PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q2 FY2022

Penske Automotive Group, Inc. — Q2 2022 Form 10-Q Summary

Business context and reporting period

The filing covers the quarter and six months ended June 30, 2022. Penske Automotive Group is a diversified international transportation services company operating automotive dealerships, commercial truck dealerships, commercial vehicle distribution and power systems businesses, and a 28.9% equity-method investment in Penske Transportation Solutions. At June 30, 2022, the company operated 332 franchised automotive dealerships, 21 used-vehicle dealerships, and 39 Premier Truck Group locations.

Financial performance and key metrics

Metric	Q2 2022	Q2 2021	Six months 2022	Six months 2021
Total revenue	$6,906.9 million	$6,987.5 million	$13,882.3 million	$12,761.3 million
Gross profit	$1,237.0 million	$1,182.7 million	$2,468.7 million	$2,095.9 million
Operating income	$387.6 million	$402.7 million	$789.6 million	$622.3 million
Income from continuing operations	$375.9 million	$340.3 million	$745.4 million	$523.4 million
Net income attributable to PAG common stockholders	$374.0 million	$338.9 million	$741.9 million	$521.4 million
Diluted EPS	$4.93	$4.20	$9.70	$6.46
Cash flow from continuing operations	Not separately provided	Not separately provided	$879.2 million	$916.7 million

Six-month revenue increased 8.8%, while gross profit increased 17.8%. Q2 revenue declined 1.2%, primarily reflecting lower vehicle volumes and unfavorable foreign currency translation, while gross profit increased 4.6%.
Calculated gross margin was approximately 17.9% in Q2 2022 versus 16.9% in Q2 2021, and approximately 17.8% for the six months versus 16.4% in the prior-year period.
Calculated operating margin was approximately 5.6% in Q2 and 5.7% for the six months, compared with 5.8% and 4.9%, respectively, in the comparable periods.
Equity in earnings of affiliates increased to $138.0 million in Q2 and $257.6 million for the six months, from $105.6 million and $161.0 million, respectively. Management attributed the increase primarily to stronger Penske Transportation Solutions results.
SG&A increased 9.1% in Q2 and 14.2% for the six months. Management cited inflationary pressure on personnel, rent and other expenses.
New-vehicle supply constraints reduced volumes but increased gross profit per unit. Six-month same-store new automotive unit sales decreased 19.7%, while same-store gross profit per new vehicle increased 53.2%.
Six-month same-store used automotive unit sales decreased 2.0%; used-vehicle revenue increased 11.9%, but used-vehicle gross margin declined to 6.5% from 7.3%.
Retail commercial truck revenue increased 47.3% for the six months, supported by acquisitions, higher new-truck deliveries and service-and-parts growth.

Cash flow, debt and liquidity

Cash and cash equivalents were $154.9 million at June 30, 2022, compared with $100.7 million at December 31, 2021.
Operating cash flow was $879.2 million. Investing cash outflow was $357.0 million, including $138.1 million of capital expenditures and $225.9 million for acquisitions. Financing cash outflow was $459.0 million, including $275.4 million of share repurchases and $74.4 million of dividends.
Total long-term debt was $1,486.0 million, including $545.4 million of 3.50% senior subordinated notes due 2025, $494.7 million of 3.75% notes due 2029 and $366.9 million of mortgage facilities. No borrowings were outstanding under the U.S. or U.K. revolving credit agreements at quarter-end.
Available borrowing capacity was reported as $800.0 million under the U.S. credit agreement, £162.0 million under the U.K. agreement, AU$40.0 million under the Australian working-capital facility and $142.8 million under the revolving mortgage facility.
Management stated that operating cash flow, distributions from Penske Transportation Solutions and existing credit and floor-plan facilities should fund operations and current commitments for at least the next twelve months.
Total undiscounted operating lease obligations were estimated at $5.3 billion, with recognized operating lease liabilities of $2.45 billion.

Material changes versus the prior comparable period

Six-month net income attributable to PAG common stockholders increased 42.3%, and diluted EPS increased 50.2%, despite lower automotive unit volumes.
Six-month new automotive revenue decreased 6.5%, but new-vehicle gross profit increased 29.5% because of higher average gross profit per unit.
Automotive finance and insurance revenue increased 15.1% for the six months, with same-store revenue per retail unit increasing 24.0%.
Retail automotive service-and-parts revenue increased 12.8%, while its gross margin declined to 60.0% from 61.2%.
Equity earnings increased 60.0% for the six months, including a $98.9 million increase from Penske Transportation Solutions.
Foreign currency movements reduced six-month revenue by $279.8 million, gross profit by $36.6 million and continuing-operations EPS by approximately $0.16.
The company repurchased 2.7 million shares for $275.4 million during the six months, compared with $28.1 million of repurchases in the prior-year period. Shares outstanding declined to 75.0 million from 77.6 million at December 31, 2021.

Guidance, outlook, risks and unusual items

Management expects vehicle and parts supply disruptions to continue until component availability improves. Higher pricing and margins may decline when supply normalizes, although volumes could increase.
The company expects continued resilient performance from Penske Transportation Solutions in 2022, supported by demand for commercial rental trucks, full-service leasing and used vehicle sales.
The company signed an agreement to acquire five Mercedes-Benz dealerships and three aftersales locations in North London, with closing expected in the third quarter of 2022 subject to customary conditions.
U.K. Mercedes-Benz dealerships are expected to transition to an agency model beginning in 2023. The model is expected to reduce vehicle inventory and floor-plan requirements, but its broader effect on revenue and profitability remains uncertain.
Key risks include vehicle and parts shortages, inflation, higher interest rates, foreign currency volatility, COVID-19 effects, the war in Ukraine, changing manufacturer distribution models, electric-vehicle adoption, franchise restrictions, acquisition integration, credit availability, covenant compliance and cybersecurity.
A 100-basis-point change in variable rates was estimated to affect annual other interest expense by approximately $0.9 million and annual floor-plan interest expense by approximately $19.4 million.
The company reported no legal proceedings reasonably expected to have a material adverse effect, although unfavorable outcomes could still materially affect results, liquidity or cash flows.
Penske Transportation Solutions adopted ASC 842 on January 1, 2022, resulting in a $121.6 million after-tax cumulative reduction to retained earnings through the equity-method investment.
The Board declared a $0.53 per-share dividend payable September 1, 2022, and increased available repurchase authorization to $330.6 million as of July 26, 2022.

Important facts for investors to verify

Whether vehicle supply normalization causes the unusually high new-vehicle and commercial-truck gross profit per unit to decline.
The sustainability of Penske Transportation Solutions earnings and cash distributions, which materially supported pre-tax income and liquidity.
The financial and operational impact of the U.K. Mercedes-Benz agency transition beginning in 2023.
Exposure to rising variable interest rates, LIBOR replacement, floor-plan financing costs and debt maturities.
Whether inflation-driven SG&A growth continues to outpace gross-profit growth in quarterly periods.
Integration, funding and closing risks associated with the North London Mercedes-Benz acquisition and other dealership acquisitions.
Foreign currency effects, particularly the impact of British pound weakness on reported revenue, profit and equity.
Compliance with credit agreement and operating lease covenants, as well as the availability of floor-plan financing.