PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q1 FY2014

Penske Automotive Group, Inc. — Form 10-Q Summary

Business context and reporting period

For the quarter ended March 31, 2014, Penske Automotive Group operated 323 automotive retail franchises across the United States, Western Europe, Australia, and New Zealand, in addition to commercial vehicle distribution, Hertz car rental operations, and a 9.0% interest in Penske Truck Leasing. The company retailed and wholesaled more than 115,000 vehicles and employed approximately 18,000 people. Automotive dealerships generated 97.3% of total revenue and 96.2% of gross profit.

Financial performance and key metrics

Metric	Q1 2014	Q1 2013	Change
Total revenue	$4,048.0 million	$3,349.3 million	+20.9%
Gross profit	$624.0 million	$526.6 million	+18.5%
Operating income	$119.7 million	$105.2 million	+13.8%
Income from continuing operations	$66.5 million	$57.6 million	+15.5%
Net income attributable to common stockholders	$67.5 million	$57.7 million	+17.0%
Diluted EPS	$0.75	$0.64	+$0.11
Net cash from continuing operating activities	$132.5 million	$97.9 million	+$34.6 million

Gross margin was approximately 15.4%, compared with 15.7% in the prior-year quarter. Retail gross margin declined to 15.9% from 16.3%, primarily because vehicle sales represented a larger share of revenue and carried lower margins.
SG&A increased 19.8% to $487.8 million, and SG&A as a percentage of gross profit increased to 78.2% from 77.3%.
New vehicle revenue increased 18.0%, used vehicle revenue increased 21.6%, finance and insurance revenue increased 22.1%, and service and parts revenue increased 10.0%.
New retail unit sales increased 11.6%, used retail unit sales increased 14.8%, and same-store new and used retail unit sales increased 7.9% and 12.2%, respectively.
Commercial vehicle operations acquired in August 2013 contributed $94.5 million of revenue and $16.0 million of gross profit. Car rental revenue increased to $13.7 million, with gross profit of $7.4 million.
Cash and cash equivalents were $54.9 million at March 31, 2014, compared with $49.8 million at December 31, 2013.
Total long-term debt was $1,075.4 million, including $65.1 million current debt; floor plan notes payable totaled $2,630.3 million.
Equity was $1,583.2 million, including $1,565.4 million attributable to Penske Automotive Group stockholders.

Cash flow, capital allocation, and liquidity

Continuing operating cash flow was $132.5 million. Including non-trade floor plan borrowings as an operating item, operating cash flow was $139.6 million, unchanged from the comparable 2013 presentation on that basis.
Continuing investing activities used $136.5 million, including $34.5 million for equipment and improvements, $28.5 million for rental vehicles, and $81.8 million for acquisitions.
Continuing financing activities used $21.1 million. The company paid $16.2 million in dividends and made no share repurchases during the quarter.
Available borrowing capacity at March 31, 2014 was $275.0 million under the U.S. credit agreement, approximately $110.0 million under the U.K. credit agreement, and $25.9 million under the Australian working capital facility.
The company stated that operating cash flow, joint venture distributions, and existing capital resources should fund operations and commitments for at least the next twelve months, subject to acquisition activity, capital spending, debt refinancing, covenant compliance, and continued access to floor plan financing.

Material changes versus the prior comparable period

Revenue growth reflected higher same-store vehicle volumes, higher average selling prices, improved finance and insurance penetration, service and parts growth, and the addition of the commercial vehicle business.
Gross profit grew more slowly than revenue because of lower new and used vehicle margins and a greater mix of lower-margin vehicle sales.
Operating leverage was limited by higher SG&A, including personnel, advertising, rent, and other expenses. Severe weather caused approximately 280 lost service days in Northeast and Central/Midwest dealerships and increased certain administrative costs.
Floor plan interest expense increased 9.9% and other interest expense increased 13.9%, reflecting higher vehicle financing balances and borrowing associated with the commercial vehicle acquisition.
Equity in earnings of affiliates increased to $5.1 million from $2.3 million, primarily due to higher earnings from PTL and other joint ventures.
Foreign currency translation generated a $9.3 million benefit in other comprehensive income, compared with a $36.6 million loss in Q1 2013.
Discontinued operations generated $1.4 million of after-tax income, compared with $0.4 million in the prior-year quarter. The 2014 result included a $14.8 million pretax gain on disposal, partly offset by an $8.2 million pretax operating loss.

Guidance, outlook, risks, and unusual items

No formal numerical earnings or revenue guidance was provided. Management expected continued improvement in U.S. and U.K. automotive markets, supported by vehicle demand, an aging vehicle population, credit availability, and new model introductions.
Management expected the Australian and New Zealand commercial vehicle market to remain relatively stable and anticipated benefits from integrating the acquired business.
Key risks include economic cycles, interest rates, foreign exchange movements, consumer demand and credit availability, manufacturer and franchise relationships, vehicle and parts supply disruptions, severe weather, acquisition integration, and the performance of PTL and other joint ventures.
Variable-rate debt creates material interest-rate exposure. A 100-basis-point change was estimated to affect annual other interest expense by approximately $2.7 million and annual floor plan interest expense by approximately $19.0 million, based on the filing’s reference balances.
A 10% change in average foreign exchange rates versus the U.S. dollar would have changed Q1 2014 revenue by approximately $170.1 million.
Interest rate swaps fixed the LIBOR component of $400.0 million of floor plan debt through December 2014. The swaps had a $6.2 million liability at March 31, 2014.
The company was in compliance with its credit agreement, lease, and note covenants and reported no legal proceeding reasonably expected to have a material adverse effect, although adverse litigation outcomes remain possible.
Material contingent exposures include $15.1 million of letters of credit, $12.8 million of surety bonds, lease guarantees for certain disposed dealerships, potential obligations related to PTL debt, and residual-value risk on the approximately 5,900-vehicle rental fleet.
On April 1, 2014, the U.S. credit agreement was amended to increase revolving capacity from $375 million to $450 million and reduce the rate on collateralized borrowings to LIBOR plus 2.00% from LIBOR plus 2.25%.

Most important facts for investors to verify

Whether higher vehicle volumes and finance and insurance growth can offset pressure on new and used vehicle margins.
The sustainability and integration results of the Western Star Trucks Australia acquisition and its effect on leverage and cash generation.
Exposure to floor plan financing, variable interest rates, covenant requirements, and the December 2014 expiration of the disclosed interest-rate swaps.
Whether weather-related disruptions and other operating costs normalize after Q1 2014.
The cash requirements associated with acquisitions, capital expenditures, dividends, share repurchase authorization of $85.6 million, and substantial operating lease obligations estimated at $4.9 billion.
The treatment and financial effect of discontinued operations and disposal gains, including the expected impact of adopting the revised discontinued-operations accounting standard.