Penske Automotive Group, Inc. — Q3 2012 Form 10-Q Summary
Business Context and Reporting Period
Quarterly report for the period ended September 30, 2012. Penske Automotive Group operated 342 retail franchises, including 169 in the U.S. and 173 primarily in the U.K. The company sells new and used vehicles and provides finance and insurance, service and parts, fleet, and wholesale services. It also held a 9.0% limited partnership interest in Penske Truck Leasing.
During the first nine months of 2012, the company acquired 21 franchises, including the 14-franchise Agnew Group in the U.K., was awarded seven franchises, and disposed of seven franchises. In October 2012, it acquired assets of Hertz’s Memphis market.
Financial Metrics
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Total revenue | $3.401 billion | $2.898 billion | $10.007 billion | $8.467 billion |
| Gross profit | $511.0 million | $460.8 million | $1.530 billion | $1.354 billion |
| Operating income | $87.5 million | $78.6 million | $272.3 million | $219.9 million |
| Net income attributable to common stockholders | $41.0 million | $55.7 million | $136.9 million | $129.2 million |
| Diluted EPS | $0.45 | $0.61 | $1.52 | $1.40 |
| Gross margin | 15.0% | 15.9% | 15.3% | 16.0% |
| Operating margin | 2.6% | 2.7% | 2.7% | 2.6% |
Q3 revenue increased 17.4% and nine-month revenue increased 18.2%. Q3 net income attributable to common stockholders declined 26.3%, primarily because of a $17.8 million pretax debt redemption charge and a favorable $11.0 million U.K. tax adjustment in the prior-year quarter. Nine-month net income increased 6.0% despite the redemption charge and the prior-year tax benefit.
- Q3 new vehicle revenue increased 21.5%; used vehicle revenue increased 14.7%; finance and insurance revenue increased 16.7%; service and parts revenue increased 7.1%.
- Nine-month new and used retail unit sales increased 20.9% and 21.1%, respectively, with same-store increases of 12.4% and 13.4%.
- Retail gross margin declined to 15.8% in Q3 and 16.3% for the nine months, from 16.8% and 16.9%, respectively, primarily due to lower vehicle margins and a greater mix of lower-margin vehicle revenue.
- Service and parts gross margin improved to 57.8% in Q3 and 58.0% for the nine months.
- Cash flow from continuing operating activities was $264.6 million for the nine months, compared with $180.1 million in 2011. Capital expenditures were $96.4 million and dealership acquisition spending was $137.8 million.
- Cash and cash equivalents were $25.9 million at September 30, 2012, compared with $28.7 million at December 31, 2011.
Debt, Liquidity, and Capital Structure
- Total long-term debt was $830.8 million, including $815.9 million classified as long-term, at September 30, 2012, compared with $850.2 million at December 31, 2011.
- Floor plan notes payable totaled $1.255 billion, and non-trade floor plan notes payable totaled $704.3 million, up from $977.5 million and $691.9 million, respectively, at year-end 2011.
- In August 2012, the company issued $550 million of 5.75% senior subordinated notes due 2022. Proceeds were used partly to redeem $375 million of 7.75% notes due 2016, repay credit agreement and floor plan borrowings, and pay financing costs.
- The company redeemed its 3.5% convertible notes and recorded a $17.8 million pretax charge related to the 7.75% note redemption.
- Available borrowing capacity at September 30, 2012 was $368.1 million under the U.S. credit agreement and £73.8 million, or approximately $119.3 million, under the U.K. credit agreement.
- Management stated that it was in compliance with its U.S., U.K., senior note, and lease covenants and expected to remain compliant for the next twelve months.
- The company paid $29.8 million of dividends and repurchased or acquired 405,631 shares for $9.8 million during the nine months. A $0.13 per-share dividend was declared for payment in December 2012.
Material Changes Versus the Prior Comparable Period
- Revenue, operating income, gross profit, retail unit sales, and operating cash flow increased substantially, supported by same-store growth and acquisitions.
- Vehicle gross margins and average gross profit per vehicle declined. Q3 average gross profit per new vehicle fell 12.4% and per used vehicle fell 7.8%.
- SG&A increased 10.7% in Q3 and 10.8% for the nine months, although SG&A as a percentage of gross profit improved.
- Floor plan interest expense increased 47.1% in Q3 and 43.9% for the nine months due to higher borrowings and interest-rate swap effects. The swaps increased nine-month floor plan interest expense by approximately $5.3 million.
- Equity earnings of affiliates declined in Q3 but increased for the nine months; Q3 results reflected lower earnings from Penske Truck Leasing following refinancing activity.
- Discontinued operations produced a net loss of $3.8 million for the nine months, compared with a $2.8 million loss in the prior-year period.
Guidance, Outlook, Risks, and Unusual Items
No specific quantitative earnings guidance was provided. Management expected continued improvement in U.S. automotive markets, citing stronger demand, an aging vehicle population, lower consumer credit costs, and new model introductions. It also expected resilient premium-brand sales in the U.K.
- Several East Coast dealerships were affected by Superstorm Sandy in late October 2012. The filing states that the company was still assessing power outages, property damage, inventory losses, flooding, and disruptions to roads, vehicles, parts, and services.
- Key risks include economic cycles, consumer confidence, interest rates, credit availability, fuel prices, foreign exchange rates, manufacturer concentration and franchise agreements, vehicle and parts supply disruptions, severe weather, acquisition integration, covenant compliance, and access to inventory financing.
- The company leases substantially all of its facilities and may remain liable for lease payments relating to dealerships sold to third parties or properties subleased to others.
- The company may be required to contribute to or indemnify obligations associated with Penske Truck Leasing refinancing. Its maximum stated potential indemnity to GECC was 9% of expected 2019 principal repayment of $63.1 million, plus 9% of interest and related amounts.
- Outstanding letters of credit were $19.0 million and surety bonds were $8.3 million. Legal proceedings were not expected to have a material adverse effect, although outcomes could not be predicted with certainty.
- A 100-basis-point interest-rate change was estimated to affect annual other interest expense by approximately $1.6 million and annual floor plan interest expense by approximately $14.5 million.
- A 10% change in average foreign exchange rates against the U.S. dollar would have changed nine-month revenue by approximately $378.1 million.
Important Facts for Investors to Verify
- Reconcile the reported nine-month operating cash flow: the consolidated cash-flow statement reports $264.6 million, while one MD&A reconciliation table displays $246.6 million before adding non-trade floor plan borrowings.
- Assess whether lower vehicle margins and higher inventory levels could continue to offset strong unit growth.
- Review the effect of the August debt refinancing on interest expense, maturity risk, covenant headroom, and liquidity.
- Monitor the financial and operational impact of Superstorm Sandy and the October 2012 Hertz Memphis acquisition.
- Evaluate exposure to variable-rate floor plan debt, interest-rate swaps, foreign currencies, manufacturer supply disruptions, and lease or PTL-related contingencies.