Penske Automotive Group, Inc. — FY2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013, with comparative information for 2012 and 2011. Penske Automotive Group operates automotive dealerships, commercial vehicle distribution, and Hertz car-rental franchises in the United States, Western Europe, Australia, and New Zealand. It operated 324 automotive retail franchises and employed approximately 18,000 people. Automotive dealerships generated 98.6% of total revenue and 97.5% of gross profit.
- 2013 revenue mix by geography: United States 64%, United Kingdom 34%, and other international markets 2%.
- Premium brands represented 69% of automotive dealership revenue.
- The company owns a 9.0% interest in Penske Truck Leasing, accounted for under the equity method.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenue | $14,705.4 million | $13,084.3 million | +12.4% |
| Gross profit | $2,259.8 million | $2,005.7 million | +12.7% |
| Gross margin | 15.4% | 15.3% | Approximately flat |
| Operating income | $436.2 million | $365.4 million | +19.4% |
| Income from continuing operations attributable to common stockholders | $249.6 million | $194.1 million | +28.6% |
| Net income attributable to common stockholders | $244.2 million | $185.5 million | +31.6% |
| Diluted EPS from continuing operations | $2.76 | $2.15 | +28.4% |
| Diluted EPS | $2.70 | $2.05 | +31.7% |
| Cash flow from continuing operating activities | $314.8 million | $324.6 million | -3.0% |
- Operating margin was approximately 3.0%; net income attributable to common stockholders was approximately 1.7% of revenue.
- Retail gross margin declined from 16.3% to 15.9%, primarily because of lower vehicle margins and a greater revenue mix from lower-margin vehicle sales.
- New vehicle retail units increased 10.4% to 199,795; used vehicle retail units increased 14.7% to 166,419.
- Finance and insurance revenue increased 16.6% to $375.7 million.
- Service and parts revenue increased 7.4% to $1,550.6 million, with gross margin improving to 59.4% from 58.2%.
- Equity in earnings of affiliates increased to $30.7 million from $27.6 million, including $23.5 million attributable to PTL.
Liquidity, debt, and cash flow
- Cash and cash equivalents were $49.8 million at December 31, 2013, compared with $43.5 million at year-end 2012.
- Working capital was $14.8 million.
- Floor plan notes payable totaled $2,607.6 million, consisting of $1,704.4 million of trade floor plan debt and $903.2 million of non-trade floor plan debt.
- Total debt excluding floor plan notes payable was $1,083.2 million, compared with $936.6 million in 2012.
- Available borrowing capacity included $285.0 million under the U.S. credit agreement, £46.0 million under the U.K. credit agreement, and AU$28.0 million under the Australian working-capital facility.
- Cash used in investing activities was $587.6 million, including $256.3 million of capital expenditures and $338.1 million for acquisitions and other investments.
- Cash provided by financing activities was $265.0 million, including $191.8 million of net non-trade floor-plan borrowings.
- Contractual obligations included $4.94 billion of operating lease commitments, $1.08 billion of long-term debt, and $306.0 million of scheduled interest payments.
Material changes versus the prior comparable period
- Revenue increased $1.62 billion, driven by higher same-store new and used vehicle sales, finance and insurance revenue, service and parts revenue, and acquisitions.
- Operating income increased $70.8 million, while income from continuing operations attributable to common stockholders increased $55.5 million.
- 2012 included a $17.8 million pretax debt-redemption charge; no comparable charge was recorded in 2013.
- Commercial vehicle distribution and retail operations were acquired on August 30, 2013. The business contributed $152.5 million of revenue and $24.0 million of gross profit from acquisition through year-end.
- Car-rental revenue increased to $52.6 million from $4.0 million, primarily because of expansion into Indiana markets.
- The company acquired or was awarded ten automotive franchises and disposed of 30 franchises, principally Toyota/Lexus and Chrysler/Jeep/Dodge locations in the U.K.
- Capital expenditures increased to $256.3 million from $162.2 million, including $86.4 million for car-rental vehicles.
- Quarterly fourth-quarter 2013 revenue was $3,855.0 million, gross profit was $586.4 million, net income attributable to common stockholders was $59.2 million, and diluted EPS was $0.66; fourth-quarter 2012 figures were $3,350.8 million, $513.3 million, $48.6 million, and $0.54, respectively.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide formal numerical earnings guidance. It expected continued improvement in U.S. and U.K. automotive markets during 2014, a relatively stable Australian and New Zealand commercial-vehicle market, and improving conditions for car rental operations and PTL.
- Key operating risks include economic cyclicality, consumer credit availability, interest rates, fuel prices, unemployment, foreign-exchange movements, and vehicle demand.
- Manufacturers exercise significant control through franchise agreements; loss or non-renewal of significant franchises could materially affect results.
- BMW/MINI, Audi/Volkswagen/Porsche/Bentley, Toyota/Lexus/Scion, Honda/Acura, and Mercedes-Benz/Sprinter/smart together represented approximately 84% of automotive dealership revenue.
- Variable-rate exposure was material: a 100-basis-point rate change was estimated to affect annual other interest expense by approximately $2.9 million and floor-plan interest expense by approximately $18.0 million.
- The company faces regulatory risk concerning dealer finance-and-insurance compensation, including potential actions by the Consumer Financial Protection Bureau and proposed changes in state law.
- Other risks include cyber-security incidents, information-system disruptions, environmental liabilities, uninsured losses, rental-fleet residual values, supply interruptions, and litigation.
- The company remained in compliance with its credit-agreement and lease covenants at year-end and stated that existing resources should fund operations and commitments for at least the next twelve months.
- Off-balance-sheet exposures included approximately $266.4 million of potential lease obligations associated with sold or subleased properties and indemnification exposure relating to PTL financing. No material legal proceeding was identified, although outcomes remain uncertain.
- Management and the auditors concluded that internal control over financial reporting was effective; controls at Western Star Trucks Australia, representing 4.5% of consolidated assets, were excluded from management’s assessment.
Most important facts for an investor to verify
- Whether revenue growth and earnings growth continue after separating same-store performance from acquisitions and dispositions.
- Whether vehicle gross-profit-per-unit pressure persists, particularly in new and used retail sales.
- The sustainability of cash flow after acquisition spending, capital expenditures, dividends, and share repurchases.
- Floor-plan financing availability, variable interest-rate sensitivity, covenant headroom, and refinancing requirements.
- Integration and profitability of Western Star Trucks Australia and the expanded Hertz operations.
- Potential effects of CFPB, dealer-finance, environmental, privacy, and franchise-regulation changes.
- Exposure to foreign exchange, manufacturer concentration, lease commitments, subtenant defaults, PTL guarantees, and rental-vehicle residual values.