Penske Automotive Group, Inc. — Form 10-Q Summary
Business context and reporting period
Report for the quarter and six months ended June 30, 2011. Penske Automotive Group operated 323 retail franchises, including 168 in the U.S. and 155 primarily in the U.K. The company sells new and used vehicles, finance and insurance products, and service and parts, and owns a 9.0% interest in Penske Truck Leasing Co., L.P. Financial statements are unaudited and presented in thousands except per-share amounts.
Financial performance and liquidity
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Total revenue | $2,888.4 million | $2,614.6 million | $5,683.9 million | $5,038.8 million |
| Gross profit | $463.6 million | $416.8 million | $908.7 million | $816.9 million |
| Operating income | $71.2 million | $65.6 million | $146.2 million | $127.4 million |
| Income from continuing operations | $40.4 million | $31.2 million | $78.5 million | $55.2 million |
| Net income attributable to common stockholders | $39.6 million | $29.4 million | $73.5 million | $49.8 million |
| Diluted EPS | $0.43 | $0.32 | $0.79 | $0.54 |
- Revenue increased 10.5% in the second quarter and 12.8% year to date. Gross profit increased 11.2% in both periods.
- Approximate consolidated gross margins were 16.0% in both the quarter and first six months. Operating margins were approximately 2.5% and 2.6%, respectively; net margins attributable to common stockholders were approximately 1.4% and 1.3%.
- Same-store retail revenue increased 9.8% in the quarter and 10.4% year to date. Same-store retail unit volume increased 4.6% and 6.9%, respectively.
- For the quarter, new vehicle revenue increased 8.2% while new retail units declined 1.1%; used vehicle revenue increased 19.5% and used retail units increased 16.1%. Service and parts revenue increased 7.5%.
- Six-month cash flow from continuing operations was $44.0 million versus $57.5 million in the prior year. Including non-trade floor-plan borrowings as operating cash flow, the comparable amounts were $114.3 million and $131.1 million.
- Continuing investing cash outflow was $62.9 million, including $51.8 million of capital expenditures and $14.0 million for dealership acquisitions. Continuing financing cash outflow was $17.8 million.
- Cash and cash equivalents were $3.3 million at June 30, 2011, down from $17.9 million at December 31, 2010. Working capital was $45.9 million.
- Available borrowing capacity was $300.0 million under the U.S. credit agreement and £51.3 million, or approximately $82.4 million, under the U.K. credit agreement.
- Total long-term debt was $716.8 million, including $375.0 million of 7.75% senior subordinated notes, $134.0 million under the U.S. term loan, $77.1 million under the U.K. revolving facility, and $63.3 million of convertible notes. Floor-plan notes payable totaled $1.42 billion.
- The company repurchased $87.3 million principal amount of convertible notes during the first six months and repurchased 618,209 common shares for $12.4 million. It paid a $0.07-per-share dividend and announced a $0.08 dividend payable September 1, 2011.
Material changes versus the prior comparable period
- Profitability improved despite higher SG&A. Second-quarter SG&A increased 12.0% and represented 82.0% of gross profit, compared with 81.5% in the prior year. Year-to-date SG&A increased 10.9%.
- Floor-plan interest expense declined 10.9% in the quarter and 12.4% year to date, while other interest expense declined 15.7% and 13.0%, respectively, reflecting lower rates, debt repayments, and convertible-note repurchases.
- Debt discount amortization declined materially because the convertible-note discount was fully amortized by March 31, 2011.
- Equity earnings from affiliates increased to $7.9 million from $4.8 million in the quarter and from $4.4 million to $7.9 million year to date, primarily due to improved PTL performance.
- Retail gross margin was 17.0% in the quarter, unchanged year over year, but declined to 16.9% from 17.2% year to date, primarily because used vehicles represented a larger revenue mix.
- The U.K. term loan was fully repaid on June 30, 2011. Convertible notes remaining outstanding were $63.3 million after $87.3 million of valid tenders.
- On June 30, 2011, the company sold the smart USA distribution operation to Daimler Vehicle Innovations for aggregate cash consideration of $44.5 million, including $0.7 million subject to final reconciliation. smart USA is presented as a discontinued operation; the six-month loss from discontinued operations was $4.5 million.
- During the six months, the company was awarded four franchises, acquired three, disposed of seven, and subsequently acquired four additional franchises for approximately $170.0 million after quarter-end.
Outlook, risks, contingencies, and unusual items
- Management reported an improving U.S. automotive market but noted that sales remained low relative to the prior decade. The March 2011 Japan earthquake and tsunami adversely affected vehicle availability and may continue to affect sales in the second half of 2011. U.K. registrations declined 7.1% year to date.
- Management believes operating cash flow, joint-venture dividends, credit facilities, and floor-plan financing will fund operations and commitments for at least the next twelve months. Significant acquisitions, security repurchases, or debt refinancing could require additional capital.
- The company was in compliance with its U.S. and U.K. credit agreements and operating-lease covenants at June 30, 2011, and stated that it expected to remain compliant over the next twelve months. Breaches could result in acceleration of obligations.
- Interest-rate exposure is significant: a 100-basis-point change in applicable rates would change annual other interest expense by approximately $2.2 million based on outstanding revolving balances. Interest-rate swaps fix the LIBOR component of $400.0 million of floor-plan debt beginning January 2012; their net liability was $6.3 million at June 30, 2011.
- Key risks include vehicle demand and pricing, manufacturer dependence and supply disruptions, consumer credit and economic conditions, foreign exchange exposure, acquisition integration, leverage and floor-plan availability, covenant compliance, legal proceedings, franchise regulation, related-party conflicts, and PTL performance.
- The company was not party to litigation reasonably expected to have a material adverse effect, but adverse outcomes remain possible. It had $20.1 million of letters of credit and $14.3 million of surety bonds outstanding.
- A 10% change in average foreign exchange rates versus the U.S. dollar would have changed six-month revenue by approximately $192.8 million.
Important facts for investors to verify
- Whether vehicle supply constraints, particularly for Japan-linked brands, affected second-half 2011 sales, inventory levels, and margins.
- The sustainability of strong used-vehicle volume growth and the effect of used-vehicle mix on retail gross margins.
- Cash conversion and liquidity after capital expenditures, acquisitions, dividends, share repurchases, and debt obligations.
- Compliance with credit, lease, and floor-plan covenants, including the availability and terms of inventory financing.
- Integration, valuation, and financing of the four post-quarter-end franchise acquisitions totaling approximately $170.0 million.
- The final reconciliation of the smart USA sale proceeds and any remaining discontinued-operation cash requirements.
- Foreign exchange sensitivity, PTL distributions, and potential conversion or future repurchase obligations related to the remaining convertible notes.