Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2011, compared with the three months ended March 31, 2010. Penske operated 326 retail franchises at quarter-end, including 172 in the U.S. and 154 primarily in the U.K. The Company sells new and used vehicles, finance and insurance products, and service and parts, and owns a 9.0% interest in Penske Truck Leasing Co., L.P.
Financial Metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenue | $2.857 billion | $2.477 billion | 15.3% increase |
| Gross profit | $454.3 million | $409.5 million | 10.9% increase |
| Gross margin | 15.9% | 16.5% | Down approximately 0.6 percentage points |
| Operating income | $72.5 million | $62.0 million | 16.9% increase |
| Operating margin | 2.5% | 2.5% | Broadly stable |
| Income from continuing operations | $36.5 million | $24.0 million | 52.1% increase |
| Net income attributable to common stockholders | $33.9 million | $20.4 million | 66.7% increase |
| Diluted EPS | $0.37 | $0.22 | Increase of $0.15 |
| Cash flow from continuing operations | $9.0 million | $34.8 million | Decrease of $25.8 million |
Revenue growth reflected increases in new vehicle revenue of 16.5%, used vehicle revenue of 18.3%, finance and insurance revenue of 14.5%, and service and parts revenue of 6.8%. Retail gross margin declined to 16.8% from 17.5%, primarily because vehicle sales represented a greater share of revenue. Service and parts gross margin improved to 57.0% from 56.4%.
At March 31, 2011, cash and cash equivalents were $35.2 million, working capital was $96.4 million, and total assets were $4.220 billion. Inventory was $1.536 billion. Total equity was $1.099 billion.
Total long-term debt was $796.2 million, including $375.0 million of 7.75% senior subordinated notes, $150.6 million of convertible notes, $134.0 million under the U.S. term loan, $76.4 million of U.K. credit agreement borrowings, and $50.6 million of mortgage debt. Floor plan notes payable totaled $1.515 billion, including $532.7 million classified as non-trade.
Continuing investing activities used $31.6 million, including $21.1 million for equipment and improvements and $14.0 million for dealership acquisitions. Continuing financing activities provided $38.9 million, including $29.7 million of net non-trade floor plan borrowings and $7.6 million of other long-term debt borrowings. Cash increased by $17.7 million to $35.2 million.
Material Changes Versus the Prior Comparable Period
- New retail unit sales increased 10.8%, while same-store new unit sales increased 7.3%.
- Used retail unit sales increased 18.1%, while same-store used unit sales increased 13.5%.
- SG&A expense increased 10.2% to $369.5 million, although SG&A as a percentage of gross profit improved from 81.9% to 81.3%.
- Floor plan interest expense decreased 13.6% to $7.2 million, and other interest expense decreased 10.4% to $11.4 million.
- Q1 2010 included a $0.6 million pre-tax gain from repurchasing convertible notes; no comparable gain occurred in Q1 2011.
- Cash flow from continuing operations declined substantially, primarily reflecting working-capital changes, including increases in accounts receivable and inventory and lower accounts payable and accrued expense contributions.
- The Company acquired three franchises and disposed of two franchises during the quarter.
- Foreign currency translation produced a $16.9 million comprehensive-income benefit in Q1 2011, compared with a $27.7 million loss in Q1 2010.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that automotive markets and customer traffic improved during 2010 and Q1 2011, but U.S. automotive sales remained low relative to the prior decade. Management expected continued market improvement, while noting uncertainty regarding its pace.
The March 2011 earthquake and tsunami in Japan caused vehicle-production and supply-chain disruptions. The Company expected reduced shipments from Japanese manufacturers for certain periods in 2011, which could affect vehicle availability, sales, pricing, and profitability. Management also noted potential weakness in U.K. and German automotive markets, although premium and luxury brands could be more resilient.
Smart USA was classified as a discontinued operation because the Company expected to transition smart fortwo distribution rights to Mercedes-Benz USA in June 2011. Completion was subject to binding documentation, regulatory approvals, and other conditions outside the Company’s control. Discontinued operations generated a $2.5 million after-tax loss in Q1 2011.
Management believed operating cash flow, dividends from joint ventures, credit facilities, and floor plan financing would fund operations and commitments for at least the next twelve months. The Company had $300.0 million of U.S. revolving availability and £55.2 million, or approximately $88.6 million, of U.K. availability at March 31, 2011. All reported credit-agreement and lease covenants were in compliance at quarter-end.
After quarter-end, the Company repurchased $83.3 million of convertible notes at par using working capital and U.S. revolving borrowings. Convertible note holders had tendered $87.3 million of the $150.6 million outstanding as of April 1, leaving $63.3 million outstanding. The quarterly cash dividend had been suspended since February 2009.
Other risks include variable-rate debt and floor plan financing, foreign currency exposure, dependence on manufacturers and vehicle brands, economic cyclicality, acquisition and integration risk, lease and debt covenant compliance, litigation, information-technology dependence, related-party conflicts, and potential obligations associated with sold or subleased properties. No legal proceeding was expected to have a material adverse effect, although outcomes could not be predicted with certainty.
Important Facts for Investors to Verify
- Verify the completion, funding, and accounting consequences of the April 2011 convertible-note repurchase and the remaining $63.3 million balance.
- Monitor the transition of smart USA distribution rights to Mercedes-Benz USA and any related purchase commitments or losses.
- Assess the effect of Japan-related supply disruptions on new-vehicle availability, unit volumes, gross margins, and manufacturer incentives.
- Reconcile reported operating cash flow with the Company’s supplemental measure that treats all floor plan borrowings as operating cash flow: $46.3 million in Q1 2011 versus $97.4 million in Q1 2010.
- Track vehicle inventory of $1.536 billion against $1.515 billion of floor plan notes payable and evaluate exposure to interest-rate changes.
- Review liquidity after the post-quarter-end debt repurchase, including remaining U.S. and U.K. borrowing capacity and covenant headroom.
- Evaluate foreign exchange effects, as management estimated that a 10% change in average exchange rates would have changed Q1 2011 revenue by approximately $109.9 million.