Penske Automotive Group, Inc. — 2012 Q1 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with the three months ended March 31, 2011. Penske operated 335 retail franchises at quarter-end, including 168 in the U.S. and 167 primarily in the U.K. The company sells new and used vehicles and provides finance and insurance, service and parts, fleet and wholesale services. It also owns a 9.0% interest in Penske Truck Leasing Co., L.P. (PTL).
During the quarter, the company acquired the Agnew Group in the U.K., representing 13 franchises, and two additional franchises; it was awarded three franchises and disposed of three franchises.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Total revenue | $3.242 billion | $2.751 billion | +17.9% |
| Gross profit | $506.6 million | $439.2 million | +15.3% |
| Operating income | $94.6 million | $72.1 million | +31.3% |
| Income from continuing operations | $50.2 million | $36.5 million | +37.6% |
| Net income attributable to common stockholders | $46.8 million | $33.9 million | +38.0% |
| Diluted EPS | $0.52 | $0.37 | +$0.15 |
| Net cash from continuing operating activities | $125.3 million | $9.8 million | +$115.5 million |
- Gross margin was approximately 15.6%, compared with 16.0% in the prior-year quarter. Retail gross margin declined from 16.9% to 16.8%, primarily because vehicle sales represented a greater share of revenue.
- Operating margin increased to approximately 2.9% from 2.6%; net margin attributable to common stockholders was approximately 1.4% versus 1.2%.
- New vehicle revenue increased 13.9%, used vehicle revenue increased 22.5%, finance and insurance revenue increased 20.2%, and service and parts revenue increased 8.3%.
- Same-store new retail unit sales increased 2.8%, while same-store used retail unit sales increased 18.1%. New vehicle gross profit per unit rose 7.4%; used vehicle gross profit per unit declined 3.8%.
- SG&A increased 12.2% to $398.6 million, but declined as a percentage of gross profit from 80.9% to 78.7%.
- Floor plan interest expense increased 40.4% to $9.7 million and other interest expense increased 8.2% to $12.2 million. Equity in earnings of affiliates rose to $4.4 million, primarily reflecting improved PTL performance.
- Cash and cash equivalents were $31.8 million at March 31, 2012, compared with $28.5 million at December 31, 2011. Inventories increased to $1.770 billion from $1.582 billion.
- Continuing investing cash outflow was $134.6 million, including $108.1 million for dealership acquisitions and $26.5 million for equipment and facility improvements.
- Total long-term debt was $861.9 million, including $13.3 million classified as current. Floor plan notes payable totaled $1.815 billion, comprising $1.114 billion of trade and $701.2 million of non-trade financing.
- Total equity was $1.182 billion at quarter-end. The company repurchased 350,000 shares for $8.5 million and paid $9.0 million in dividends during the quarter.
Material changes versus the prior comparable period
- Results benefited from dealership acquisitions, higher same-store new and used vehicle volumes, improved finance and insurance revenue, and stronger service and parts gross profit.
- Aggregate revenue grew $491.3 million and gross profit grew $67.3 million. The increase in SG&A was more than offset by gross profit growth, improving operating leverage.
- Operating cash flow improved substantially, although reported operating cash flow benefited from a $136.5 million increase in trade floor plan notes payable and was partly offset by a $109.0 million inventory investment.
- Discontinued operations generated a $3.2 million net loss in Q1 2012, compared with a $2.5 million loss in Q1 2011. Discontinued-operation revenues declined to $45.9 million from $129.5 million, while the company recorded a $10.2 million gain on disposal.
- The company had no debt discount amortization in Q1 2012 because the convertible-note discount had been fully amortized in 2011.
- Foreign currency translation increased accumulated other comprehensive income by $9.9 million during the quarter.
Guidance, outlook, commentary, risks and unusual items
Management did not provide specific quantitative earnings or revenue guidance. It expected U.S. automotive markets to continue recovering, while noting that sales remained below the prior ten-year average and that the pace of improvement was uncertain. The U.K. market was expected to remain challenging because of economic uncertainty, although premium brands had shown greater resilience.
Management stated that operating cash flow, PTL distributions, existing capital resources, credit agreements and floor plan financing should be sufficient to fund operations and commitments for at least the next twelve months. Available borrowing capacity at March 31, 2012 was $261.1 million under the U.S. credit agreement and £70.0 million, or approximately $111.7 million, under the U.K. agreement.
- The U.S. and U.K. credit agreements, lease arrangements and other debt covenants were satisfied at quarter-end. Non-compliance could result in restrictions, termination of facilities or acceleration of debt.
- Variable-rate exposure remained significant. A 100-basis-point rate change was estimated to affect annual other interest expense by approximately $3.0 million and annual floor plan interest expense by approximately $14.5 million, after considering swaps.
- Interest-rate swaps fixed the LIBOR component of $400 million of floor plan debt through December 2014; the swaps increased the weighted-average floor plan borrowing rate by approximately 40 basis points in Q1 2012.
- PTL refinanced significant indebtedness in April and May 2012 through $700 million of 3.8% senior unsecured notes due 2019. Penske agreed to indemnify GECC for 9.0% of principal and interest that GECC may be required to pay as co-obligor. Potential exposure includes approximately $63.1 million of principal, 9.0% of interest payments, fees and possible default interest.
- Management did not expect material payments under the PTL indemnity, but stated that the outcome could not be predicted with certainty. PTL may require additional partner contributions or refinancing to repay the 2019 bonds.
- Other risks include economic and consumer-demand cycles, vehicle availability, manufacturer concentration and franchise agreements, foreign exchange, interest rates, credit availability, supply-chain disruptions, litigation, lease obligations and the ability to integrate acquisitions.
- An automotive supplier explosion in March 2012 created a shortage of nylon resin used in vehicle production; the company could not yet determine the impact on vehicle or parts supply.
Most important facts for investors to verify
- Whether U.S. and U.K. vehicle volumes and the broader automotive recovery support continued same-store growth.
- Whether used-vehicle pricing pressure and a greater mix of lower-margin vehicle revenue continue to constrain gross margins.
- The sustainability of strong operating cash flow after considering inventory growth and floor plan financing classification.
- Acquisition integration, returns on the $108.1 million of Q1 acquisition spending, and the effect of acquired dealerships on leverage.
- Compliance headroom under U.S., U.K. and lease covenants, particularly if interest rates or operating results deteriorate.
- Exposure to variable interest rates, floor plan availability and refinancing requirements, including the $375 million 7.75% senior subordinated notes due 2016.
- The financial performance of PTL, future distributions, and Penske’s potential obligations under the PTL bond indemnity.
- Potential effects of manufacturer or supplier disruptions, foreign currency movements and pending legal or administrative matters.