PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q2 FY2013

Penske Automotive Group, Inc. — Form 10-Q Summary

Business context and reporting period

This quarterly report covers the three and six months ended June 30, 2013. Penske Automotive Group operated 329 retail automotive franchises, including 172 in the United States and 157 primarily in the U.K. The company also operated Hertz rental locations, held a 9.0% interest in Penske Truck Leasing, and acquired a 27% interest in Around-The-Clock Freightliner during June 2013.

Financial performance and key metrics

Metric	Three months ended June 30, 2013	Three months ended June 30, 2012	Six months ended June 30, 2013	Six months ended June 30, 2012
Total revenue	$3.699 billion	$3.315 billion	$7.104 billion	$6.479 billion
Gross profit	$569.0 million	$505.0 million	$1.103 billion	$999.9 million
Operating income	$113.7 million	$91.0 million	$218.9 million	$185.0 million
Net income attributable to PAG stockholders	$62.0 million	$49.1 million	$119.7 million	$95.9 million
Diluted EPS	$0.69	$0.54	$1.32	$1.06

Second-quarter revenue increased 11.6%; six-month revenue increased 9.6%.
Second-quarter net income attributable to common stockholders increased 26.4%; six-month net income increased 24.8%.
Approximate second-quarter gross, operating, and net margins were 15.4%, 3.1%, and 1.7%, respectively, compared with 15.2%, 2.7%, and 1.5% in the prior-year quarter.
Approximate six-month gross, operating, and net margins were 15.5%, 3.1%, and 1.7%, respectively, compared with 15.4%, 2.9%, and 1.5% in the prior-year period.
Six-month retail unit sales increased 10.6% for new vehicles and 13.7% for used vehicles. Same-store unit sales increased 8.5% and 10.5%, respectively.
Six-month finance and insurance revenue increased 14.7% to $182.6 million. Service and parts revenue increased 7.4% to $776.9 million, with gross margin improving to 59.2% from 58.1%.
Six-month operating cash flow from continuing operations was $175.6 million, compared with $202.0 million in 2012. Including non-trade floor-plan borrowings as operating activity, adjusted operating cash flow was $209.1 million versus $229.0 million.
Capital expenditures were $143.6 million, including $76.5 million for Hertz rental vehicles. Acquisition and other investment cash outflows were $30.7 million.
Cash and cash equivalents declined to $26.3 million at June 30, 2013, from $43.4 million at December 31, 2012.

Material changes versus the prior comparable period

Revenue growth was led by higher vehicle volumes, with second-quarter new and used vehicle revenue increasing 12.7% and 15.5%, respectively.
Gross profit rose 12.7% in the second quarter and 10.3% for the six-month period, although vehicle gross profit per unit declined. Retail gross margin decreased to 15.9% in the quarter and 16.1% year to date, from 16.3% and 16.5%.
SG&A increased 9.9% in the quarter and 8.4% year to date, but SG&A as a percentage of gross profit improved to 77.4% and 77.5%, respectively.
Floor-plan interest expense increased 10.7% in the quarter and 9.3% year to date due primarily to higher inventory financing balances. Other interest expense increased modestly despite the lower coupon on debt issued in August 2012.
Discontinued operations generated after-tax losses of $2.0 million in the quarter and $1.1 million year to date, compared with losses of $1.2 million and $4.1 million in the prior-year periods.
Accumulated other comprehensive loss increased to $41.5 million, primarily because of a $35.6 million foreign-currency translation loss during the first six months.
Long-term debt, including current maturities, was $920.2 million at June 30, 2013, compared with $937.5 million at December 31, 2012. Floor-plan notes payable totaled $2.228 billion, compared with $2.134 billion.

Guidance, outlook, risks, contingencies, and unusual items

Management expected continued improvement in U.S. and U.K. vehicle markets, citing stronger consumer demand, an aging vehicle fleet, credit availability, new model introductions, and favorable industry forecasts. No formal earnings guidance was provided.

In July 2013, the company agreed to acquire Western Star Trucks Australia for approximately AU$218.9 million, or about $200 million, subject to closing conditions. The transaction was expected to close in the third quarter and be initially funded with cash and revolving credit capacity, with floor-plan financing expected to fund part of vehicle inventory.
Management stated that operating cash flow, investment distributions, existing cash, credit facilities, and floor-plan financing were expected to fund operations and commitments for at least the next twelve months, including the planned acquisition.
Available borrowing capacity was $353.0 million under the U.S. credit agreement and £110.0 million, or approximately $167.3 million, under the U.K. credit agreement. The company was in compliance with credit, lease, and debt covenants at June 30, 2013.
Variable-rate exposure remained significant. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $1.2 million and annual floor-plan interest expense by approximately $16.3 million.
Interest-rate swaps fixed the LIBOR component of $400 million of floor-plan debt through December 2014, but increased the weighted-average floor-plan borrowing rate by approximately 35 basis points in the quarter and 37 basis points year to date.
Foreign-currency exposure was material; a 10% change in average exchange rates versus the U.S. dollar would have changed six-month revenue by approximately $252.2 million.
Key risks include economic cycles, consumer demand and credit availability, manufacturer and franchise dependence, vehicle and parts supply disruptions, foreign exchange, acquisition integration, covenant compliance, interest rates, legal proceedings, self-insurance claims, and the performance of PTL and other affiliates.
The company reported $18.2 million of letters of credit and $9.1 million of surety bonds. It also retained certain lease obligations for sold or subleased properties and indemnification exposure related to PTL financing.

Important facts for investors to verify

Whether the Western Star Trucks Australia acquisition closed on expected terms and its effect on leverage, liquidity, and earnings.
Inventory levels, floor-plan borrowings, and the ability to convert higher vehicle volumes into sustainable per-unit gross profit.
Continued margin performance in new and used vehicles versus higher-margin finance and insurance and service operations.
Cash conversion after capital expenditures, acquisitions, dividends, share repurchases, and working-capital changes.
Compliance with U.S. and U.K. credit covenants and availability under revolving facilities.
Exposure to variable interest rates, foreign-currency movements, manufacturer incentives, and potential changes in PTL distributions.
Resolution and potential financial impact of legal, lease-guarantee, self-insurance, and other contingent obligations.
The effect of discontinued operations, foreign-currency translation losses, and other non-operating items on reported earnings and equity.