Penske Automotive Group, Inc. — Q1 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with the same period in 2018. Penske Automotive Group operates automotive and commercial truck dealerships in the United States, Canada and Western Europe, distributes commercial vehicles, engines and power systems in Australia and New Zealand, and owns a 28.9% equity interest in Penske Truck Leasing. As of March 31, 2019, the company operated 339 retail automotive franchises, 19 Premier Truck Group locations and 14 used-vehicle supercenters.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $5,564.4 million | $5,746.9 million | (3.2%) |
| Gross profit | $851.5 million | $864.4 million | (1.5%) |
| Gross margin | 15.3% | 15.0% | +0.3 percentage points |
| Operating income | $158.7 million | $175.7 million | (9.7%) |
| Operating margin | 2.9% | 3.1% | Down |
| Net income attributable to PAG common stockholders | $100.2 million | $108.1 million | (7.3%) |
| Diluted EPS | $1.19 | $1.26 | (5.6%) |
| Cash flow from continuing operations | $91.4 million | $174.8 million | (47.7%) |
| Capital expenditures | $63.1 million | $64.7 million | Down $1.6 million |
- Retail automotive revenue declined 3.9% to $5,091.2 million, primarily reflecting lower new-vehicle volume and unfavorable foreign currency translation.
- Retail commercial truck revenue increased 13.6% to $332.3 million, supported by higher new-truck volume and margins.
- Commercial vehicle distribution and other revenue declined 11.1% to $140.9 million, primarily due to product mix and foreign exchange.
- Equity in earnings of affiliates increased 54.9% to $26.8 million, including $25.8 million from Penske Truck Leasing. PTL earnings included a $3.3 million favorable litigation-related item.
- Floor plan interest expense increased 15.3% to $21.8 million; other interest expense was substantially unchanged at $29.9 million.
- Cash and cash equivalents were $43.5 million at March 31, 2019, compared with $39.4 million at December 31, 2018.
- Total long-term debt was $2,212.8 million, including $94.5 million classified as current. Floor plan notes payable totaled $3,907.9 million.
- The company paid $32.2 million in dividends and repurchased 1,258,348 shares for $54.3 million. The quarterly dividend was $0.38 per share, compared with $0.34 in Q1 2018.
Material changes versus the prior comparable period
- New retail automotive units decreased 8.3% overall and 8.5% on a same-store basis. New-vehicle gross profit declined 5.7%, although gross profit per vehicle increased 2.7%.
- Used automotive unit sales were nearly stable on a same-store basis, but used-vehicle gross profit declined 15.3%, with average gross profit per vehicle down 14.7%.
- Automotive service and parts revenue increased 3.0% and gross profit increased 4.2%; the gross margin improved to 59.2% from 58.5%.
- Retail commercial truck new-unit sales increased 14.0%, while new-truck gross profit increased 52.2% and gross margin improved to 4.9% from 3.9%.
- SG&A expense increased 0.5% to $666.4 million. SG&A as a percentage of gross profit increased to 78.3% from 76.7%, pressuring operating income.
- Foreign currency movements reduced reported revenue by $180.6 million and gross profit by $25.9 million. Excluding currency effects, revenue was flat and gross profit increased 1.5%.
- Operating cash flow declined largely because accounts receivable increased by $104.9 million and inventories increased by $90.5 million, compared with an inventory-related operating cash inflow in Q1 2018.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $2,416.4 million of operating lease right-of-use assets and $2,378.2 million of long-term operating lease liabilities at March 31, 2019. The adoption produced an approximately $5.0 million after-tax increase to retained earnings and did not materially affect income or cash flow.
- During the quarter, PAG acquired one New Zealand commercial vehicle dealership, disposed of seven retail automotive franchises and one retail commercial truck location, and increased its ownership in the Jacobs Group to 87.8%.
Guidance, outlook, management commentary and risks
- The filing does not provide a formal quantitative earnings or revenue guidance range.
- Management expects the U.S. new-vehicle market to remain strong but plateaued, with trucks, crossovers and SUVs continuing to outperform passenger cars. Used-vehicle supply is expected to benefit from strong lease returns.
- Management expects North American Class 8 truck demand to remain strong during 2019. Australian and New Zealand commercial vehicle markets were also described as generally improving.
- Management expects Penske Truck Leasing to benefit from demand for truck leasing, rental, maintenance and logistics services, although freight growth is expected to moderate.
- Material risks include economic and vehicle-sales cycles, interest-rate and foreign-exchange exposure, Brexit and potential disruption to U.K. vehicle supply chains, tariffs, manufacturer and franchise dependence, vehicle recalls, inventory financing availability, covenant compliance, leverage, technology and cybersecurity, litigation, regulatory changes and the transition toward electrification and new mobility technologies.
- As of March 31, 2019, management stated that the company was in compliance with its debt and operating-lease covenants and expected to remain compliant for the next twelve months. Available borrowing capacity included $645.0 million under the U.S. credit agreement, £56.0 million under the U.K. agreement and AU$33.5 million under the Australian working-capital facility.
- Operating lease obligations totaled $5.655 billion on an undiscounted basis, with a present value of $2.467 billion. The company also had $37.8 million of letters of credit and $29.4 million of surety bonds outstanding.
- No legal proceeding was identified as reasonably expected to have a material adverse effect, although management cautioned that litigation outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether weaker automotive new- and used-vehicle margins persist, particularly in the U.S. and U.K.
- Inventory levels, floor plan borrowings and the effect of variable interest rates on cash flow and earnings.
- The sustainability of higher earnings from Penske Truck Leasing, including the effect of the favorable $3.3 million litigation-related item.
- Brexit developments, foreign exchange movements and their effect on the company’s substantial U.K. operations.
- Compliance with debt and lease covenants and the availability of committed financing.
- The balance between capital expenditures, dividends, share repurchases and acquisitions relative to operating cash generation.
- The scale and duration of the company’s lease obligations and the effect of ASC 842 on leverage and credit metrics.