Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
International transportation services company operating automotive and commercial truck dealerships principally in the United States, Canada, and Western Europe, plus commercial vehicle, engine, and power-systems distribution businesses in Australia and New Zealand. The filing covers the unaudited three and six months ended June 30, 2017, compared with the prior-year periods. PAG operated 354 retail automotive franchises and held a 23.4% equity interest in Penske Truck Leasing Co., L.P. (“PTL”).
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $5,383.4 million, up 2.5% | $10,464.5 million, up 3.8% |
| Gross profit | $817.3 million, up 6.0% | $1,591.6 million, up 6.5% |
| Gross margin | 15.2%, versus 14.7% | 15.2%, versus 14.8% |
| Operating income | $172.0 million, up 4.8% | $322.2 million, up 4.5% |
| Operating margin | 3.2%, versus 3.1% | 3.1%, versus 3.1% |
| Net income attributable to PAG stockholders | $106.2 million, versus $93.5 million | $188.8 million, versus $172.8 million |
| Diluted EPS | $1.23, versus $1.10 | $2.20, versus $1.99 |
| Cash flow from continuing operations | Not separately provided | $320.5 million, versus $270.6 million |
Six-month revenue was generated primarily by retail automotive dealerships ($9,797.1 million), retail commercial truck dealerships ($440.2 million), and commercial vehicle distribution and other operations ($227.2 million). Retail automotive represented 93.6% of revenue and 91.4% of gross profit. Cash dividends were $0.61 per share for the six months, compared with $0.53 in the prior-year period.
At June 30, 2017, cash and cash equivalents were $20.7 million, working capital was $104.8 million, total long-term debt was $2,025.9 million, and floor plan notes payable totaled $3,515.8 million. Available borrowing capacity was $377.0 million under the U.S. credit agreement, £97.0 million under the U.K. facility, and AU$4.1 million under the Australian working-capital facility.
Material changes versus the prior comparable period
- Revenue and gross profit increased, primarily from dealership acquisitions and stronger finance and insurance, service and parts, and distribution results.
- Same-store automotive trends were weaker: six-month same-store new vehicle units declined 1.4% and used vehicle units declined 0.8%. New and used vehicle gross profit per unit declined 5.2% and 8.2%, respectively.
- Finance and insurance revenue increased 16.6% for the six months, with same-store revenue up 4.2% and same-store revenue per unit up 5.4%.
- Retail commercial truck revenue declined 14.7%, reflecting lower new-truck volumes, while gross profit increased 6.9%, supported by used-truck performance and service operations.
- Commercial vehicle distribution revenue increased 10.6% and gross profit increased 10.8% for the six months.
- Equity in earnings of affiliates increased to $40.0 million from $17.5 million, primarily because PAG owned 23.4% of PTL during the period versus 9.0% before the July 2016 investment increase.
- SG&A increased 7.2% to $1,223.7 million, while SG&A as a percentage of gross profit increased to 76.9% from 76.4%. Floor plan interest expense rose 12.7% and other interest expense rose 40.1%.
- Operating cash flow increased, but cash used in investing activities rose to $530.3 million, including $431.9 million for acquisitions and $113.4 million for capital expenditures. Cash declined $3.3 million during the six months.
Guidance, outlook, risks, and unusual items
The filing provides qualitative outlook rather than formal earnings or revenue guidance. Management expects the U.S. light-vehicle market to remain near current levels for the remainder of 2017, with potential strength in used vehicles as lease returns increase. Management expects stronger new commercial truck sales later in 2017, continued strength in truck service and parts, and gradual improvement in Australian and New Zealand commercial vehicle markets. PTL is expected to benefit from demand for leasing, rental, maintenance, and logistics services.
In the first quarter, PAG acquired CarSense and CarShop, stand-alone used-vehicle businesses, and six retail automotive franchises. Aggregate consideration for 2017 acquisitions was $488.1 million, including $431.9 million of cash used. Management stated that CarSense and CarShop are expected to generate approximately $700.0 million of annual revenue.
PAG was considering acquiring an additional 5.5% PTL interest for approximately $235.0 million, but no agreement or closing was assured. The company stated that it expected existing operating cash flow, distributions from joint ventures, credit facilities, and floor plan financing to fund operations and current commitments for at least the next twelve months.
- Material risks include economic cyclicality, vehicle demand, interest-rate and foreign-exchange exposure, manufacturer and franchise dependence, inventory recalls, acquisition integration, leverage and covenant compliance, and availability of floor plan financing.
- Brexit created uncertainty for U.K. operations. Foreign-currency translation reduced six-month revenue by approximately $472.4 million, gross profit by $61.5 million, and continuing-operations EPS by approximately $0.13.
- A 100-basis-point interest-rate change was estimated to affect annual other interest expense by approximately $4.1 million and annual floor plan interest expense by approximately $32.7 million.
- Legal proceedings were not expected to have a material adverse effect individually or in the aggregate, although outcomes could not be predicted with certainty. The company had $32.5 million of letters of credit and $25.6 million of surety bonds outstanding.
- PAG adopted inventory, deferred-tax, and stock-compensation accounting updates in 2017 without a material effect. It planned to adopt the new revenue standard on January 1, 2018 and did not expect a material financial impact; the new lease standard is expected to significantly increase reported assets and liabilities when adopted in 2019.
Investor verification points
- Assess whether acquisition-driven growth can offset declining same-store new and used vehicle volumes and lower vehicle gross profit per unit.
- Monitor inventory levels, floor plan borrowings, variable-rate exposure, and the company’s limited cash balance relative to obligations.
- Verify integration progress and realized synergies from CarSense, CarShop, and the other 2017 acquisitions.
- Track PTL operating performance, cash distributions, and any decision regarding the proposed additional 5.5% interest purchase.
- Evaluate U.K. demand, Brexit-related economic effects, and foreign-currency translation impacts.
- Review compliance with credit-facility, lease, and debt covenants and the potential effect of future acquisitions or refinancing needs.
- Confirm the timing and implementation effects of the new revenue and lease accounting standards.