Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results for the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. 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-method interest in Penske Truck Leasing.
- At June 30, 2018, the company operated 341 retail automotive franchises and 21 Premier Truck Group locations.
- Retail automotive generated 92.0% of six-month revenue and 89.9% of gross profit.
- The company retailed and wholesaled more than 330,000 vehicles during the first six months.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $5,940.3 million, up 10.3% | $11,687.2 million, up 11.7% |
| Gross profit | $889.8 million, up 8.9% | $1,754.2 million, up 10.2% |
| Operating income | $188.7 million, up 9.7% | $364.4 million, up 13.1% |
| Net income | $135.2 million, versus $106.9 million | $243.0 million, versus $189.9 million |
| Net income attributable to PAG common stockholders | $134.6 million; diluted EPS $1.58 | $242.7 million; diluted EPS $2.84 |
| Gross margin | 15.0% | 15.0% |
| Operating margin | 3.2% | 3.1% |
| Net margin | 2.3% | 2.1% |
- Six-month revenue by segment: retail automotive $10,751.5 million; retail commercial truck $631.2 million; commercial vehicle distribution and other $304.5 million.
- Six-month equity in earnings of affiliates increased to $53.3 million from $40.0 million, primarily reflecting the higher PTL ownership interest and increased PTL earnings.
- The effective tax rate declined to 24.2% from 32.4% for the six-month period, principally due to the U.S. Tax Cuts and Jobs Act.
- Cash dividends were $0.35 per share in the second quarter and $0.69 per share for the first six months. A $0.36 per-share dividend was announced for September 2018.
Cash Flow, Debt, and Liquidity
- Six-month cash provided by continuing operating activities was $417.0 million, compared with $320.5 million in 2017.
- After treating non-trade floor plan borrowings as operating cash flow for analytical purposes, operating cash flow was $324.1 million versus $451.8 million in 2017.
- Cash used in investing activities was $226.2 million, including $118.8 million of capital expenditures and $168.6 million of acquisition spending, partially offset by $58.4 million of dealership-sale proceeds.
- Cash used in financing activities was $190.7 million, including $92.9 million of non-trade floor plan repayments, $55.8 million of share repurchases, and $59.0 million of dividends.
- Cash and cash equivalents were $45.8 million at June 30, 2018, essentially unchanged from December 31, 2017.
- Total long-term debt was $2,151.9 million, including $1,635.7 million of senior subordinated notes; current and long-term debt reported on the balance sheet totaled $2,151.9 million.
- Floor plan notes payable totaled $3,603.7 million, consisting of $2,278.0 million of trade floor plan debt and $1,325.7 million of non-trade floor plan debt.
- Available borrowing capacity was $601.0 million under the U.S. credit agreement, $134.7 million under the U.K. agreement, and $31.9 million under the Australian working capital facility.
- Management reported $51.6 million of working capital and stated that existing cash flow and financing resources should fund operations and current commitments for at least the next twelve months. The company was in compliance with its debt and lease covenants.
Material Changes Versus the Prior Comparable Period
- Revenue growth was supported by higher same-store used-vehicle, finance and insurance, service and parts, commercial truck, and distribution activity, as well as acquisitions and favorable foreign currency translation.
- Retail automotive new-vehicle unit sales declined 4.6% year to date, while same-store units declined 0.8%; higher average selling prices increased new-vehicle revenue.
- Retail automotive used-vehicle revenue rose 18.3% year to date, with same-store revenue up 10.7% and same-store units up 1.9%.
- Retail commercial truck new-vehicle unit sales increased 59.7% year to date, while new-truck revenue increased 67.7%.
- SG&A increased 9.4% year to date, but declined to 76.3% of gross profit from 76.9%.
- Floor plan interest expense increased 32.9% year to date because of higher inventory financing balances and interest rates; other interest expense increased 13.6%.
- Foreign currency translation increased reported six-month revenue by $455.5 million and gross profit by $60.7 million. Excluding average exchange-rate effects, revenue and gross profit increased 7.3% and 6.4%, respectively.
- The company acquired The Car People in the U.K., four Italian automotive franchises, and one Canadian commercial truck dealership; it also disposed of six retail automotive franchises. Acquisition cash spending declined from $431.9 million to $168.6 million.
Guidance, Outlook, Risks, and Unusual Items
- No formal numerical earnings or revenue guidance was provided. Management expected continued strength in U.S. used vehicles, North American Class 8 trucks, Australian and New Zealand commercial vehicles, and PTL services through the remainder of 2018.
- Management characterized the U.S. new-light-vehicle market as strong but plateauing. The U.K. market remained pressured by lower registrations, diesel-related uncertainty, and Brexit-related economic and political uncertainty.
- Management adopted ASC 606 using the modified retrospective method on January 1, 2018. The adoption increased retained earnings by $6.6 million and increased reported six-month net income by approximately $2.1 million versus the amount that would have been reported without adoption.
- The company expects to adopt the new lease standard on January 1, 2019. It expects a significant increase in reported assets and liabilities from recognizing operating leases on the balance sheet.
- Key risks include economic and vehicle-demand cycles, rising interest rates, foreign exchange volatility, Brexit, potential tariffs on foreign vehicles and parts, manufacturer or supply-chain disruptions, new emissions testing requirements in Europe, franchise dependence, leverage and covenant compliance, litigation, cybersecurity, and technology changes such as electrification, shared mobility, and autonomous vehicles.
- Legal proceedings were not expected to have a material adverse effect individually or in the aggregate, although unfavorable outcomes remain possible. The company had $36.5 million of letters of credit and $27.0 million of surety bonds outstanding.
- A $1.0 million after-tax net benefit, or $0.01 per share, was included in six-month results from dealership sales, franchise terminations, and property valuation adjustments.
Investor Verification Checklist
- Verify the sustainability of used-vehicle and commercial-truck volume and gross-profit gains as market conditions normalize.
- Assess exposure to rising benchmark interest rates, particularly the sensitivity of floor plan interest expense; management estimated that a 100-basis-point change would affect annual floor plan interest expense by approximately $35.6 million.
- Review liquidity after acquisition spending, capital expenditures, dividends, repurchases, and required floor plan repayments.
- Evaluate the effect of Brexit, potential vehicle and parts tariffs, and European WLTP emissions testing on U.K. and European inventory availability and demand.
- Reconcile reported cash flow with cash flow including all floor plan borrowings and repayments.
- Monitor the impact of ASC 606 and the planned 2019 lease-accounting adoption on comparability, reported assets, liabilities, and earnings.
- Confirm PTL operating performance and distributions, which are important contributors to equity earnings and liquidity.