Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2018; comparative period is the three months ended March 31, 2017. PAG 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 holds a 28.9% equity-method interest in Penske Truck Leasing. At quarter-end, PAG operated 342 retail automotive franchises, 20 Premier Truck Group locations and 14 stand-alone used-vehicle dealerships.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $5,746.9 million | $5,081.1 million | 13.1% |
| Gross profit | $864.4 million | $774.3 million | 11.6% |
| Gross margin | 15.0% | 15.2% | Down approximately 20 bps |
| Operating income | $175.7 million | $150.2 million | 17.0% |
| Operating margin | 3.1% | 3.0% | Up approximately 10 bps |
| Income from continuing operations | $107.7 million | $83.6 million | 28.8% |
| Net income attributable to PAG stockholders | $108.1 million | $82.6 million | 30.8% |
| Diluted EPS | $1.26 | $0.96 | 31.3% |
| Cash flow from continuing operations | $174.8 million | $198.6 million | Down $23.8 million |
| Capital expenditures | $64.7 million | $36.9 million | Up $27.8 million |
| Cash used for acquisitions | $156.5 million | $314.2 million | Down $157.7 million |
Retail automotive generated $5,296.0 million of revenue, or 92.2% of consolidated revenue, and $106.6 million of segment income. Retail commercial truck revenue was $292.4 million, with $12.1 million of segment income. Commercial vehicle distribution and other revenue was $158.5 million, with $9.6 million of segment income. Equity in earnings of affiliates increased to $17.3 million from $13.2 million, primarily due to the larger PTL ownership interest.
Cash and cash equivalents were $52.8 million at March 31, 2018, compared with $45.7 million at December 31, 2017. Working capital was $26.6 million. Available borrowing capacity was $572.0 million under the U.S. credit agreement, $68.7 million under the U.K. credit agreement and $38.0 million under the Australian working capital facility.
Total long-term debt was $2,221.2 million, including current maturities of $84.3 million. Floor plan notes payable totaled $3,769.4 million, consisting of $2,355.6 million of trade floor plan debt and $1,413.8 million of non-trade floor plan debt. PAG was in compliance with its debt and lease covenants at quarter-end.
Material changes versus the prior comparable period
- Revenue increased 13.1%, driven by same-store growth, acquisitions, favorable foreign currency translation and strong commercial truck activity.
- Excluding favorable foreign currency effects, revenue and gross profit increased 7.3% and 6.5%, respectively.
- Retail automotive new-vehicle units declined 4.7%, but revenue per unit increased 11.3%. Same-store new-vehicle units declined 1.6%.
- Retail automotive used-vehicle units increased 17.6%, including acquisitions; same-store used units increased 2.5%.
- Retail automotive finance and insurance revenue increased 17.0%, and service and parts revenue increased 8.9%.
- Retail commercial truck new-unit sales increased 46.9%, while used-unit sales increased 18.4%.
- Penske Power Systems revenue increased 111.8%, primarily from project timing, new orders and stronger mining, military, marine, engine and parts activity. PCV Australia revenue decreased 11.3%, although gross profit increased 28.4%.
- SG&A increased 10.2% to $663.1 million, but declined to 76.7% of gross profit from 77.7%. Floor plan interest increased 38.0% and other interest expense increased 19.2%.
- The effective tax rate decreased to 25.4% from 33.0%, primarily reflecting the U.S. Tax Cuts and Jobs Act. No additional adjustment to the provisional tax accounting was recorded in the quarter.
- PAG adopted ASC 606 using the modified retrospective method, increasing retained earnings by approximately $6.6 million at January 1, 2018. The reported Q1 net income benefit was approximately $0.4 million.
- PAG acquired The Car People in the U.K. and four Italian automotive franchises, disposed of five retail automotive franchises, and repurchased 1,133,016 common shares for $50.0 million.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical earnings or revenue guidance. Management expects continued strength in U.S. used vehicles, North American Class 8 truck sales, Australian and New Zealand commercial vehicle markets, PPS orders and PTL demand. Management believes the U.S. new-light-vehicle market has plateaued, while U.K. registrations may remain pressured by diesel-related tax uncertainty, residual-value concerns and Brexit-related economic and political uncertainty.
Management stated that operating cash flow, joint-venture distributions and existing credit and floor plan facilities should fund operations and current commitments for at least the next twelve months. Significant acquisitions, repurchases or debt refinancing could require additional capital, which may not be available on acceptable terms.
Key risks include economic cycles, interest-rate increases, foreign exchange volatility, Brexit, vehicle demand and inventory availability, manufacturer and franchise relationships, recalls and supply-chain disruptions, acquisition integration, leverage and covenant compliance, lease obligations, litigation, technology and data-security risks, regulatory changes, and the performance and distributions of PTL.
A 100-basis-point change in interest rates would affect annual other interest expense by approximately $2.8 million and annual floor plan interest expense by approximately $35.3 million. A 10% change in average foreign exchange rates versus the U.S. dollar would have changed Q1 revenue by approximately $275.7 million.
The quarter included a $1.0 million after-tax net benefit, or $0.01 per share, from dealership actions: a $6.4 million net gain from selling five locations and terminating franchises, partially offset by $5.4 million of property valuation adjustments. No legal proceeding was identified as reasonably expected to have a material adverse effect, although unfavorable outcomes remain possible.
Investor verification checklist
- Verify the sustainability of revenue and earnings growth after separating acquisitions and favorable foreign currency effects.
- Monitor new-vehicle volume declines, used-vehicle pricing and gross-margin trends, particularly in the U.K.
- Assess the effect of higher variable interest rates on floor plan and other debt costs.
- Review total leverage, debt maturities, covenant headroom and the availability of floor plan financing.
- Evaluate the integration and returns of The Car People and other dealership acquisitions.
- Track PTL operating performance and future cash distributions to PAG.
- Confirm the final accounting effects of the Tax Cuts and Jobs Act and the continuing impact of ASC 606.
- Consider Brexit, foreign exchange, manufacturer franchise, vehicle-supply, litigation and regulatory risks.