Penske Automotive Group, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
Penske Automotive Group is a diversified international transportation services company operating automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe, plus commercial vehicle, engine, and power-systems distribution operations principally in Australia and New Zealand. The filing covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019. Results were materially affected by the COVID-19 pandemic, particularly during March.
- The company operated 317 retail automotive franchises and 25 Premier Truck Group locations at March 31, 2020.
- It held a 28.9% equity-method interest in Penske Truck Leasing/Penske Transportation Solutions.
- The company disposed of four U.K. automotive franchises during the quarter and completed no acquisitions.
Financial performance and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $5,009.1 million | $5,564.4 million | (10.0%) |
| Gross profit | $776.7 million | $851.5 million | (8.8%) |
| Operating income | $106.4 million | $158.7 million | (33.0%) |
| Income from continuing operations | $51.4 million | $99.1 million | (48.1%) |
| Net income attributable to PAG stockholders | $51.7 million | $100.2 million | (48.4%) |
| Diluted EPS | $0.64 | $1.19 | (46.2%) |
| Cash dividends per share | $0.42 | $0.38 | Increase |
- Gross margin was approximately 15.5%, compared with 15.3% in the prior-year quarter. Operating margin was approximately 2.1%, compared with 2.9%; net income attributable to PAG stockholders represented approximately 1.0% of revenue, compared with 1.8%.
- Retail automotive revenue declined 13.3% to $4,416.6 million. New vehicle revenue declined 16.4%, used vehicle revenue declined 12.5%, finance and insurance revenue declined 9.8%, and service and parts revenue declined 8.3%.
- Retail commercial truck revenue increased 47.9% to $491.4 million, primarily reflecting the 2019 Warner Trucks acquisition. Same-store new truck revenue declined 0.7%, and same-store new truck gross margin fell to 3.7% from 4.9%.
- Commercial vehicle distribution and other revenue declined 28.2% to $101.1 million, while gross profit declined 16.1% to $29.8 million.
- Equity in earnings of affiliates declined 45.9% to $14.5 million, including PTS earnings of $13.6 million versus $25.8 million. PTS reported revenue of $2.194 billion and net income of $47 million, compared with $2.135 billion and $89 million, respectively.
- SG&A declined 3.7% to $641.8 million, but SG&A as a percentage of gross profit increased to 82.6% from 78.3%.
Cash flow, balance sheet, debt, and liquidity
- Cash flow from continuing operating activities was $211.9 million, compared with $91.4 million in Q1 2019. Including non-trade floor plan financing, operating cash flow was $223.6 million versus $151.5 million.
- Investing cash flow was an outflow of $16.1 million, including $25.7 million of capital expenditures and $10.3 million of dealership-sale proceeds.
- Financing cash flow was $209.9 million, reflecting net borrowings, $29.4 million of share repurchases, $34.2 million of dividends, and $21.1 million of contingent-consideration payments.
- Cash and cash equivalents increased to $431.9 million from $28.1 million at December 31, 2019.
- Total long-term debt was $2.621 billion, including $350.0 million drawn on the U.S. revolving credit line, $124.2 million equivalent under the U.K. revolving facility and overdraft, and $299.5 million of 3.75% senior subordinated notes due August 15, 2020.
- Floor plan notes payable totaled $3.889 billion, consisting of $2.283 billion of trade floor plan notes and $1.606 billion of non-trade floor plan notes.
- At March 31, 2020, management reported $431.9 million of cash, $350.0 million of U.S. revolving availability, £61.9 million of U.K. availability, and AU$30.0 million of Australian working-capital availability. Management also reported access to approximately $450 million of potentially financeable real estate.
- At April 30, 2020, reported liquidity was $221 million of cash and $700 million of revolving-credit availability.
- Total operating lease liabilities were $2.322 billion, with undiscounted future lease payments of $5.272 billion.
Material changes versus the prior comparable period
- COVID-19 drove significant March deterioration: same-store new and used automotive retail sales declined 40.2%; automotive service and parts declined 24.5%; and commercial vehicle service and parts declined 6.6%.
- Q1 same-store automotive new unit sales declined 17.5% and used unit sales declined 12.3%. New vehicle gross margin fell to 7.4% from 7.7%, while used vehicle gross margin increased to 5.3% from 5.0%.
- Foreign-currency movements reduced reported revenue by $49.9 million and gross profit by $7.8 million; accumulated other comprehensive loss increased to $299.5 million from $202.8 million, principally due to a $92.9 million foreign-currency translation loss.
- North American Class 6–8 truck markets declined approximately 25% to 26%, but PAG’s consolidated truck results benefited from the Warner Trucks acquisition.
- Net debt increased as the company drew on revolving facilities. The U.S. credit agreement balance increased to $350.0 million from $45.0 million at December 31, 2019.
- The company repurchased 890,195 shares for $29.4 million at an average price of $33.06 per share. The filing states that $170.6 million remained authorized, although the monthly repurchase table indicates no remaining authorization after the March repurchase.
Guidance, outlook, management commentary, risks, and unusual items
- The company did not provide specific full-year earnings or revenue guidance. Management stated that the duration, scope, and severity of COVID-19 effects could not be predicted with certainty.
- Most automotive and some commercial-vehicle showrooms were closed or restricted; service, parts, and collision operations generally remained open. Online, appointment-based, curbside, and home-delivery channels were used where permitted.
- The company instituted a hiring freeze, reduced advertising and other expenses, postponed an estimated $150 million of capital expenditures, furloughed more than 15,000 employees, and implemented executive and director compensation reductions.
- Management expected to reopen substantially all U.K. service and parts operations on May 11, 2020, but could not predict when U.K. sales showrooms would reopen.
- Management expected to fund the August 15, 2020 maturity of the $300 million notes with availability under the U.S. Credit Agreement and stated that it expected to remain in compliance with debt and lease covenants for the next twelve months.
- In April 2020, lenders deferred certain U.S. Credit Agreement interest payments for April through June until December 2020. PAG also entered into a five-year interest-rate swap fixing the LIBOR component of $300 million of U.S. floating-rate floor-plan debt at 0.5875% through April 2025.
- Key risks include prolonged pandemic-related closures and demand weakness, vehicle and parts supply disruptions, reduced PTS distributions, covenant compliance, refinancing risk, variable interest rates, foreign-currency volatility, Brexit, manufacturer and franchise dependence, technology disruptions, litigation, and the ability to maintain dividends.
- Management stated that no legal proceedings were reasonably expected to have a material adverse effect, but adverse outcomes remain possible.
Important facts for investors to verify
- Whether showroom reopenings and vehicle demand recovered after March 31, 2020, particularly in the U.S. and U.K.
- Actual repayment or refinancing of the $300 million notes due August 15, 2020, and subsequent borrowing availability.
- Compliance with debt, lease, and other financial covenants under continued COVID-19 stress.
- Whether the quarterly dividend and share-repurchase program were maintained, suspended, or modified.
- Changes in used-vehicle values, truck margins, inventory levels, and floor-plan borrowings.
- PTS operating performance, cash distributions, and the effect of its workforce reductions on PAG’s equity earnings.
- The resolution of the apparent discrepancy between the stated $170.6 million remaining repurchase authorization and the March repurchase table showing no remaining authorization.