Penske Automotive Group, Inc. — Q1 2021 Form 10-Q Summary
Business context and reporting period
Quarter ended March 31, 2021; comparative period was the quarter ended March 31, 2020. Penske Automotive Group operates automotive and commercial truck dealerships in the United States, Canada, and Western Europe; distributes commercial vehicles, engines, and power systems in Australia and New Zealand; and owns a 28.9% equity-method interest in Penske Truck Leasing/Penske Transportation Solutions (PTS).
- At March 31, 2021, the company operated 304 retail automotive franchises, 25 Premier Truck Group locations, and 17 CarShop used-vehicle centers.
- Retail automotive represented 90.2% of consolidated revenue and 87.6% of gross profit.
- The filing states that U.K. showroom closures under COVID-19 shelter-in-place orders largely expired April 12, 2021.
Financial performance and key metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $5,773.8 million | $5,009.1 million | 15.3% |
| Gross profit | $913.2 million | $776.7 million | 17.6% |
| Operating income | $219.6 million | $106.4 million | 106.4% |
| Net income | $183.1 million | $51.5 million | 255.5% |
| Net income attributable to PAG stockholders | $182.5 million | $51.7 million | 253.0% |
| Diluted EPS | $2.26 | $0.64 | 251.6% |
| Net cash from continuing operating activities | $239.3 million | $211.9 million | 12.9% |
- Gross margin was approximately 15.8%, compared with 15.5% in the prior-year quarter. Operating margin was approximately 3.8%, compared with 2.1%; net margin attributable to PAG stockholders was approximately 3.2%, compared with 1.0%.
- Retail automotive revenue increased to $5,206.9 million from $4,416.6 million. New vehicle revenue increased 29.9%, used vehicle revenue increased 11.6%, and finance and insurance revenue increased 16.9%; service and parts revenue declined 2.0%.
- Retail commercial truck revenue declined 11.5% to $434.7 million, primarily because new truck unit sales fell 23.0%. Used truck revenue increased 47.1%.
- Commercial vehicle distribution revenue increased 30.8% to $132.2 million; reported growth benefited from favorable foreign currency movements.
- PTS and other equity-method earnings increased to $55.4 million from $14.5 million, including $53.7 million from PTS versus $13.6 million in the prior-year quarter.
- SG&A increased 3.5% to $664.3 million, but declined to 72.7% of gross profit from 82.6%, a 990-basis-point improvement. The company cited employee reductions, lower travel and entertainment costs, other cost reductions, and increased gross profit.
- Floor plan interest expense declined 46.3% to $9.5 million, and other interest expense declined 43.5% to $17.9 million.
Liquidity, debt, cash flow, and capital allocation
- Cash and cash equivalents were $94.6 million at March 31, 2021, compared with $49.5 million at December 31, 2020.
- Total current assets were $4,358.9 million and total current liabilities were $4,588.7 million. Inventories were $3,277.8 million, down from $3,425.6 million at year-end.
- Total long-term debt was $1,580.5 million, including $1,492.5 million net of the current portion. Floor plan notes payable totaled $3,021.6 million, including $1,334.7 million classified as non-trade.
- Debt included $543.6 million of 3.50% senior subordinated notes due 2025, $496.6 million of 5.50% notes due 2026, and $453.7 million of mortgage facilities. There were no outstanding U.S. or U.K. revolving-credit borrowings at quarter-end.
- Available borrowing capacity was $800.0 million under the U.S. credit agreement, £162.0 million under the U.K. credit agreement, and AU$49.5 million under the Australian working-capital facility.
- Operating cash flow was $239.3 million; investing cash flow was an outflow of $18.3 million, including $42.4 million of capital expenditures; financing cash flow was an outflow of $174.1 million.
- The company paid $34.6 million of dividends, or $0.43 per share, and made no share repurchases during the quarter. Remaining repurchase authorization was $170.6 million.
- Management stated that operating cash flow, distributions from joint ventures, existing cash, credit facilities, and floor plan financing should fund operations and current commitments for at least the next twelve months, subject to stated risks.
Material changes versus the prior comparable period
- Profitability improved substantially despite the continuing pandemic. Management attributed the improvement to cost reductions, stronger demand, higher vehicle gross profit per unit, lower inventory, and manufacturer production shortages.
- New vehicle gross profit per unit increased 26.7% and used vehicle gross profit per unit increased 32.9%. New vehicle gross profit margin rose to 8.5% from 7.4%; used vehicle margin rose to 6.1% from 5.3%.
- Retail automotive same-store new unit sales increased 18.8%, while same-store used unit sales declined 3.6%, primarily due to U.K. showroom closures.
- Foreign currency movements increased reported revenue by $201.6 million and gross profit by $29.5 million. Excluding those effects, revenue increased 11.2% and gross profit increased 13.8%.
- Net cash increased $45.1 million during the quarter, versus an increase of $403.8 million in Q1 2020, primarily because the prior-year period included substantially higher net financing inflows.
- On April 28, 2021, after quarter-end, the company amended its U.S. credit agreement, retaining $800.0 million of total revolving capacity and adding covenant flexibility.
- In April 2021, the company acquired Kansas City Freightliner, adding four full-service dealerships, four parts and service centers, and two collision centers to Premier Truck Group.
Guidance, outlook, risks, contingencies, and unusual items
- The filing does not provide formal earnings or revenue guidance. Management expects resilient performance in 2021 from PTS and commercial vehicle distribution and expects the North American heavy-duty truck market to improve.
- Automotive microchip shortages reduced global vehicle production and are expected to keep new-vehicle inventories below normal until component supply improves. Lower inventory supported pricing and gross profit per unit but could reduce future sales volumes if prolonged.
- COVID-19 remains a material risk, including renewed restrictions, supply-chain disruption, changes in customer demand, workforce constraints, technology disruption, and effects on liquidity and debt covenant compliance.
- Management expects four additional CarShop sites to open in 2021 and continues facility improvement and expansion programs.
- The company has substantial lease obligations: approximately $5.37 billion of undiscounted operating lease payments and $2.45 billion of recognized operating lease liabilities at March 31, 2021. The filing also describes total rent obligations of approximately $6.3 billion under broader assumptions.
- Variable-rate debt and floor plan financing create interest-rate exposure. A 100-basis-point change would affect annual other interest expense by approximately $2.1 million and annual floor plan interest expense by approximately $27.6 million, based on the filing’s assumptions.
- Many credit facilities and floor plan arrangements reference LIBOR; the company was evaluating the transition to alternative benchmarks and could not predict the effect on borrowing costs.
- The company reported $42.5 million of letters of credit and $21.9 million of surety bonds. It also has contingent obligations related to leases, subtenants, dealership repurchase commitments, and legal proceedings.
- No legal proceeding was considered reasonably likely to have a material adverse effect individually or in the aggregate, although unfavorable outcomes remain possible.
Most important facts for an investor to verify
- Whether higher vehicle gross profit per unit is sustainable after inventory levels and manufacturer production normalize.
- The duration and financial effect of automotive microchip shortages, vehicle availability constraints, and any renewed COVID-19 restrictions.
- PTS operating performance and cash distributions, which materially contributed to earnings and liquidity.
- Compliance with debt and lease covenants, availability under revolving and floor plan facilities, and the effect of LIBOR replacement.
- The scale and timing of capital expenditures, CarShop expansion, and the integration and contribution of the Kansas City Freightliner acquisition.
- Exposure to foreign exchange movements, interest-rate changes, franchise agreements, manufacturer concentration, lease obligations, and contingent liabilities.