Penske Automotive Group, Inc. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three months ended March 31, 2017, compared with the same period in 2016. Penske Automotive Group operates automotive and commercial truck dealerships in the United States, Canada and Western Europe and distributes commercial vehicles, engines, power systems, parts and services principally in Australia and New Zealand. It operated 357 retail automotive franchises and retailed or wholesaled more than 154,000 vehicles during the quarter.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $5,081.1 million | $4,824.6 million | 5.3% |
| Gross profit | $774.3 million | $723.8 million | 7.0% |
| Operating income | $150.2 million | $144.1 million | 4.2% |
| Income from continuing operations | $83.6 million | $80.2 million | 4.2% |
| Net income attributable to common stockholders | $82.6 million | $79.3 million | 4.2% |
| Diluted EPS | $0.96 | $0.90 | 6.7% |
| Cash dividends per share | $0.30 | $0.26 | 15.4% |
- Retail automotive dealership revenue was $4,756.4 million, retail commercial truck revenue was $211.7 million, and commercial vehicle distribution and other revenue was $113.0 million.
- Gross margin was approximately 15.2%, compared with 15.0% in the prior-year quarter. Operating margin was approximately 3.0% in both periods, while net margin attributable to common stockholders was approximately 1.6% in both periods.
- SG&A increased 7.7% to $601.7 million; SG&A as a percentage of gross profit increased to 77.7% from 77.2%.
- Other interest expense increased 45.3% to $25.0 million, primarily because of the $500 million senior subordinated notes issued in May 2016, higher revolving borrowings and higher rates. Floor plan interest expense increased 7.0% to $13.7 million.
- Equity in earnings of affiliates increased 140.0% to $13.2 million, primarily reflecting the increase in PAG’s Penske Truck Leasing ownership from 9.0% to 23.4% in July 2016.
- Comprehensive income attributable to common stockholders was $108.3 million, including $24.7 million of foreign-currency translation income.
Cash flow, debt and liquidity
- Cash provided by continuing operating activities was $198.6 million, up from $82.6 million. Including non-trade floor-plan borrowings as operating activity for analytical purposes, operating cash flow was $261.6 million versus $137.5 million.
- Cash used in continuing investing activities was $342.1 million, including $314.2 million for acquisitions and $36.9 million for equipment and improvements.
- Cash provided by continuing financing activities was $187.8 million, including $153.1 million of net long-term debt borrowings, $63.0 million of non-trade floor-plan borrowings, $25.6 million of dividends and $2.7 million of share repurchases.
- Cash and cash equivalents increased to $72.2 million from $24.0 million at December 31, 2016. Reported working capital was $169.3 million.
- Total long-term debt was $2,037.4 million, including $287.0 million under the U.S. revolving credit line, $146.8 million under the U.K. revolving credit line, $1,336.1 million of senior subordinated notes, $215.0 million of mortgage facilities and other borrowings. Floor plan notes payable totaled $3,401.2 million.
- Available borrowing capacity was $413.0 million under the U.S. credit agreement, $54.0 million under the U.K. credit agreement and $18.6 million under the Australian working capital facility. Management reported compliance with all debt and lease covenants.
Material changes versus the prior comparable period
- Revenue increased $256.5 million and gross profit increased $50.5 million, largely from dealership acquisitions and growth in new and used vehicles, finance and insurance, and service and parts.
- Foreign-exchange translation, particularly the weaker British pound, reduced reported revenue by $287.6 million and gross profit by $37.2 million; management estimated a $0.09 reduction in continuing-operations EPS. Excluding currency effects, revenue and gross profit increased 11.3% and 12.1%, respectively.
- New retail automotive unit sales increased 5.8%, but same-store new units increased only 0.6% and same-store gross profit declined 4.9%. Used retail unit sales increased 18.1%, primarily from acquisitions, while same-store used units declined 1.5%.
- Finance and insurance revenue increased 16.0% to $137.4 million, and service and parts revenue increased 4.4% to $498.9 million.
- Premier Truck Group revenue increased 2.4% and gross profit increased 9.6%, despite a 17.3% decline in same-store new truck units. Used truck sales and profitability improved.
- Commercial vehicle distribution revenue increased 11.3% to $112.1 million and gross profit increased 18.1% to $29.3 million.
- The company acquired CarSense in the United States, CarShop in the United Kingdom and four retail automotive franchises. Aggregate acquisition consideration was $370.4 million, including $314.2 million of cash, $32.4 million of common stock and $20.0 million of contingent consideration. Management expects the CarSense and CarShop businesses to generate approximately $700 million of annual revenue.
- The company disposed of four retail automotive franchises during the quarter. A $0.6 million after-tax loss from discontinued operations was recorded.
Guidance, outlook, risks and unusual items
- No formal earnings or revenue guidance was provided. Management expects U.S. light-vehicle sales to remain near current 2017 levels and expects opportunities in used vehicles as lease returns increase.
- Management expects continued demand for PTL’s leasing, rental, maintenance and logistics services, but commercial truck markets remain exposed to excess fleet capacity and softer freight demand. North American Class 8 heavy-duty truck sales declined 24.0% in the quarter.
- U.K. operations face uncertainty from Brexit, including potential effects on economic conditions, trade terms, currency values and vehicle registrations. The weaker British pound materially reduced reported results.
- The company expects Australian and New Zealand commercial vehicle markets to improve modestly, while parts distribution is expected to remain resilient and off-highway engine orders to continue growing.
- Key risks include economic and consumer-demand cycles, interest-rate and foreign-exchange volatility, manufacturer and franchise dependence, vehicle recalls or supply disruptions, acquisition integration, leverage and covenant compliance, lease obligations, litigation, self-insurance exposures, regulatory changes, technology disruption and the performance and distributions of PTL.
- Management believes operating cash flow, investment distributions, credit facilities and floor-plan financing are sufficient for existing operations and commitments for at least the next twelve months. Significant acquisitions, debt refinancing or large repurchases could require additional capital.
- Interest-rate sensitivity was estimated at approximately $4.3 million of annual other-interest expense for a 100-basis-point change in applicable revolving rates and approximately $32.2 million of annual floor-plan interest expense for a 100-basis-point change in floor-plan rates. A 10% change in average foreign-exchange rates would have changed quarterly revenue by approximately $224.4 million.
- No legal proceedings were identified as reasonably expected to have a material adverse effect, although management cautioned that adverse outcomes remain possible. Letters of credit totaled $28.7 million and surety bonds totaled $16.4 million.
Most important facts for investors to verify
- Whether acquisition-driven revenue growth converts into sustainable same-store growth and improved vehicle gross profit per unit.
- The continued effect of the British pound and other currency movements on reported revenue, margins and EPS.
- Commercial truck demand, used-truck pricing and the impact of excess fleet capacity on Premier Truck Group and PTL.
- Debt levels, variable-rate exposure, floor-plan availability and compliance with financial covenants.
- The integration and profitability of CarSense, CarShop and other acquired dealerships, including contingent consideration.
- Future PTL earnings, cash distributions and the company’s ability to realize the expected benefits of its 23.4% ownership interest.
- Lease, litigation, self-insurance, guarantee and other off-balance-sheet obligations.
- Potential effects of Brexit, manufacturer actions, regulatory changes and vehicle supply or recall disruptions.