Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited quarterly report for the three and nine months ended September 30, 2021, filed October 28, 2021. Penske Automotive Group is an international transportation services company operating 305 retail automotive franchised dealerships, 35 commercial truck locations, commercial vehicle distribution operations in Australia and New Zealand, and a 28.9% equity-method investment in Penske Transportation Solutions (PTS).
Operations span the United States, United Kingdom, Canada, Germany, Italy, Japan, Australia, and New Zealand. The company retailed and wholesaled more than 433,000 vehicles during the first nine months of 2021 and employed more than 24,000 people worldwide.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $6,497.3 million | $5,971.6 million | $19,258.6 million | $14,631.8 million |
| Gross profit | $1,165.7 million | $956.5 million | $3,261.6 million | $2,286.1 million |
| Operating income | $377.8 million | $284.2 million | $1,000.1 million | $462.0 million |
| Income from continuing operations | $356.0 million | $247.5 million | $879.4 million | $343.6 million |
| Net income attributable to PAG common stockholders | $355.1 million | $246.6 million | $876.5 million | $343.4 million |
| Diluted EPS | $4.47 | $3.07 | $10.92 | $4.27 |
| Net cash from continuing operating activities | Not provided for quarter | Not provided for quarter | $1,330.4 million | $849.5 million |
- Q3 revenue increased 8.8%, gross profit increased 21.9%, operating income increased 32.9%, and diluted EPS increased 45.6% versus the prior-year quarter.
- Nine-month revenue increased 31.6%, gross profit increased 42.7%, operating income increased 116.5%, and diluted EPS increased 155.7% year over year.
- Implied gross margin was approximately 17.9% in Q3 and 16.9% for the first nine months, compared with 16.0% and 15.6%, respectively, in the comparable 2020 periods. Implied operating margin was approximately 5.8% in Q3 and 5.2% for the first nine months.
- Retail automotive dealership revenue was $17,039.4 million for the first nine months, retail commercial truck revenue was $1,777.3 million, and commercial vehicle distribution revenue was $441.9 million.
- Equity in earnings of affiliates increased to $281.5 million from $110.6 million for the first nine months, including $274.5 million of earnings from PTS versus $108.0 million in 2020.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash and cash equivalents were $119.2 million at September 30, 2021, versus $49.5 million at December 31, 2020.
- Total assets were $12,719.3 million and total liabilities were $8,852.9 million. Total equity was $3,866.4 million.
- Inventory declined to $2,598.4 million from $3,425.6 million, primarily reflecting lower new-vehicle inventory. New-vehicle days’ supply was 19 at September 30, 2021, versus 50 at year-end 2020; used-vehicle days’ supply was 40 versus 48.
- Total long-term debt was $1,424.6 million, including $544.3 million of 3.50% senior subordinated notes due 2025, $494.1 million of 3.75% notes due 2029, $319.8 million of mortgage facilities, and $27.4 million of Australian capital loans. Net long-term debt was $1,356.7 million.
- There were no outstanding borrowings under the U.S. or U.K. revolving credit facilities at September 30, 2021. Reported available borrowing capacity was $800.0 million under the U.S. facility, £162.0 million under the U.K. facility, and AU$50.0 million under the Australian working capital facility.
- Operating cash flow was $1,330.4 million. Investing cash flow used $376.1 million, including $157.5 million of capital expenditures and $278.0 million for acquisitions. Financing cash flow used $881.5 million, including $206.9 million of share repurchases, $106.3 million of dividends, and net repayments of debt and non-trade floor plan borrowings.
- The company issued $500.0 million of 3.75% notes due 2029 and redeemed $500.0 million of 5.50% notes due 2026, reducing interest costs but producing a $17.0 million debt redemption charge.
Material Changes Versus the Prior Comparable Period
- Results benefited from higher vehicle gross profit per unit, cost reductions, improved demand, favorable foreign currency translation, and increased PTS earnings.
- Q3 new retail automotive unit sales declined 15.5%, but revenue declined only 3.2% because revenue per unit increased 14.6%; new-vehicle gross profit increased 36.9% and gross margin rose to 11.6% from 8.2%.
- Q3 used retail automotive revenue increased 17.8% despite a 0.5% unit decline; revenue per unit increased 18.4% and gross profit increased 34.8%.
- For the first nine months, new automotive units increased 20.7% and used automotive units increased 16.5%, while gross profit per unit increased 41.2% and 49.6%, respectively.
- Q3 SG&A increased 17.8% to $757.7 million, but SG&A as a percentage of gross profit improved to 65.0% from 67.3%. Nine-month SG&A as a percentage of gross profit improved to 66.6% from 76.1%.
- Q3 floor plan interest expense declined 25.0% and other interest expense declined 44.3%. Nine-month declines were 37.4% and 39.7%, respectively.
- The company acquired Kansas City Freightliner and one U.S. retail automotive franchise during the first nine months, for total acquisition cash outlays of $278.0 million. In October 2021, it acquired the remaining 51% of the Nicole Group in Japan; those dealerships are expected to be consolidated beginning in Q4 2021.
- Share repurchases totaled $206.9 million for the first nine months, including $178.7 million during Q3. The remaining repurchase authorization was $71.3 million at September 30, 2021. Quarterly dividends increased from $0.42 in Q1 to $0.45 in Q3, and a $0.46 dividend was announced for December 2021.
Guidance, Outlook, Commentary, and Risks
- The filing does not provide formal full-year revenue or earnings guidance. Management expects resilient performance in commercial vehicle distribution and PTS for the remainder of 2021 and planned to open one additional CarShop location by year-end.
- Management expects vehicle and parts shortages related to microchips and other components to continue into 2022. Lower inventories have supported higher new and used vehicle margins, but management expects gross profit per vehicle could decline when supply normalizes.
- COVID-19 conditions improved relative to 2020, although renewed restrictions, workforce disruptions, changing customer demand, and global supply-chain effects remain risks.
- Major risks include manufacturer dependence and franchise agreement renewals, potential agency selling models in the U.K. and Europe, cyclical vehicle demand, interest-rate and foreign-currency exposure, LIBOR transition, acquisition integration, cyberattacks, regulatory changes, electrification, and continued vehicle and parts shortages.
- The company estimates total undiscounted operating lease obligations of approximately $5.4 billion and has $29.2 million of letters of credit and $21.3 million of surety bonds outstanding.
- Management stated that it was in compliance with debt and lease covenants and expects available cash flow, distributions, credit facilities, and floor plan financing to fund existing operations and commitments for at least the next twelve months. Litigation matters were not expected to have a material adverse effect, although outcomes cannot be predicted with certainty.
- Unusual items included an $8.8 million tax expense from the U.K. tax-rate revaluation, a $17.0 million debt-redemption expense, and a $15.4 million tax benefit in the 2020 comparison period related to tax legislation.
Important Facts for Investors to Verify
- Whether elevated vehicle gross profit per unit persists after microchip and vehicle supply constraints ease.
- The timing and financial impact of the October 2021 Nicole Group acquisition and other CarShop openings.
- PTS operating performance, distributions, and the sustainability of its contribution to PAG earnings.
- New-vehicle and parts availability, days’ supply, used-vehicle pricing, and manufacturer production levels through 2022.
- Compliance with debt and lease covenants, available revolving capacity, and exposure to variable interest rates and LIBOR replacement benchmarks.
- Potential effects of agency sales models, vehicle electrification, manufacturer concentration, and evolving dealership regulations.
- Remaining share-repurchase authorization, dividend capacity, and competing uses of cash for acquisitions, capital expenditures, and debt service.