Penske Automotive Group, Inc. — Form 10-Q Summary
Business Context and Reporting Period
This filing covers the quarter ended March 31, 2023. Penske Automotive Group is an international transportation services company operating automotive dealerships, commercial truck dealerships, commercial vehicle distribution businesses, and a 28.9% equity-method investment in Penske Transportation Solutions. The company operated 333 franchised automotive dealerships, 20 used-vehicle dealerships, and 39 commercial truck locations at quarter-end.
Retail automotive generated 85.8% of revenue, retail commercial truck generated 12.2%, and commercial vehicle distribution and other operations generated 2.0%. Results include the transition of Mercedes-Benz U.K. dealerships to an agency model, under which PAG records manufacturer fees rather than the full vehicle selling price.
Financial Performance and Key Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $7,339.0 million | $6,975.4 million | 5.2% increase |
| Gross profit | $1,252.3 million | $1,231.7 million | 1.7% increase |
| Operating income | $373.5 million | $402.0 million | 7.1% decrease |
| Net income attributable to PAG | $298.3 million | $367.9 million | 18.9% decrease |
| Diluted EPS | $4.31 | $4.76 | 9.5% decrease |
| Net cash from operating activities | $311.2 million | $380.6 million | 18.2% decrease |
Gross margin was approximately 17.1%, compared with 17.7% in the prior-year quarter. Operating margin was approximately 5.1%, compared with 5.8%, and net margin attributable to PAG was approximately 4.1%, compared with 5.3%.
- Retail automotive revenue increased 4.5% to $6,299.8 million. New vehicle revenue increased 11.3%, while used vehicle revenue declined 5.2%, finance and insurance revenue declined 4.8%, and service and parts revenue increased 16.5%.
- Retail commercial truck revenue increased 13.0% to $895.6 million, driven by a 27.2% increase in new truck revenue and a 15.7% increase in service and parts revenue. Used truck revenue declined 50.6%.
- Commercial vehicle distribution and other revenue declined 6.7% to $143.6 million, while gross profit increased 7.3% to $42.7 million.
- Equity in earnings of affiliates declined 31.4% to $82.1 million, including $80.8 million from Penske Transportation Solutions, compared with $118.5 million in the prior-year quarter.
- Floor plan interest expense increased 272.0% to $27.9 million, and other interest expense increased 26.1% to $20.8 million, reflecting higher interest rates and higher average borrowings.
- SG&A increased 5.9% to $844.9 million. SG&A as a percentage of gross profit increased to 67.5% from 64.8%, primarily reflecting inflation in personnel, rent, and other expenses.
Cash Flow, Liquidity, Debt, and Capital Allocation
- Cash and cash equivalents were $100.6 million at March 31, 2023, compared with $106.5 million at December 31, 2022.
- Operating cash flow was $311.2 million. After treating non-trade floor plan changes as financing, operating cash flow was $178.1 million, compared with $387.1 million in the prior-year quarter.
- Capital expenditures were $102.4 million, compared with $56.2 million in Q1 2022. Investing cash outflow was $105.5 million; PAG made no acquisitions during the quarter.
- Total long-term debt was $1,701.3 million, including $546.5 million of 3.50% notes due 2025, $495.2 million of 3.75% notes due 2029, $590.9 million of mortgage facilities, and $26.2 million under the Australia credit agreement.
- Floor plan notes payable totaled $2,896.1 million, including $1,584.2 million of trade floor plan financing and $1,311.9 million of non-trade floor plan financing.
- Available borrowing capacity at March 31, 2023 included $800.0 million under the U.S. credit agreement, £200.0 million under the U.K. agreement, AU$35.8 million under the Australia agreement, and $43.0 million under the revolving mortgage facility. PAG had no outstanding revolver borrowings under the U.S. or U.K. credit agreements.
- PAG repurchased 890,327 shares for $110.2 million and paid $42.3 million of dividends. The quarterly dividend increased to $0.61 per share from $0.47.
Management stated that operating cash flow, distributions from PTS and other joint ventures, credit facilities, and floor plan financing should fund existing operations and commitments for at least the next twelve months. The company was in compliance with its debt and lease covenants at quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue grew, but profitability declined because of lower used-vehicle margins, higher interest expense, higher SG&A, and lower PTS earnings.
- New automotive unit sales increased 4.7%, excluding agency units, while new vehicle gross profit per unit declined 7.7%. Used automotive unit sales decreased 0.6%, and used gross profit per unit declined 20.8%.
- New commercial truck sales increased 17.2%, but new truck gross profit per unit declined 4.3%. Used truck sales declined 21.7%, and used truck gross profit per unit declined 56.8%.
- Foreign currency movements reduced reported revenue by $294.2 million, gross profit by $43.9 million, and EPS by approximately $0.11. Excluding currency effects, revenue increased 9.4% and gross profit increased 5.2%.
- Inventory increased to $3,630.4 million from $3,509.1 million at year-end 2022, while cash declined modestly.
- The company closed four U.S. locations during the quarter: three automotive franchises and one CarShop location.
- On April 20, 2023, after quarter-end, PAG amended its U.S. credit agreement, increasing borrowing capacity from $800 million to $1.2 billion and transitioning the reference rate from LIBOR to SOFR.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal quantitative earnings or revenue guidance. Management expects continued demand for commercial trucks, increasing new-vehicle availability, and strong demand for PTS full-service leasing and commercial rental trucks. Management also expects PTS results to be partly offset by lower vehicle-sale gains, lower consumer rental utilization, and higher inflation and interest costs.
- New vehicle supply is improving, but further supply disruptions could suppress volumes. Improved supply may also reduce new and used vehicle gross profit per unit.
- Used vehicle affordability is pressured by inflation and higher interest rates. Used vehicle days’ supply improved to 39 days from 53 days at December 31, 2022.
- The Mercedes-Benz U.K. agency model and potential expansion of agency or direct-sales models could reduce reported revenue and floor plan interest expense; the effect on profitability and operations remains uncertain.
- Variable-rate debt and floor plan financing create material interest-rate exposure. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $3.8 million and annual floor plan interest expense by approximately $27.7 million.
- Foreign currency exposure is significant; a 10% change in average exchange rates versus the U.S. dollar would have changed quarterly revenue by approximately $321.4 million.
- Key risks include vehicle and parts shortages, inflation, consumer credit availability, economic cyclicality, manufacturer franchise relationships, electric-vehicle and emissions regulations, cybersecurity, labor availability, PTS performance, covenant compliance, and litigation.
- No legal proceedings were identified that management reasonably expects to have a material adverse effect, although unfavorable outcomes remain possible. The company had $26.8 million of letters of credit, $19.0 million of bank guarantees, and $21.5 million of surety bonds outstanding.
Investor Verification Checklist
- Verify whether improving vehicle availability leads to higher unit volumes or further compression of new and used vehicle gross profit per unit.
- Monitor used-vehicle pricing, inventory levels, affordability, and finance-and-insurance revenue per unit.
- Track floor plan balances, variable interest rates, interest expense, and the impact of the SOFR transition.
- Evaluate the sustainability of PTS distributions and equity earnings, including the effects of lower vehicle-sale gains and utilization.
- Assess the financial and reporting effects of the Mercedes-Benz U.K. agency model and any additional manufacturer agency initiatives.
- Review capital allocation between share repurchases, dividends, acquisitions, capital expenditures, and debt reduction.
- Consider foreign currency sensitivity, regulatory changes affecting internal-combustion and commercial vehicles, and compliance with debt and lease covenants.