Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly period ended September 30, 2011; filed November 7, 2011. Penske Automotive Group operated 327 retail franchises, including 172 in the U.S. and 155 primarily in the U.K. The company sells new and used vehicles and provides finance and insurance, service and parts, fleet and wholesale services. It also held a 9.0% interest in Penske Truck Leasing.
The company acquired seven franchises and disposed of seven during the first nine months of 2011. The smart USA distribution operation was sold to Daimler Vehicle Innovations for final aggregate cash consideration of $44.6 million and is presented as a discontinued operation.
Financial performance and key metrics
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Total revenue | $2,951.0 million | $2,669.8 million | $8,623.7 million | $7,697.8 million |
| Gross profit | $467.1 million | $418.2 million | $1,374.1 million | $1,233.4 million |
| Operating income | $79.1 million | $67.2 million | $225.7 million | $195.1 million |
| Income from continuing operations | $57.0 million | $35.1 million | $135.8 million | $90.6 million |
| Net income attributable to common stockholders | $55.7 million | $30.0 million | $129.2 million | $79.8 million |
| Diluted EPS | $0.61 | $0.33 | $1.40 | $0.87 |
Revenue increased 10.5% in the quarter and 12.0% for the nine months. Gross profit increased 11.7% and 11.4%, respectively. Operating margins were approximately 2.7% in Q3 and 2.6% for the nine months, compared with approximately 2.5% in both prior-year periods. Retail gross margin was 16.7% in Q3 versus 16.6% and 16.8% for the nine months versus 17.0%.
- Q3 new vehicle revenue increased 7.2%, while used vehicle revenue increased 18.6%; finance and insurance revenue increased 12.4%, and service and parts revenue increased 8.6%.
- For the nine months, new vehicle revenue increased 10.5%, used vehicle revenue 18.9%, finance and insurance revenue 13.1%, and service and parts revenue 7.7%.
- Q3 same-store retail revenue increased 6.4%; same-store retail unit volume increased 3.0%. For the nine months, same-store revenue increased 8.8% and unit volume increased 5.4%.
- SG&A increased 10.7% in Q3 and 10.8% for the nine months, but declined as a percentage of gross profit to 80.4% and 80.9%, respectively.
- Floor-plan interest expense declined 20.3% in Q3 and 15.2% for the nine months; other interest expense declined 7.7% and 11.3%, respectively.
Cash flow, liquidity, debt and balance sheet
- Cash from continuing operating activities was $175.8 million for the nine months, compared with $118.7 million in 2010. Including non-trade floor-plan borrowings as operating cash flow, the company reported $281.9 million versus $169.4 million.
- Continuing investing cash use was $309.5 million, including $232.1 million for dealership acquisitions and $80.3 million for capital expenditures.
- Continuing financing activities provided $116.2 million, including $120.0 million of net U.S. revolving borrowings and $106.1 million of non-trade floor-plan borrowings, partly offset by $87.3 million of convertible-note repurchases, $44.3 million of share repurchases and $13.9 million of dividends.
- Cash and cash equivalents declined to $7.7 million at September 30, 2011 from $17.8 million at December 31, 2010.
- Total assets were $4.30 billion and total equity was $1.11 billion at September 30, 2011. Inventory was $1.48 billion, including $949.4 million of new vehicles and $453.2 million of used vehicles.
- Total long-term debt was $851.6 million, including $375.0 million of 7.75% senior subordinated notes, $134.0 million of U.S. term debt, $120.0 million of U.S. revolver borrowings, $67.0 million of U.K. revolver borrowings, $77.9 million of mortgages and $63.3 million of convertible notes.
- Available borrowing capacity was approximately $233.1 million under the U.S. credit agreement and £54.3 million, or $84.6 million, under the U.K. credit agreement.
- The U.S. credit agreement was extended through September 30, 2014, revolving availability was increased to $375.0 million, and the collateralized revolving borrowing rate was reduced to LIBOR plus 2.50%. The company reported compliance with all credit and lease covenants.
Material changes, outlook and unusual items
- Profit growth benefited from higher same-store sales, increased used-vehicle volume, improved new-vehicle gross profit per unit, acquisitions and stronger equity earnings from affiliates, including PTL.
- Q3 and nine-month 2011 results included a net $11.0 million tax benefit, or approximately $0.12 per share, from resolving U.K. tax items, partially offset by a $6.0 million reduction in U.K. deferred tax assets. This benefit is non-recurring in nature and materially affected comparability.
- Prior-year periods included pre-tax gains on convertible-note repurchases of $0.6 million in Q3 and $1.6 million for the nine months. No comparable gain was recorded in 2011.
- Discontinued operations generated after-tax losses of $1.0 million in Q3 and $5.7 million for the nine months, versus losses of $4.8 million and $10.3 million, respectively, in 2010.
- Management expected continued recovery in the U.S. automotive market but noted uncertainty, low sales levels relative to the prior decade and adverse effects from the March 2011 Japan earthquake and tsunami on vehicle availability.
- Key risks include economic and consumer-demand cycles, vehicle and parts availability, manufacturer dependence, interest-rate and foreign-exchange exposure, acquisition integration, debt and floor-plan financing availability, covenant compliance, legal proceedings and performance of PTL.
- Forward guidance was qualitative; the filing did not provide a specific earnings or revenue forecast. Management stated that existing resources, operating cash flow, joint-venture dividends and credit and floor-plan facilities should fund operations and commitments for at least the next twelve months, subject to acquisition and refinancing needs.
- Interest-rate swaps fixed the LIBOR component of $400.0 million of floor-plan debt beginning January 2012 through December 2014 at a blended rate of 1.99%. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $2.1 million.
Most important facts for investors to verify
- Whether the $11.0 million U.K. tax benefit is excluded when assessing recurring earnings and EPS performance.
- The sustainability of used-vehicle volume growth and the effect of vehicle availability on new-vehicle sales and margins.
- Integration and returns from the seven acquired franchises and the related $232.1 million acquisition cash outlay.
- Debt maturity, refinancing and covenant risks, including the $375.0 million notes due 2016 and remaining convertible notes subject to future purchase rights.
- Liquidity after acquisitions, capital expenditures, share repurchases, dividends and vehicle inventory financing requirements.
- Exposure to variable interest rates, foreign currencies, manufacturer incentives and potential disruptions in international operations.
- Potential obligations under leases, subleases, letters of credit, surety bonds and guarantees for properties sold to third parties.
- The filing’s statement that no pending legal matter was reasonably expected to be materially adverse, while noting that unfavorable outcomes could still affect results or liquidity.