LKQ Corporation — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. LKQ distributes replacement vehicle parts and specialty aftermarket products through Wholesale–North America, Europe, Specialty and Self Service segments. Figures below are in millions of U.S. dollars, except per-share data and percentages.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $3,448 | $3,341 | $6,797 | $6,689 |
| Gross margin | $1,414; 41.0% | $1,367; 40.9% | $2,786; 41.0% | $2,724; 40.7% |
| Operating income | $407; 11.8% | $559; 16.7% | $772; 11.4% | $930; 13.9% |
| Net income attributable to LKQ stockholders | $281 | $420 | $551 | $693 |
| Diluted EPS attributable to LKQ stockholders | $1.05 | $1.49 | $2.06 | $2.44 |
| Segment EBITDA | $485 | $475 | $941 | $922 |
- Revenue and segment trends: Q2 revenue increased 3.2%; parts and services revenue rose 5.4%, while other revenue fell 23.9%, mainly because of lower precious-metals and scrap-steel prices. First-half revenue increased 1.6%, with organic growth partly offset by divestitures and foreign exchange.
- Profitability: Q2 net income fell year over year despite higher revenue and Segment EBITDA. The 2022 comparison included a $155 million pretax gain from the PGW Auto Glass sale. Q2 interest expense also increased $36 million to $52 million. SG&A was 27.2% of revenue versus 26.8% a year earlier. First-half effective tax rate was 27.1%, up from 24.1%.
- Segment EBITDA: Q2 Wholesale–North America was $248 million (20.6% margin) and Europe $188 million (11.5%), both higher year over year. Specialty fell to $42 million (9.5% margin) amid softer recreational-vehicle demand and pricing pressure. Self Service fell to $7 million (4.1% margin), primarily from lower metals revenue and margin compression. First-half trends were similar.
- Cash flow: First-half operating cash flow was $703 million versus $737 million; capital expenditures were $136 million versus $99 million; free cash flow was $567 million versus $638 million. Investing activities used $185 million, compared with $265 million provided in 2022, which included $372 million of PGW sale proceeds.
- Debt and liquidity: June 30 cash was $1,904 million, including $1,385 million of net note proceeds designated for the Uni-Select transaction. Total debt was $4,030 million; net of the designated acquisition cash, management reported adjusted debt of $2,645 million. Available liquidity was $2,604 million, or $1,219 million excluding that cash. The company reported $579 million of current maturities, principally the €500 million Euro Notes due April 2024, which it intends to refinance. Credit-facility leverage and interest-coverage ratios were 2.3 and 15.4, respectively, within covenant limits of 4.00 and a minimum 3.00.
- Other: The company paid $148 million in dividends during the first half and declared a further $0.275-per-share quarterly dividend in July. It repurchased no shares in Q2; $1,106 million of authorization remained at June 30.
Material changes and notable items
- Revenue grew, but reported earnings and margins were lower than the prior-year periods, in part because 2022 included the PGW sale gain. First-half diluted EPS was $2.06 versus $2.44.
- Debt increased from $2,662 million at year-end 2022 to $4,030 million, mainly reflecting acquisition financing. LKQ issued $800 million of 5.75% notes due 2028 and $600 million of 6.25% notes due 2033. It also had $500 million of term loans and $1,226 million outstanding on revolving facilities at quarter-end.
- On July 26, 2023, LKQ requested the full CAD 700 million delayed-draw term loan and initiated approximately $150 million of revolver borrowings ahead of the Uni-Select closing. At June 30, the term loan had not been drawn.
- Acquisition-related foreign-exchange contracts generated a $23 million Q2 gain and $46 million first-half gain. These gains are not recurring operating revenue and are tied to the Uni-Select purchase-price currency hedge.
Outlook, commentary and risks
- LKQ anticipated completing the Uni-Select acquisition around August 1, 2023, subject to remaining closing conditions, and planned to divest Uni-Select’s U.K. GSF Car Parts business soon after closing. The filing describes expected strategic benefits in paint distribution and Canadian mechanical parts, but does not provide a clear numerical earnings outlook or guidance range.
- The U.S. Notes due 2033 include a special mandatory redemption provision: if the acquisition is not completed or the arrangement is terminated by the specified outside date, LKQ may have to redeem those notes at 101% of principal, plus accrued interest.
- The 1 LKQ Europe transformation is expected to continue through 2027. LKQ estimates total costs of $125–$155 million for 2023 through completion across restructuring, transformation and capital expenditures; the timeline extension and additional process work increased the cost estimate by $85 million.
- Management cited risks from foreign-exchange movements, interest rates, commodity prices and inflation. A 100-basis-point interest-rate change would affect interest expense by an estimated $10 million over the next 12 months on unhedged variable-rate debt. LKQ also warned it may not fully offset cost inflation through pricing or productivity measures.
- Management said the Ukraine/Russia conflict was not expected to materially affect ongoing results or cash flows, but future developments could change estimates. The company reported no material change in internal controls; management considered disclosure controls effective. It stated pending legal claims were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Uni-Select acquisition closed as anticipated, its final funding and leverage impact, and the timing and terms of the planned GSF Car Parts divestiture.
- Progress on refinancing the Euro Notes due April 2024 and the effect of acquisition debt, higher rates and the credit-facility pricing step-up on interest expense and covenant headroom.
- Whether Specialty and Self Service segment weakness persists, including RV demand, competitive pricing, vehicle procurement costs and precious-metals and scrap-steel prices.
- How much of reported cash is available for general corporate purposes versus designated for the acquisition, and whether free cash flow supports capital spending, dividends and debt service.
- Actual spending, timing and realized benefits of the 1 LKQ Europe plan, including the stated $125–$155 million total estimated cost range.