LKQ Corporation — Q3 2011 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2011, compared with the same 2010 periods. LKQ distributes aftermarket, recycled, refurbished and remanufactured vehicle replacement products, and also operates self-service retail and heavy-duty truck businesses. The company reports one aggregated segment. Amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $783.9 | $607.6 | $2,330.2 | $1,795.8 |
| Gross margin | $334.3; 42.6% | $261.4; 43.0% | $1,000.2; 42.9% | $806.0; 44.9% |
| Operating income / margin | $85.5 / 10.9% | $65.2 / 10.7% | $271.3 / 11.6% | $224.7 / 12.5% |
| Income from continuing operations | $49.2 | $35.9 | $154.1 | $125.8 |
| Diluted EPS from continuing operations | $0.33 | $0.25 | $1.04 | $0.86 |
| Operating cash flow | Not separately presented for the quarter | $159.2 | $144.6 |
Q3 revenue grew 29.0%; nine-month revenue grew 29.8%. Organic revenue growth was 11.1% in Q3 and 12.3% year to date. Nine-month net income was $154.1 million versus $127.7 million, which included $2.0 million from discontinued operations. Nine-month net cash used in investing was $240.3 million, including $180.5 million for acquisitions and $61.3 million of property and equipment purchases. Cash declined by $50.6 million during the nine months to $45.1 million.
Balance sheet and liquidity at September 30, 2011: current assets were $936.6 million and current liabilities $227.5 million. Total long-term obligations, including current maturities, were $632.6 million, compared with $601.0 million at December 31, 2010. Credit-facility borrowings were $618.4 million; $540.0 million of revolver availability remained after letters of credit. The company reported covenant compliance and a 2.72% weighted-average borrowing rate after swaps.
Material changes and management commentary
- Growth reflected acquisitions, higher product volumes and higher scrap and other metals revenue. Nine-month organic growth in parts and services was 8.8%; higher metals prices and volume drove 35.1% growth in other revenue.
- Nine-month gross margin fell 2.0 percentage points. Management cited lower-margin product mix, including remanufactured engines and scrap aluminum, competitive pricing and higher aftermarket input costs, and increased salvage-vehicle acquisition costs. Q3 gross margin declined 0.4 percentage points year over year.
- Operating expenses benefited from scale: nine-month facility and warehouse expense fell to 9.1% of revenue from 9.5%, and SG&A to 11.8% from 12.7%. Higher fuel and freight costs pressured distribution expense.
- Interest expense declined year over year, but nine-month results included a $5.3 million loss on extinguishment of debt following refinancing. Nine-month restructuring and acquisition-related expenses were $5.3 million, versus $0.6 million a year earlier.
- LKQ completed 17 acquisitions in the first nine months for $193.7 million of consideration. On October 1, 2011, it acquired UK distributor Euro Car Parts for £225 million (approximately $347 million), with up to £55 million additional consideration tied to EBITDA targets. A £211 million (approximately $325.6 million) revolver draw funded the acquisition; remaining revolver availability after the draw was $214.4 million.
Outlook, risks and contingencies
- For full-year 2011, management estimated continuing-operations income of $204–$212 million and diluted EPS of $1.38–$1.43, excluding restructuring and acquisition-related expenses and acquisition or divestiture gains or losses. Estimates include projected ECP income from its acquisition date.
- Management expected approximately $195 million of 2011 operating cash flow and $24–$34 million of remaining 2011 capital expenditures, excluding acquisitions and certain ECP-related capital expenditures. Fourth-quarter organic parts-and-services growth was expected to be lower than the first-nine-month rate.
- Risks include economic weakness affecting driving, accidents and repairs; acquisition integration and contingent purchase-price adjustments; salvage-vehicle costs and competition; margin exposure to volatile scrap and metals prices; variable interest rates; and foreign exchange and legal/regulatory exposure in foreign markets. A 100-basis-point rate move was estimated to change annual interest expense by $2.7 million on the debt outstanding at September 30, before the later ECP borrowing.
- The credit agreement includes leverage and interest-coverage covenants, restrictions on certain actions, and events of default. The company said it was compliant at quarter-end. It reported operating leases with $380.8 million of future minimum payments and stated that litigation and environmental contingencies were not expected to materially affect results.
- Goodwill was $1.12 billion. No interim impairment-triggering event was identified, but management noted uncertainty in projections for the heavy-duty truck reporting unit. Purchase accounting for recent acquisitions remained preliminary.
Most important facts to verify
- Whether reported growth and forecast earnings are sustainable after separating organic performance, acquisitions, metals-price effects and the specified excluded expenses.
- Post-ECP leverage, interest costs, covenant headroom and actual remaining revolver availability, including the effect of the acquisition and any contingent payments.
- Whether gross-margin pressure from product mix, salvage costs and aftermarket pricing persists, and whether higher fuel and freight costs can be offset.
- ECP integration, achievement of its EBITDA targets, and final purchase-price allocation and pro forma impact; also the expected completion and cost of Cross Canada and Akzo Nobel integration.
- Working-capital needs, particularly inventory and receivables growth, and whether operating cash flow and capital-expenditure expectations are achieved.