Penske Automotive Group, Inc. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2013. Penske Automotive Group operated 321 retail automotive franchises, including 171 in the U.S. and 150 internationally, primarily in the U.K. The company also operated Hertz rental locations, distributed commercial vehicles, held a 9.0% interest in Penske Truck Leasing, and owned or consolidated automotive joint ventures.
In August 2013, the company acquired Penske Commercial Vehicles, the exclusive distributor of Western Star, MAN and Dennis Eagle vehicles in Australia, New Zealand and portions of Southeast Asia. The acquisition contributed $49.4 million of revenue after August 30, 2013. PAG also acquired an additional 35% interest in its northern Italy joint venture, resulting in a 70% controlling interest.
Financial performance and key metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $3.824 billion, up 14.6% | $10.928 billion, up 11.3% |
| Gross profit | $579.9 million; 15.2% margin | $1.683 billion; 15.4% margin |
| Operating income | $109.9 million; 2.9% margin | $328.9 million; 3.0% margin |
| Income from continuing operations | $66.3 million | $187.9 million |
| Net income attributable to common stockholders | $65.3 million, or $0.72 diluted EPS | $185.0 million, or $2.05 diluted EPS |
| Cash flow from continuing operations | Not separately reported for the quarter | $298.0 million |
| Cash and cash equivalents | $71.1 million at September 30, 2013 |
Service and parts generated $381.5 million of third-quarter revenue and $1.158 billion for the nine-month period, with gross margins of 60.1% and 59.5%, respectively. Finance and insurance revenue increased 19.2% in the quarter and 16.3% year to date. Retail gross margin declined to 15.7% in the quarter and 15.9% year to date, primarily because of lower new-vehicle margins.
At September 30, 2013, total floor plan notes payable were $2.339 billion, consisting of $1.537 billion of trade floor plan debt and $802.1 million of non-trade floor plan debt. Total long-term debt, including the current portion, was $1.061 billion. Total liabilities were $4.553 billion and total equity was $1.457 billion.
Material changes versus the prior comparable period
- New retail vehicle unit sales increased 13.4% in the quarter and 11.6% year to date; same-store new vehicle unit sales increased 12.1% and 9.7%, respectively.
- Used retail vehicle unit sales increased 13.7% in the quarter and year to date; same-store unit sales increased 11.8% and 10.9%, respectively.
- Gross profit increased 15.6% in the quarter and 12.1% year to date, while SG&A increased 13.5% and 10.1%, respectively. SG&A as a percentage of gross profit improved by 150 basis points in the quarter and 140 basis points year to date.
- Operating income increased from $87.7 million to $109.9 million in the quarter and from $272.7 million to $328.9 million year to date.
- Prior-year results included $17.8 million of debt redemption costs; no such costs were recorded in 2013. This contributed materially to the improvement in pre-tax and net income.
- Continuing operating cash flow increased from $262.7 million to $298.0 million year to date. Investing cash outflow increased to $433.9 million, reflecting $205.3 million of capital expenditures and $221.2 million of acquisition spending.
- Long-term debt increased from $937.5 million at December 31, 2012 to $1.061 billion at September 30, 2013, while cash increased from $43.4 million to $71.1 million.
Guidance, outlook, risks and unusual items
Management did not provide specific earnings or revenue guidance. Management reported improving U.S. and U.K. vehicle markets and expected continued growth, supported by stronger consumer credit, pent-up demand, an aging vehicle population and new model introductions.
Management stated that operating cash flow, joint venture distributions and existing credit and floor plan facilities were expected to fund operations and commitments for at least the next twelve months. Available borrowing capacity was $331.0 million under the U.S. credit agreement and £33.0 million, or approximately $53.4 million, under the U.K. credit agreement.
The U.S. and U.K. credit agreements, lease arrangements and senior subordinated notes contain financial covenants and other restrictions. PAG was in compliance with its covenants at September 30, 2013 and reported no events of default. The rental car revolver had $97.1 million outstanding and expires in October 2014. Variable-rate exposure remained significant; management estimated that a 100-basis-point rate increase would raise annual other interest expense by approximately $2.7 million and annual floor plan interest expense by approximately $17.1 million.
Key risks include economic and automotive-market cyclicality, interest-rate and foreign-exchange movements, manufacturer and franchise dependence, vehicle supply disruptions, acquisition integration, commercial vehicle demand and availability, rental vehicle residual values, litigation, self-insurance exposure, covenant compliance and the availability of floor plan financing. Legal proceedings were not expected to have a material adverse effect, although outcomes could not be predicted with certainty.
The Penske Commercial Vehicles purchase price was approximately $200.0 million and remained subject to a working-capital adjustment expected to be finalized in the fourth quarter of 2013. PAG also had $18.2 million of letters of credit and $9.2 million of surety bonds outstanding.
Important facts for investors to verify
- Verify the final working-capital adjustment and subsequent operating performance of Penske Commercial Vehicles.
- Assess whether higher unit volumes can offset declining new-vehicle gross profit per unit and retail gross-margin pressure.
- Monitor floor plan debt, inventory levels, variable-rate exposure and the maturity or renewal of the rental car revolver.
- Review acquisition integration, goodwill and franchise-value impairment risks, particularly following the commercial vehicle acquisition and Italian joint-venture consolidation.
- Confirm ongoing compliance with U.S. and U.K. credit, lease and notes covenants and available borrowing capacity.
- Evaluate foreign-exchange sensitivity, international market conditions, manufacturer incentives and the sustainability of higher finance-and-insurance and service margins.
- Consider contingent obligations related to Penske Truck Leasing, lease guarantees, subleases, letters of credit, litigation and self-insurance.