Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2014. Penske Automotive Group operates automotive dealerships principally in the United States and Western Europe, distributes commercial vehicles and related products principally in Australia and New Zealand, operates Hertz car rental locations, and owns a 9.0% equity-method interest in Penske Truck Leasing. At quarter-end, the company operated 324 automotive retail franchises and employed approximately 20,000 people.
Automotive dealerships generated 97% of nine-month revenue and 96% of gross profit. The company retailed and wholesaled more than 363,000 vehicles during the first nine months, with 61% of dealership revenue from the United States and Puerto Rico, 39% from outside the United States, and 71% from premium brands.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenue | $4,417.9 million, up 17.5% | $12,872.6 million, up 19.9% |
| Gross profit | $658.7 million, up 15.3%; 14.9% margin | $1,949.6 million, up 17.6%; 15.1% margin |
| Operating income | $128.0 million, up 17.1%; 2.9% margin | $383.9 million, up 17.5%; 3.0% margin |
| Income from continuing operations | $77.0 million, up 16.1% | $224.8 million, up 20.0% |
| Net income attributable to common stockholders | $74.5 million, up 14.1% | $214.9 million, up 16.2% |
| Diluted earnings per share | $0.83, versus $0.72 | $2.38, versus $2.05 |
- Revenue growth reflected higher new and used vehicle sales, finance and insurance revenue, service and parts revenue, and the inclusion of the commercial vehicle business acquired in August 2013.
- Retail gross margin declined to 15.4% in the third quarter and 15.7% for the nine months, from 15.7% and 16.0%, respectively, primarily because vehicle sales represented a greater share of revenue. Used-vehicle margin also declined.
- Nine-month continuing operating cash flow was $277.3 million, compared with $296.6 million in 2013. Including non-trade floor-plan financing as an operating activity, cash flow was $269.3 million versus $374.6 million.
- Continuing investing cash outflow was $279.5 million, including $119.6 million for equipment and improvements, $93.5 million for rental vehicles, and $86.2 million for acquisitions.
- Continuing financing cash inflow was $75.2 million. The company paid $51.5 million in dividends and repurchased $15.5 million of common stock.
- Cash and cash equivalents increased to $150.5 million at September 30, 2014, from $49.8 million at December 31, 2013.
- Total long-term debt was $1,233.4 million, including current maturities of $71.8 million, versus $1,083.2 million at year-end 2013. Floor-plan notes payable totaled $2,499.7 million.
- Available borrowing capacity was approximately $276.0 million under the U.S. credit agreement, $42.2 million under the U.K. facility, and $24.5 million under the Australian working-capital facility.
- Total assets were $6,682.3 million and total equity was $1,655.4 million at September 30, 2014.
Material changes versus the prior comparable period
- Third-quarter new retail unit sales increased 9.2%, used retail unit sales increased 11.6%, finance and insurance revenue increased 16.8%, and service and parts revenue increased 16.1%.
- For the nine months, same-store new retail unit sales increased 5.4%, same-store used retail unit sales increased 8.3%, same-store finance and insurance revenue increased 14.7%, and same-store service and parts revenue increased 8.7%.
- Commercial vehicle revenue was $304.3 million for the nine months, compared with $49.4 million in the one month operated during the 2013 comparable period. The business generated $50.3 million of gross profit.
- SG&A increased 17.7% for the nine months, broadly in line with gross profit growth; SG&A was 77.7% of gross profit versus 77.6% in 2013.
- Equity in earnings of affiliates increased 28.1% to $28.7 million, primarily due to stronger earnings from Penske Truck Leasing and newer joint ventures.
- Discontinued operations produced a $7.9 million after-tax loss for the nine months, versus a $1.4 million loss in 2013. Assets held for sale declined to $45.6 million from $107.3 million.
- Accumulated other comprehensive income declined to a $13.4 million loss, primarily because of a $27.4 million foreign-currency translation loss for the nine months.
- The U.S. credit agreement was amended to increase revolving capacity from $375 million to $450 million and reduce the collateralized borrowing spread to LIBOR plus 2.00%. The U.K. facilities were amended to provide covenant flexibility for the MTU acquisition.
Guidance, outlook, risks, contingencies, and unusual items
Management expected U.S. and U.K. automotive markets to remain resilient through the remainder of 2014, supported by improving economic conditions, consumer credit availability, an aging vehicle population, lease returns, and new model introductions. Management expected continued strength in used vehicles, parts and service, and commercial parts distribution, but expected the Australian commercial vehicle market to lag 2013 levels.
On October 1, 2014, after the reporting date, the company acquired MTU Detroit Diesel Australia for an initial purchase price of approximately $115.0 million, funded with U.S. and U.K. revolving facilities. The price remained subject to a post-closing adjustment.
- Results are exposed to economic cycles, vehicle demand, consumer confidence, interest rates, fuel prices, unemployment, credit availability, seasonality, severe weather, recalls, supply disruptions, and manufacturer incentives.
- Variable-rate debt creates interest-rate exposure. A 100-basis-point change was estimated to affect annual other interest expense by approximately $4.1 million and annual floor-plan interest expense by approximately $20.9 million.
- Foreign-currency exposure is significant; a 10% change in average exchange rates versus the U.S. dollar would have changed nine-month revenue by approximately $517.0 million.
- The company had substantial lease commitments, estimated at $4.8 billion, and guarantees or contingent obligations relating to certain sold dealerships, subleases, floor-plan arrangements, and its PTL investment. Its maximum potential PTL-related indemnity was described as 9% of specified 2019 principal and interest obligations, plus fees and default interest.
- The company reported $24.1 million of letters of credit and $13.3 million of surety bonds outstanding. Management stated that it was in compliance with credit-agreement and lease covenants and expected continued compliance for the next twelve months.
- Management reported no legal proceedings reasonably expected to have a material adverse effect, although unfavorable outcomes could still materially affect results, financial condition, or cash flows.
- Interest-rate swaps covering $400 million of floor-plan debt were scheduled to mature in December 2014, potentially increasing exposure to variable rates thereafter.
Most important facts for investors to verify
- Whether vehicle volumes and same-store growth continue without further deterioration in used-vehicle and overall retail margins.
- The integration, earnings contribution, financing, and post-closing purchase-price adjustment associated with the MTU Detroit Diesel Australia acquisition.
- Compliance with U.S., U.K., and lease covenants as debt and floor-plan financing remain significant relative to equity.
- The effect of the December 2014 swap maturities and future interest-rate movements on floor-plan interest expense.
- Foreign-exchange effects on reported revenue, earnings, and accumulated other comprehensive income.
- Cash conversion after capital expenditures, acquisitions, dividends, share repurchases, and changes in floor-plan liabilities.
- Potential obligations from operating leases, dealership guarantees, PTL indemnification, litigation, self-insurance, and rental-vehicle residual values.