Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the three months ended March 31, 2016, filed April 27, 2016. Penske Automotive Group operates automotive and commercial truck dealerships principally in the United States and Western Europe and distributes commercial vehicles, engines, power systems, parts, and related services in Australia and New Zealand. At quarter-end, it operated 349 automotive franchises and employed more than 22,000 people worldwide.
- Retail Automotive generated 93.5% of consolidated revenue and 91.9% of gross profit.
- Retail Commercial Truck includes Premier Truck Group, in which PAG owned 96%.
- Other operations include commercial vehicle and power-systems distribution and equity-method investments, including a 9% interest in Penske Truck Leasing.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenue | $4,824.6 million | $4,482.9 million | 7.6% |
| Gross profit | $723.8 million | $689.9 million | 4.9% |
| Gross margin | 15.0% | 15.4% | Down approximately 40 bps |
| Operating income | $144.1 million | $135.5 million | 6.3% |
| Operating margin | 3.0% | 3.0% | Broadly stable |
| Net income attributable to PAG stockholders | $79.3 million | $75.2 million | 5.5% |
| Diluted EPS | $0.90 | $0.83 | 8.4% |
| Cash dividends per share | $0.26 | $0.22 | 18.2% |
| Cash flow from continuing operations | $82.6 million | $193.3 million | Down $110.7 million |
| Capital expenditures | $46.8 million | $33.7 million | Up $13.1 million |
Revenue growth reflected increases in new and used vehicle sales, finance and insurance revenue, and service and parts revenue. Foreign-currency translation reduced reported revenue by $106.1 million, gross profit by $14.9 million, and continuing-operations EPS by approximately $0.03. Excluding currency effects, revenue and gross profit increased 10.0% and 7.1%, respectively.
SG&A increased 4.3% to $558.9 million, while SG&A as a percentage of gross profit improved to 77.2% from 77.7%. Floor-plan interest expense increased 24.3% to $12.8 million, and other interest expense increased 5.5% to $17.2 million. Equity in earnings of affiliates declined to $5.5 million from $6.7 million.
Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $45.6 million at March 31, 2016, down from $62.4 million at December 31, 2015.
- Working capital was $67.0 million. Available borrowing capacity was $445.4 million under the U.S. credit agreement, $175.3 million equivalent under the U.K. credit agreement, and $4.4 million equivalent under the Australian working-capital facility.
- Total long-term debt was $1,384.6 million, including $237.0 million under the U.S. revolving credit line, $53.1 million under the U.K. revolving line, $841.0 million of senior subordinated notes, and $187.0 million of mortgage facilities.
- Floor-plan notes payable totaled $3,449.8 million, comprising $2,262.5 million of trade floor-plan debt and $1,187.3 million of non-trade floor-plan debt.
- The company reported compliance with all credit-agreement and operating-lease covenants and expected to remain compliant for the next twelve months.
- PAG repurchased 4.5 million shares for $167.9 million, or $37.21 per share, leaving $32.1 million of authorization. It paid $23.3 million of dividends.
Material Changes Versus the Prior Comparable Period
- Retail automotive new-vehicle units increased 10.2%, while same-store units increased 4.2%; same-store gross profit per new vehicle declined 6.8%.
- Retail automotive used-vehicle units increased 9.6%, but same-store used-vehicle gross profit declined 5.4% and same-store gross profit per unit declined 6.6%.
- Retail automotive service and parts revenue increased 9.1%, with same-store revenue up 3.7%.
- Premier Truck Group revenue increased to $206.7 million from $192.7 million, but same-store new-truck units declined 9.6% and used-truck gross profit fell $2.1 million, resulting in a negative used-truck gross margin.
- Commercial vehicle distribution revenue was broadly stable, but gross profit declined due to lower Australian and New Zealand vehicle volumes and product-mix changes.
- Operating cash flow declined substantially, primarily reflecting higher uses of working capital, including accounts receivable and inventory, and lower increases in floor-plan financing than in the prior year.
- PAG acquired one U.K. automotive franchise, acquired an additional 8% of a German automotive joint venture, acquired a 49% interest in the Nicole Group in Japan, and disposed of seven automotive franchises and one truck-parts location.
- PTG acquired Harper Truck Centres in Ontario, Canada, in April 2016, after the reporting date.
Outlook, Risks, Contingencies, and Unusual Items
Management expected U.S. and U.K. light-vehicle markets to remain strong through the balance of 2016, supported by economic conditions, employment, credit availability, low interest rates, vehicle age, and fuel costs. Management expected North American medium- and heavy-duty truck demand to remain generally favorable, although Class 8 volumes had begun to decline. It expected Australian commercial-vehicle markets to lag historical levels because of weaker commodity conditions, while parts distribution was expected to remain resilient.
The filing does not provide formal numerical earnings or revenue guidance. Management stated that operating cash flow, joint-venture distributions, existing capital resources, credit facilities, and floor-plan financing should fund operations and current commitments for at least the next twelve months, subject to acquisition activity, repurchases, debt refinancing, covenant compliance, and continued availability of financing.
- Key exposures include vehicle demand, consumer confidence, interest rates, credit availability, fuel prices, foreign exchange, economic cycles, and manufacturer incentives and franchise agreements.
- Variable-rate debt creates material interest-rate exposure; a 100-basis-point change was estimated to affect annual other interest expense by approximately $3.1 million and annual floor-plan interest expense by approximately $31.5 million.
- Substantially all inventory is financed through floor-plan arrangements, many of which are payable on demand or at vehicle sale or maturity.
- Contingencies include litigation, self-insurance reserves, lease guarantees, $30.5 million of letters of credit, $13.2 million of surety bonds, and potential obligations related to PAG’s guarantee of 9% of specified Penske Truck Leasing bond obligations.
- No legal proceeding was identified as reasonably expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
- The company adopted updated debt-issuance-cost presentation guidance retrospectively. It also noted that future lease accounting adoption is expected to materially increase reported assets and liabilities.
Important Facts for Investors to Verify
- Whether vehicle volumes and gross-profit-per-unit trends, particularly for used vehicles and Class 8 trucks, improve or deteriorate.
- The sustainability of liquidity after substantial share repurchases, dividends, capital expenditures, and inventory financing requirements.
- Compliance with debt, floor-plan, and lease covenants and the continued availability of revolving and floor-plan facilities.
- The effect of foreign exchange, especially the British pound, Australian dollar, and New Zealand dollar, on reported results.
- The performance and distributions of Penske Truck Leasing and other equity-method investments.
- The integration and financial contribution of the German, Japanese, U.K., and Canadian dealership investments and the effect of recent divestitures.
- The potential balance-sheet impact of future lease-accounting adoption and the company’s off-balance-sheet lease and guarantee obligations.