Penske Automotive Group, Inc. — 2010 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2010. The filing is an annual report, not a standalone fourth-quarter filing; quarterly data are included. The company operated 323 automotive franchises, including 172 in the U.S. and 151 primarily in the U.K. and Germany. Approximately 63% of revenue came from the U.S. and Puerto Rico and 37% from international operations.
Business context
Penske Automotive is a diversified automotive retailer selling new and used vehicles, finance and insurance products, service and parts, collision repair, fleet and wholesale vehicles, and smart fortwo vehicles through its distribution business. It also owns a 9.0% interest in Penske Truck Leasing Co., L.P. Premium brands represented 66% of 2010 retail revenue, while non-U.S. manufacturers represented 95% of retail revenue.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Total revenue | $10.714 billion | $9.504 billion | +12.7% |
| Gross profit | $1.702 billion | $1.578 billion | +7.8% |
| Operating income | $240.9 million | $208.5 million | +15.5% |
| Income from continuing operations attributable to common stockholders | $111.2 million | $83.3 million | +33.5% |
| Net income attributable to common stockholders | $108.3 million | $76.5 million | +41.6% |
| Diluted EPS | $1.18 | $0.83 | +42.2% |
| Cash flow from continuing operations | $199.9 million | $301.2 million | -33.6% |
| Capital expenditures | $80.9 million | $90.3 million | -10.4% |
Calculated consolidated gross margin was approximately 15.9% in 2010 versus 16.6% in 2009. Operating margin was approximately 2.2% versus 2.2%, and net margin was approximately 1.0% versus 0.8%. Retail gross margin declined from 17.6% to 16.9%, primarily because vehicle sales represented a larger share of revenue.
- New retail vehicle sales increased 10.4% to 155,352 units; revenue increased 17.2% to $5.456 billion.
- Used retail vehicle sales increased 11.2% to 113,676 units; revenue increased 13.2% to $2.940 billion, but gross margin declined from 8.6% to 7.7%.
- Finance and insurance revenue increased 13.4% to $252.0 million.
- Service and parts revenue increased 2.1% to $1.344 billion, while same-store revenue declined 0.3%. Service and parts generated 45% of retail gross profit.
- Distribution revenue declined 60.7% to $81.0 million, and the smart distribution segment generated a $24.1 million loss.
- Equity in earnings of affiliates increased to $20.6 million from $13.8 million, primarily due to improved PTL results.
Balance sheet, debt, liquidity, and cash flow
- Cash and cash equivalents were $16.6 million at December 31, 2010, up from $14.0 million.
- Working capital was $49.7 million.
- Total floor plan notes payable were $1.479 billion, up from $1.193 billion, reflecting higher vehicle inventories.
- Total debt excluding floor plan notes payable was $779.9 million, down from $946.4 million.
- Total equity attributable to common stockholders was $1.042 billion, up from $942.5 million.
- Available borrowing capacity was $300.0 million under the U.S. credit agreement and £49.1 million, or approximately $76.6 million, under the U.K. credit agreement.
- The company reported compliance with its U.S. and U.K. credit agreement covenants and operating lease covenants at year-end.
- Operating cash flow, including all floor plan notes payable changes for informational purposes, was $282.0 million versus $217.1 million in 2009. Reported continuing operating cash flow was lower because of working-capital investment in inventory and receivables.
- The company paid no dividends in 2010 or 2009; the quarterly dividend was suspended in February 2009.
Material changes versus prior comparable period
- The automotive retail business improved materially in 2010, with higher same-store new and used unit sales and improved consumer confidence and credit availability.
- Gross profit rose, but retail gross margin declined because of a greater mix of lower-margin vehicle sales and weaker used-vehicle margins.
- SG&A increased 7.3% to $1.412 billion, although SG&A as a percentage of revenue improved to 13.2% from 13.8%.
- Interest expense declined due to lower floor plan balances and rates, repayments of term debt, and repurchases of convertible notes.
- The company repurchased $155.7 million principal amount of convertible notes for $156.6 million and recorded a $1.6 million pre-tax gain. It also repurchased 68,000 common shares for $0.8 million.
- No goodwill or franchise impairment charges were recorded in 2010 or 2009, compared with $643.5 million of intangible impairment charges in 2008.
- The company acquired five retail franchises for aggregate consideration of $27.4 million and was awarded additional franchises expected to generate approximately $400 million of annualized revenue.
Guidance, outlook, risks, contingencies, and unusual items
Management expected continued improvement in the U.S. automotive market over the following several years, but noted that the pace was uncertain. Management anticipated lower U.K. new-vehicle sales in 2011 after government incentive programs ended, while expecting premium and luxury brands to be more resilient. A moderate recovery in Germany was expected, also with substantial uncertainty.
- The company expected holders to require redemption of $150.6 million of 3.5% convertible notes in April 2011. Management planned to use operating cash flow, working capital, and U.S. revolving credit capacity.
- In February 2011, the company began discussions to transfer smart fortwo distribution to Mercedes-Benz USA, potentially by June 30, 2011. Completion depended on binding agreements, regulatory approvals, and other conditions. The company could incur material franchise termination or inventory-related payments.
- Smart USA terminated development of a five-door vehicle in February 2011; the filing stated that the related net expense, if any, could not yet be estimated. Smart USA had incurred $5.5 million of related 2010 SG&A expense.
- Total future operating lease commitments were estimated at $4.684 billion, including renewal periods. The company also remained liable for approximately $175.1 million of third-party lease payments if subtenants or former purchasers failed to perform.
- Key risks include economic cyclicality, consumer credit and interest-rate conditions, manufacturer control and franchise renewal, brand concentration, foreign exchange exposure, variable-rate debt, competition and online price transparency, environmental liabilities, regulatory claims, information-system dependence, and risks associated with joint ventures and related parties.
- The company reported no legal proceedings reasonably expected to have a material adverse effect, although unfavorable outcomes remain possible. Management and auditors concluded that internal control over financial reporting was effective.
Most important facts for investors to verify
- Whether the April 2011 convertible-note redemption was completed and how it affected liquidity, leverage, and interest expense.
- The final outcome and financial effects of transferring smart fortwo distribution to Mercedes-Benz USA, including any dealer termination or inventory obligations.
- Subsequent changes in new- and used-vehicle volumes, retail gross margins, and same-store service and parts performance.
- Availability and cost of floor plan financing and revolving credit, particularly under rising interest rates or weaker vehicle demand.
- Compliance with debt, lease, and manufacturer franchise covenants and renewal requirements.
- Performance and distributions from PTL and other equity-method investments.
- Potential goodwill or franchise impairment if international operating performance or valuation assumptions deteriorate.
- The company’s substantial lease commitments, sublease guarantees, environmental exposures, tax positions, and related-party transactions.