Penske Automotive Group, Inc. — Q1 2022 Form 10-Q Summary
Business context and reporting period
Penske Automotive Group is a diversified international automotive and commercial truck retailer and transportation services company. It operates 321 franchised automotive dealerships, 23 CarShop used-vehicle dealerships, 41 Premier Truck Group locations, Penske Australia distribution operations, and owns 28.9% of Penske Transportation Solutions. The filing covers the unaudited three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Total revenue | $6,975.4 million | $5,773.8 million | 20.8% increase |
| Gross profit | $1,231.7 million | $913.2 million | 34.9% increase |
| Gross margin | 17.7% | 15.8% | Up approximately 190 bps |
| Operating income | $402.0 million | $219.6 million | 83.1% increase |
| Operating margin | 5.8% | 3.8% | Up approximately 200 bps |
| Net income attributable to PAG stockholders | $367.9 million | $182.5 million | 101.6% increase |
| Diluted EPS | $4.76 | $2.26 | 110.6% increase |
| Cash flow from continuing operations | $380.6 million | $239.3 million | Increase of $141.3 million |
Revenue contributions were $6,029.2 million from retail automotive, $792.3 million from retail commercial truck, and $153.9 million from commercial vehicle distribution and other operations. Equity in earnings of affiliates increased to $119.6 million from $55.4 million, including $118.5 million from Penske Transportation Solutions.
Cash and cash equivalents were $170.3 million at March 31, 2022, compared with $100.7 million at December 31, 2021. Total long-term debt was $1,463.3 million, including the current portion, and floor plan notes payable totaled $2,548.3 million. Operating lease liabilities totaled $2,505.1 million. The company reported $800.0 million of U.S. revolving credit availability, £145.0 million of U.K. availability, AU$46.0 million of Australian working-capital availability, and $149.1 million of mortgage-facility availability.
Material changes versus the prior comparable period
- Retail automotive revenue increased 15.8%, driven primarily by higher used-vehicle revenue, finance and insurance revenue, and service and parts revenue. New-vehicle units declined 9.7%, but new-vehicle revenue increased 1.0% because of higher selling prices and gross profit per unit.
- Used-vehicle revenue increased 34.0%, with used retail units up 12.9% and average revenue per unit up 18.7%. Used-vehicle gross profit increased 42.4%.
- Retail commercial truck revenue increased 82.3%, reflecting the February 2022 acquisition of TEAM Truck Centres and higher new-truck volumes and pricing.
- Gross profit benefited from constrained new-vehicle and truck supply, strong demand, and higher gross profit per unit. Management cautioned that margins may decline when supply conditions normalize.
- SG&A increased 20.1% to $797.8 million, but declined to 64.8% of gross profit from 72.7%, reflecting operating leverage and expense control.
- Operating cash flow increased to $380.6 million. Investing cash usage increased to $149.8 million, including $93.6 million for acquisitions and $56.2 million of capital expenditures.
- Financing cash usage included $119.2 million of common-stock repurchases and $36.4 million of dividends. The company repurchased 1,203,449 shares at an average price of $99.06 per share.
- On January 1, 2022, Penske Transportation Solutions adopted ASC 842, resulting in a $121.6 million after-tax cumulative reduction to retained earnings.
- Foreign-currency movements reduced revenue by $34.6 million, gross profit by $3.4 million, and continuing-operations EPS by approximately $0.05.
Guidance, outlook, commentary, risks, and unusual items
Management expects cash flow from operations, distributions from Penske Transportation Solutions and other investments, and existing financing resources to fund current operations and commitments for at least the next twelve months. No quantitative earnings or revenue guidance was provided.
- Vehicle and parts shortages caused by COVID-19, semiconductor and component constraints, and the war in Ukraine are expected to continue. New-vehicle supply was 16 days at March 31, 2022, versus 17 days at December 31, 2021; used-vehicle supply was 41 days versus 60 days.
- Management expects resilient 2022 performance from Penske Transportation Solutions, supported by demand for commercial rental trucks, full-service leasing, and used-vehicle sales.
- The company agreed to transition 14 U.K. Mercedes-Benz dealerships to an agency model beginning January 1, 2023. Management expects lower reported revenue, SG&A, and floor-plan interest expense, but the broader earnings impact remains uncertain.
- Key risks include inflation, higher interest rates, foreign-exchange volatility, cyclical vehicle demand, manufacturer and franchise dependence, supply-chain disruption, changing emissions and electric-vehicle regulations, agency and direct-sales models, cybersecurity, covenant compliance, and the ability to refinance debt.
- A 100-basis-point interest-rate change was estimated to affect annual other interest expense by approximately $1.4 million and annual floor-plan interest expense by approximately $20.3 million.
- Legal proceedings were not expected to have a material adverse effect, although unfavorable outcomes could materially affect results. The company had $29.2 million of letters of credit and $21.6 million of surety bonds outstanding.
- The company was in compliance with its debt and lease covenants as of March 31, 2022, and expected to remain compliant for the following twelve months.
Important facts for investors to verify
- Whether unusually high new- and used-vehicle gross profit per unit persists as vehicle availability improves.
- The effect of the January 2023 U.K. Mercedes-Benz agency transition on reported revenue, margins, working capital, and earnings.
- Progress integrating TEAM Truck Centres and the April 2022 BMW/MINI dealership acquisitions.
- Exposure to variable-rate floor-plan and other debt, including the impact of LIBOR transition and rising interest rates.
- Sustainability of distributions and earnings from the 28.9% Penske Transportation Solutions investment.
- Liquidity after acquisitions, capital expenditures, dividends, and the remaining share-repurchase authorization.
- Effects of inflation, foreign exchange, supply-chain constraints, the war in Ukraine, and regulatory changes affecting gasoline and electric vehicles.