LKQ Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited results compared with Q1 2017. LKQ distributes replacement vehicle parts and specialty products through North America, Europe, and Specialty segments.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2,720.8 million | $2,342.8 million | +16.1% |
| Gross profit / margin | $1,054.0 million / 38.7% | $930.1 million / 39.7% | Margin down 1.0 point |
| Operating income | $226.6 million | $235.7 million | Down 3.9% |
| Net income attributable to LKQ stockholders | $153.0 million | $136.3 million | Up 12.2% |
| Diluted EPS from continuing operations | $0.49 | $0.45 | Up 8.9% |
| Cash from operating activities | $145.2 million | $172.3 million | Down $27.1 million |
| Capital expenditures | $62.2 million | $44.4 million | Up $17.8 million |
| Total debt, gross | $3,339.1 million | $3,428.3 million at Dec. 31, 2017 | Down $89.2 million |
Operating cash flow less capital expenditures was approximately $83.0 million, versus $127.9 million in Q1 2017. Cash and equivalents were $245.7 million at quarter-end, down from $279.8 million at year-end 2017. Credit-facility availability was $1.513 billion; reported total liquidity, including cash, was $1.758 billion. Current assets were $4.039 billion and current liabilities $1.475 billion.
Performance and material changes
- Revenue growth reflected 4.7% organic growth, 6.3% acquisition contribution, and 5.1% foreign-exchange benefit. Parts and services revenue rose 15.7%; other revenue rose 23.5%.
- Segment revenue growth was strongest in Europe: North America +10.1%, Europe +26.7%, and Specialty +11.7%. Europe growth included acquisitions and currency translation; constant-currency Europe Segment EBITDA fell 18.9%.
- Segment EBITDA increased 1.7% to $295.2 million, but segment margins weakened in North America (13.4% versus 14.6%) and Europe (7.3% versus 9.6%). Specialty margin improved to 11.9% from 11.3%.
- Consolidated gross margin declined as cost of goods sold rose to 61.3% of revenue from 60.3%; SG&A rose to 28.2% from 27.4%. Higher supplier costs, product mix, freight, personnel, and European distribution issues contributed.
- Net income benefited from a lower effective tax rate of 24.7%, versus 33.9%, primarily following the U.S. federal tax-rate reduction. Q1 2017 included a $4.5 million discontinued-operations loss related to the sold glass manufacturing business.
- LKQ adopted ASC 606 in January 2018. The company reported that adoption reduced Q1 revenue by $7.9 million and cost of goods sold by $7.4 million compared with presentation without the standard; management expected the ongoing net-income effect to be immaterial.
Outlook, financing, and risks
- No specific earnings or revenue guidance is provided in the supplied filing text. Management said current liquidity and expected operating cash flows should cover current operating and capital needs; future acquisitions could require additional funding.
- The pending Stahlgruber acquisition has an enterprise value of €1.5 billion. LKQ expected to close the transaction outside the Czech Republic in Q2 2018; Czech approval remained under review. Financing included €1.0 billion of notes issued in April, 8,055,569 LKQ shares, and revolving-credit borrowings. The notes include mandatory redemption provisions if the acquisition is not completed by October 6, 2018.
- Management anticipated less than $15 million of additional acquisition integration and restructuring costs. One North American wholesale acquisition was completed during Q1 and was not material.
- Risks highlighted include foreign exchange exposure, variable interest rates, commodity-price volatility, seasonal/weather effects, and operational issues. A 10% currency movement was estimated to change consolidated revenue by 4.3% and operating income by 2.6%; a 100-basis-point interest-rate movement could change interest expense by $10 million over 12 months. About $1.0 billion of variable-rate debt was unhedged at quarter-end.
- UK distribution-center and stock-availability problems temporarily affected service and revenue. Specialty sales were affected by adverse weather. Management said existing litigation and other contingencies were not expected to materially affect results. Operating lease commitments totaled $1.429 billion; adoption of the new lease standard was expected to materially affect the balance sheet.
- LKQ reported compliance with credit-agreement covenants. Its operating results are seasonal and may fluctuate; historical interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether Stahlgruber closes as expected, including Czech regulatory approval, final funding needs, and any share dilution.
- Whether margin pressure in North America and Europe abates, and whether the UK distribution and inventory issues are resolved.
- How much of reported growth reflects organic demand versus acquisitions, currency movements, and higher scrap-metal prices.
- Whether operating cash flow recovers given the larger receivables-related cash outflow and increased capital spending.
- Final effects of tax reform and future adoption of lease accounting, along with debt costs, interest-rate exposure, and refinancing capacity.