PENSKE AUTOMOTIVE GROUP, INC. quarterly report, Q2 FY2016

Penske Automotive Group, Inc. — Form 10-Q Summary

Business context and reporting period

Unaudited results cover the three and six months ended June 30, 2016, compared with the corresponding 2015 periods. 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, parts, and related services principally in Australia and New Zealand. At June 30, 2016, the company operated 352 automotive retail franchises and employed more than 23,000 people worldwide.

Financial performance and liquidity

Metric	Three months ended June 30, 2016	Three months ended June 30, 2015	Six months ended June 30, 2016	Six months ended June 30, 2015
Total revenue	$5,254.1 million	$4,920.6 million	$10,078.7 million	$9,403.5 million
Gross profit	$771.3 million	$731.3 million	$1,495.1 million	$1,421.2 million
Operating income	$164.1 million	$158.9 million	$308.2 million	$294.4 million
Net income attributable to PAG common stockholders	$93.5 million	$94.0 million	$172.8 million	$169.2 million
Diluted EPS	$1.10	$1.04	$1.99	$1.87
Cash dividends per share	$0.27	$0.23	$0.53	$0.45

Six-month gross margin was approximately 14.8%, operating margin 3.1%, and net margin attributable to common stockholders 1.7%. For the quarter, gross margin was approximately 14.7%, operating margin 3.1%, and net margin attributable to common stockholders 1.8%.

Six-month revenue mix was $9,349.7 million from retail automotive, $516.2 million from retail commercial truck, and $212.8 million from commercial vehicle distribution and other operations.
Retail automotive represented 92.8% of total revenue and 91.4% of gross profit for the six months. Premium brands generated 72% of retail automotive dealership revenue.
Cash provided by continuing operating activities was $264.5 million, compared with $270.6 million in the prior-year period. After treating all non-trade floor-plan changes as operating cash flow, adjusted operating cash flow was $101.5 million versus $390.9 million.
Continuing investing cash flow was an outflow of $227.1 million, including $136.7 million of capital expenditures and $65.4 million for acquisitions.
Continuing financing cash flow was $1.5 million, reflecting issuance of $500.0 million of senior subordinated notes, $173.6 million of share repurchases, $46.4 million of dividends, and $163.0 million of non-trade floor-plan repayments.
Cash and cash equivalents increased to $97.5 million from $62.4 million at December 31, 2015. Working capital was $344.0 million.
Total long-term debt was $1,660.8 million, including $493.5 million of 5.50% senior subordinated notes due 2026, $296.6 million of 5.375% notes due 2024, and $544.7 million of 5.75% notes due 2022. Floor-plan notes payable totaled $3,031.2 million.
Available borrowing capacity at June 30, 2016 was $700.0 million under the U.S. credit agreement, approximately $147.8 million under the U.K. facility, and approximately $4.9 million under the Australian working-capital facility.

Material changes versus the prior comparable period

Six-month revenue increased 7.2% and gross profit increased 5.2%; management attributed the increase principally to acquisitions and higher new and used vehicle, finance and insurance, and service and parts revenue.
Operating income increased 4.7%, while net income attributable to common stockholders increased 2.1%. Diluted EPS increased from $1.87 to $1.99, aided by a lower share count following repurchases.
Six-month retail automotive new-vehicle units increased 7.9% and used-vehicle units increased 8.2%, but same-store new units increased only 1.3% and same-store used units declined 0.7%. Same-store used-vehicle gross profit declined 5.1%, reflecting lower per-unit margins.
Retail commercial truck revenue increased 18.8% to $516.2 million, primarily from acquisitions. Same-store new truck units declined 17.1%, and used-truck gross profit fell to a loss of $1.0 million from $3.3 million of profit.
Commercial vehicle distribution revenue declined, principally because of lower Australian distribution volumes and difficult macroeconomic and commodity conditions. Power Systems gross profit increased on product mix.
SG&A increased 4.8% overall but declined 0.6% on a same-store basis; SG&A as a percentage of gross profit improved to 76.4% from 76.6%.
Foreign exchange was a significant headwind. Currency movements reduced six-month revenue by approximately $223.3 million, gross profit by $30.8 million, and continuing-operations EPS by approximately $0.06.
The company issued $500.0 million of 5.50% senior subordinated notes in May 2016 and repurchased 4.7 million common shares for $173.6 million during the six months.

Guidance, outlook, risks, contingencies, and unusual items

No formal numerical earnings or revenue guidance is provided. Management expected U.S. new-vehicle demand to remain near current levels, supported by employment, credit availability, low rates, leasing, and vehicle innovation.
Management expected U.K. vehicle registrations to remain supported by favorable conditions but identified Brexit as a material uncertainty. The U.K. generated 34% of total revenue in the six-month period.
Management anticipated declining 2016 and 2017 Class 8 heavy-duty truck sales because of excess fleet capacity and sluggish freight growth, with weaker used-truck demand and pricing. Service and parts demand was expected to remain comparatively resilient.
Australian and New Zealand commercial-vehicle markets were expected to remain below historical levels because of macroeconomic conditions and weak commodity prices, while parts distribution and off-highway engine demand were expected to be more resilient.
On July 27, 2016, after quarter-end, the company acquired an additional 14.4% of Penske Truck Leasing for approximately $498.7 million, increasing its ownership to 23.4%. The transaction was funded using existing liquidity, including approximately $350.0 million of U.S. credit-agreement borrowings.
After quarter-end, the company also acquired a U.K. dealer group with 12 franchises. The filing does not provide its purchase price or expected financial contribution.
Legal proceedings, lease obligations, self-insurance, letters of credit, surety bonds, and guarantees remain contingencies. Management stated that no pending legal matter was reasonably expected to have a material adverse effect, while acknowledging outcomes cannot be predicted with certainty.
The company had $32.8 million of letters of credit and $12.7 million of surety bonds outstanding. It also had contingent obligations related to Penske Truck Leasing debt and certain Australian floor-plan arrangements.
Management stated that the company was in compliance with debt and lease covenants and expected to remain compliant for the next twelve months. Variable-rate exposure was material: a 100-basis-point change was estimated to affect annual floor-plan interest expense by approximately $32.0 million.
Accumulated other comprehensive loss increased to $177.6 million, primarily because of a $55.8 million foreign-currency translation loss in the first six months.

Important facts investors should verify

Reconcile reported operating cash flow with the company’s adjusted presentation that treats all floor-plan changes as operating activity.
Assess leverage and liquidity after the $500.0 million note issuance and the subsequent $498.7 million PTL investment, including approximately $350.0 million of new U.S. borrowings.
Monitor same-store used-vehicle and commercial-truck margins, which deteriorated despite revenue growth.
Evaluate the continuing effects of Brexit, Sterling weakness, and broader foreign-exchange movements on reported revenue, earnings, and equity.
Review debt covenants, variable-rate exposure, floor-plan availability, lease obligations, guarantees, and the PTL-related contingent indemnity.
Verify the purchase accounting, financing, and operating impact of the post-quarter-end U.K. acquisition and increased PTL ownership.