its $500.0 million of 5.50% notes due 2026. The refinancing lowered the stated coupon and extended maturity.
- No borrowings were outstanding under the U.S. or U.K. revolving credit agreements at June 30, 2021. Reported available borrowing capacity included $800.0 million under the U.S. facility, £162.0 million under the U.K. facility, and AU$40.0 million under the Australian working-capital facility.
- Operating cash flow was $916.7 million; investing cash use was $331.6 million, including $278.0 million for acquisitions; and financing cash use was $470.1 million.
- PAG paid $70.2 million of dividends and repurchased $28.1 million of common stock during the first six months. The board later increased management’s repurchase authority to $250.0 million. A $0.45-per-share dividend was announced for payment September 1, 2021.
- The company stated that cash flow, investment distributions, credit facilities, and floor-plan financing should fund operations and current commitments for at least the next twelve months, subject to economic conditions, acquisitions, repurchases, covenant compliance, and financing availability.
Material changes versus the prior comparable period
- Results benefited from recovery from the early-pandemic 2020 comparison period, stronger consumer and commercial demand, cost reductions, favorable foreign-currency translation, and substantially higher vehicle gross profit per unit.
- Retail automotive same-store Q2 new-vehicle unit sales increased 91.5%, while same-store used-vehicle unit sales increased 74.7%. Average gross profit per new vehicle rose 38.2% and per used vehicle rose 98.3%.
- For the first six months, retail automotive new-vehicle units increased 49.0% on a same-store basis and used-vehicle units increased 28.0%. Service and parts revenue increased 22.2%, with gross margin rising to 61.2% from 58.8%.
- Retail commercial truck performance improved, including higher unit volumes and substantially higher used-truck margins. The KCFL acquisition added four full-service dealerships, four parts and service centers, and two collision centers.
- Equity in earnings of affiliates rose to $161.0 million from $44.4 million for the first six months, primarily due to stronger PTS results and higher gains on used-truck remarketing.
- SG&A increased in absolute dollars but declined to 67.5% of gross profit from 82.4% for the first six months, reflecting cost reductions and operating leverage.
Guidance, outlook, commentary, and risks
- Management expected resilient performance in 2021 across PTS, commercial vehicle distribution, and commercial truck markets. It expected to open four additional CarShop used-vehicle supercenters by year-end 2021.
- Global automotive microchip and component shortages reduced vehicle production and pushed PAG’s new-vehicle supply to 26 days versus 50 days at December 31, 2020. Used-vehicle supply was 38 days versus 48 days at year-end.
- Management stated that constrained new-vehicle supply supported higher new- and used-vehicle margins, but warned that prolonged shortages could reduce new-vehicle sales volumes and adversely affect results.
- COVID-19 restrictions, particularly in the U.K., were easing during the period, but renewed restrictions, supply-chain disruption, workforce constraints, and changing customer demand remained risks.
- Other principal risks include vehicle-manufacturer concentration and franchise dependence, potential adoption of agency sales models in the U.K. and Europe, economic cyclicality, interest-rate and foreign-exchange exposure, debt and lease covenants, PTS performance, cybersecurity, regulatory changes, and litigation.
- PAG’s facilities and floor-plan arrangements largely use variable rates tied to LIBOR or other benchmarks. The company was evaluating the transition from LIBOR to alternative rates and could not predict the effect on its cost of capital.
- As of June 30, 2021, the company reported compliance with debt and operating-lease covenants. It had $55.9 million of letters of credit and $21.8 million of surety bonds outstanding.
- No legal proceeding was identified as reasonably expected to have a material adverse effect, although unfavorable outcomes remain possible. Disclosure controls and procedures were assessed as effective.
Most important facts for investors to verify
- Whether unusually high vehicle margins and PTS earnings remain sustainable after inventory availability and supply-chain conditions normalize.
- The duration and financial effect of the automotive semiconductor shortage, including its impact on unit volumes, used-vehicle pricing, and floor-plan borrowings.
- The contribution and integration costs of KCFL and other acquisitions, as well as the planned CarShop expansion.
- Actual liquidity, covenant headroom, and availability under revolving and floor-plan facilities if economic conditions deteriorate.
- The effects of LIBOR replacement, rising interest rates, and foreign-currency movements on interest expense, cash flow, and reported earnings.
- The potential revenue and margin implications of agency distribution models and other manufacturer changes to franchise arrangements.
- The reliance on PTS distributions and equity earnings, including PTS utilization, used-truck values, customer health, and access to capital.