LKQ Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. LKQ distributes vehicle replacement parts, specialty aftermarket products and recycled vehicle products through four reportable segments: Wholesale–North America, Europe, Specialty and Self Service. Figures are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $3,349 | $3,348 | Flat as reported; organic growth was 6.3%, offset by acquisition/divestiture effects of 3.4% and foreign exchange effects of 2.8%. |
| Gross margin | $1,372; 41.0% | $1,357; 40.5% | Improved 0.5 percentage points. |
| Operating income | $365 | $371 | Down $6; operating margin declined to 10.9% from 11.1%. |
| Income from continuing operations | $270 | $269 | Up $1; continuing-operations diluted EPS was $1.01 versus $0.94. |
| Net income | $270 | $273 | Prior-year net income included $4 from discontinued operations. |
| Segment EBITDA | $456 | $447 | Up 2.0%; non-GAAP measure defined by the company. |
| Operating cash flow / free cash flow | $223 / $153 | $409 / $350 | Free cash flow is operating cash flow less capital expenditures. |
| Capital expenditures | $70 | $59 | Higher, primarily from Europe and Specialty projects. |
Business performance and material changes
- Parts and services revenue increased 1.5% to $3,152; other revenue fell 19.2% to $197, mainly reflecting lower precious-metal and scrap-related revenue.
- Wholesale–North America revenue rose 2.3% to $1,229 and Segment EBITDA increased 15.6% to $252. Results benefited from pricing, improved aftermarket volumes, productivity and lower freight costs; the prior-year comparison included the subsequently divested PGW glass business.
- Europe revenue grew 4.5% to $1,555 and Segment EBITDA rose 14.8% to $151. Currency translation reduced reported revenue growth by 5.9% and Segment EBITDA by $9.
- Specialty revenue declined 14.0% to $396 and Segment EBITDA fell 46.3% to $31, reflecting weaker RV demand, competitive pricing, discounting and unfavorable product mix.
- Self Service revenue declined 14.8% to $169 and Segment EBITDA fell 43.5% to $22. Lower metals revenue and higher vehicle procurement costs weighed on results; lower precious-metal prices reduced Segment EBITDA by an estimated $15.
Debt, liquidity and capital allocation
- Gross debt was $2,740 at March 31, 2023, versus $2,662 at year-end 2022; cash and equivalents were $342. Total reported liquidity was $933, comprising cash and $591 available under credit facilities.
- Debt included $500 of term loans and $1,335 outstanding under the new $2,000 unsecured revolving facility, as well as Euro notes. The company reported compliance with its credit covenants.
- Weighted average borrowing rates were 4.7% overall and 5.0% on Senior Unsecured Credit Agreement borrowings after swaps. Approximately $1,135 of variable-rate debt was unhedged; a 100-basis-point rate change was estimated to affect interest expense by $11 over the next 12 months.
- Operating cash flow was lower year over year, chiefly reflecting substantially lower cash inflows from accounts payable, partly offset by inventory-related cash benefits. Supplier-finance balances included in accounts payable were $240 at quarter-end.
- LKQ paid a quarterly dividend of $0.275 per share and repurchased approximately 0.1 million shares during the quarter. The board declared another $0.275 dividend payable in June.
Outlook, transactions and risks
- Uni-Select acquisition: LKQ agreed to acquire Uni-Select for CAD 48 per share, at an estimated enterprise value of CAD 2.8 billion (about $2.1 billion at the March 31 exchange rate). Shareholders approved the transaction on April 27; closing was expected in the second half of 2023, subject to regulatory approvals and customary conditions. LKQ intends to divest Uni-Select’s GSF Car Parts business at or shortly after closing.
- Financing arrangements included a $1.6 billion bridge facility and a delayed-draw term facility of up to CAD 700 million. LKQ expected to fund the remaining purchase price with cash and senior-note issuance. No draws had been made on the acquisition facilities as of March 31.
- The quarter included a $23 gain on CAD acquisition-related foreign-exchange contracts, reported in earnings, and $18 of restructuring and transaction-related expenses, versus $3 in Q1 2022. Interest expense rose $20, primarily due to higher rates and $3 of bridge-financing fee amortization.
- The filing does not provide a clear numerical full-year earnings or revenue guidance target. Management said current liquidity, expected operating cash generation and capital-market access were expected to support operating and capital needs, while noting additional financing would be required for Uni-Select.
- Management identified risks from foreign exchange, interest rates, metals prices, inflation and demand. It cautioned that pricing and productivity may not fully offset cost inflation. The Ukraine/Russia conflict was expected to continue affecting operations, though management did not expect a material impact on ongoing results or cash flows; future developments remain uncertain.
- The 2022 Global Restructuring Plan was expected to cost $30–$40 in total and be substantially complete by the end of 2024. The 1 LKQ Europe program’s remaining projects were scheduled through 2025; expected costs across restructuring, transformation and capital spending were $50–$80 through completion.
- LKQ settled an EPA stormwater matter for $465,000, paid in February 2023. Management stated outstanding claims and lawsuits were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether Uni-Select receives required regulatory approvals, closes on the expected timetable, and can be financed on acceptable terms; also verify execution and proceeds of the planned GSF Car Parts divestiture.
- Whether Specialty and Self Service trends improve, particularly RV demand, vehicle procurement costs and exposure to precious-metal and scrap prices.
- Whether operating cash flow recovers from the year-over-year decline and how working capital, including supplier-finance balances, affects cash generation.
- How higher borrowing costs and unhedged variable-rate debt affect interest expense, liquidity and acquisition leverage.
- Whether restructuring and Europe transformation costs remain within disclosed estimates and deliver the expected efficiencies.