Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2017. Penske Automotive Group operates automotive and commercial truck dealerships principally in the United States, Canada and Western Europe, and distributes commercial vehicles, engines, power systems and related parts and services principally in Australia and New Zealand. As of September 30, 2017, it operated 354 retail automotive franchises, 20 Premier Truck Group locations and held a 28.9% equity-method interest in Penske Truck Leasing Co., L.P. (PTL).
Retail automotive generated 93.1% of nine-month revenue and 91.1% of gross profit. The company retailed and wholesaled more than 471,700 vehicles during the nine-month period; 58% of retail automotive revenue was generated in the U.S. and Puerto Rico and 42% internationally.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $5,524.4 million | $5,152.0 million | $15,988.9 million | $15,230.7 million |
| Gross profit | $822.6 million | $744.2 million | $2,414.2 million | $2,239.3 million |
| Operating income | $152.2 million | $141.5 million | $474.4 million | $449.7 million |
| Income from continuing operations | $94.2 million | $88.4 million | $284.5 million | $264.8 million |
| Net income attributable to common stockholders | $94.4 million | $87.5 million | $283.2 million | $260.3 million |
| Diluted EPS | $1.10 | $1.03 | $3.30 | $3.02 |
| Cash dividends per share | $0.32 | $0.28 | $0.93 | $0.81 |
- Revenue increased 7.2% in Q3 and 5.0% for the nine-month period. Gross profit increased 10.5% and 7.8%, respectively.
- Calculated gross margins were approximately 14.9% in Q3 and 15.1% for nine months; operating margins were approximately 2.8% and 3.0%; and net margins attributable to common stockholders were approximately 1.7% and 1.8%.
- Equity in earnings of affiliates increased to $30.9 million in Q3 and $70.9 million for nine months, versus $25.6 million and $43.1 million, respectively, primarily reflecting the increased PTL ownership interest.
- SG&A increased 11.2% in Q3 and 8.5% for nine months, while SG&A as a percentage of gross profit rose to 78.5% in Q3 and 77.5% for nine months.
- Q3 retail automotive trends included lower same-store new-vehicle units, stronger used-vehicle volume from acquisitions, higher finance and insurance revenue per unit, and improved service and parts margins. Nine-month same-store new-vehicle units declined 4.5% and used-vehicle units declined 0.3%.
- Premier Truck Group Q3 revenue increased 12.6% and gross profit increased 16.0%; nine-month revenue declined 5.4% while gross profit increased 10.0%, supported by used-truck performance and service and parts.
Cash flow, balance sheet, debt and liquidity
- Cash provided by continuing operating activities was $466.8 million for the nine months, compared with $463.3 million in 2016. Including non-trade floor plan borrowings as operating cash flow, management presented adjusted operating cash flow of $622.0 million versus $476.1 million.
- Investing cash use was $855.6 million, including $180.1 million of capital expenditures, $449.7 million for acquisitions and $239.1 million to acquire an additional 5.5% PTL interest.
- Financing cash provided was $397.1 million. The company issued $300.0 million of 3.75% senior subordinated notes due 2020, had $155.2 million of net non-trade floor plan borrowings, repurchased $18.5 million of common stock and paid $80.1 million of dividends.
- Cash and cash equivalents were $37.2 million at September 30, 2017, compared with $24.0 million at December 31, 2016. Working capital was $166.2 million.
- Total long-term debt was $2,238.1 million, including $2,170.5 million classified as noncurrent. Floor plan notes payable totaled $3,610.8 million, consisting of $2,222.3 million of trade floor plan debt and $1,388.5 million of non-trade floor plan debt.
- Available borrowing capacity was $484.0 million under the U.S. credit agreement, $107.2 million under the U.K. facility and approximately $6.8 million under the Australian working-capital facility.
- Management stated that operating cash flow, investment distributions and existing credit and floor plan facilities should fund operations and current commitments for at least the next twelve months. The company was in compliance with its debt and lease covenants at September 30, 2017.
Material changes versus the prior comparable period
- The company acquired CarSense and CarShop, eight retail automotive franchises and increased its PTL ownership from 23.4% to 28.9%. Acquisition cash use rose to $449.7 million from $106.0 million.
- Goodwill increased to $1,660.4 million from $1,291.2 million at year-end 2016, and other indefinite-lived intangible assets increased to $473.3 million from $420.1 million, primarily from acquisitions and foreign-currency translation.
- Total assets increased to $10.28 billion from $8.83 billion, while total liabilities increased to $8.17 billion from $7.05 billion.
- The company issued $300.0 million of 3.75% senior subordinated notes in August 2017. Other interest expense increased 28.2% for nine months, and floor plan interest expense increased 20.6%, reflecting higher borrowings and rates.
- Foreign-currency movements reduced nine-month reported revenue by $453.4 million, gross profit by $58.4 million and continuing-operations EPS by approximately $0.12. In contrast, Q3 currency movements increased revenue by $19.0 million and gross profit by $3.1 million.
- Hurricane Maria, Irma and Harvey disrupted operations. Storm-related losses, expenses and business interruption, net of expected insurance proceeds, reduced Q3 EPS by approximately $0.04; Puerto Rico impacts could continue into Q4.
- On October 2, 2017, after quarter-end, the company paid $63.8 million to settle its contingent obligations related to PTL senior unsecured notes and stated that no further obligations remained under that arrangement.
Guidance, outlook, commentary and risks
The filing does not provide formal numeric earnings or revenue guidance. Management expected U.S. new-vehicle demand to normalize after hurricane-related replacement demand boosted September sales. It anticipated support from higher OEM incentives, increased lease returns, credit availability and demand for affordable late-model used vehicles, while noting declining U.K. registrations and uncertainty related to Brexit.
Management expected stronger commercial-truck sales later in 2017 as Class 8 orders, freight metrics, utilization and used-truck values improved. It also expected continued demand for PTL leasing, maintenance and logistics services, and continued growth in Australian and New Zealand commercial-vehicle and power-systems markets.
- Key risks include economic cycles, interest-rate increases, foreign-exchange volatility, Brexit, vehicle demand and manufacturer incentives, franchise and distribution agreement restrictions, supply disruptions or recalls, severe weather, uninsured losses and dependence on key personnel.
- Debt and floor plan financing expose the company to variable-rate risk. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $3.2 million and annual floor plan interest expense by approximately $33.3 million.
- Leasing commitments, letters of credit of $33.0 million, surety bonds of $26.1 million, guarantees and other contingent obligations could require cash outlays.
- The company reported no legal proceeding reasonably expected to have a material adverse effect, but unfavorable outcomes remain possible.
- Revenue recognition standard ASC 606 was expected to be adopted January 1, 2018, using a cumulative-effect approach; management did not expect a material financial-statement impact but expected enhanced disclosures.
Important facts for investors to verify
- Whether same-store new- and used-vehicle trends and vehicle gross profit per unit improve after Q3 declines.
- The durability of increased PTL earnings and cash distributions following the 28.9% ownership increase.
- Post-quarter-end hurricane losses, insurance recoveries and Puerto Rico operating conditions.
- Debt, floor plan borrowings, covenant compliance and sensitivity to higher interest rates.
- Integration and returns from CarSense, CarShop and other acquisitions, including goodwill and intangible-asset impairment risk.
- The impact of Brexit, foreign-currency movements and changes in U.S., U.K., Australian and New Zealand vehicle markets.
- The company’s use of the expanded $200.0 million securities-repurchase authorization and its ability to maintain dividend growth while funding acquisitions and capital expenditures.