LKQ Corporation — FY 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports unaudited quarterly results, including Q4 2010; this is an annual report, not a standalone Q4 filing. Amounts below are U.S. dollars.
Business context
LKQ distributes aftermarket, recycled, refurbished and remanufactured vehicle parts, and operates self-service recycling and heavy-duty truck businesses. It serves primarily collision and mechanical repair shops, with insurance companies influencing product selection. The company reported one reportable segment, aggregating three operating segments. It completed 20 acquisitions in 2010 and expanded its products and geographic reach, particularly in Canada.
Financial performance and position
| Metric | FY 2010 | FY 2009 | Change / context |
|---|---|---|---|
| Revenue | $2,469.9 million | $2,047.9 million | Up 20.6%; parts and services organic growth was 6.6% |
| Gross profit / margin | $1,093.5 million / 44.3% | $927.8 million / 45.3% | Profit increased; margin declined 1.0 percentage point |
| Operating income / margin | $297.9 million / 12.1% | $231.4 million / 11.3% | Up 28.7%; margin improved 0.8 point |
| Continuing income | $167.1 million | $127.1 million | Up 31.4% |
| Diluted EPS from continuing operations | $1.15 | $0.88 | Up 30.7% |
| Operating cash flow | $159.2 million | $164.0 million | Down $4.8 million, largely reflecting higher working-capital investment and taxes |
| Investing cash flow | $(191.6) million | $(102.5) million | Includes $143.6 million cash used for acquisitions |
| Cash and equivalents | $95.7 million | $108.9 million | Working capital was $611.6 million at year-end, versus $526.1 million |
| Debt and obligations | $601.0 million balance-sheet long-term obligations, including current portion | $603.0 million | Bank facility borrowings were $590.1 million; filing separately cites total indebtedness of $627.8 million using a broader measure |
Cost of goods sold rose to 55.7% of revenue from 54.7%. Higher salvage-vehicle acquisition costs and a greater share of lower-margin scrap-aluminum revenue weighed on gross margin. Operating expense leverage supported higher operating margins. The effective tax rate was 38.1% in both years. The company had $73.2 million available on its $100 million revolving facility after letters of credit.
Q4 comparison: Revenue was $674.1 million versus $555.9 million; operating income was $73.1 million versus $59.7 million; continuing income was $41.3 million versus $36.5 million; diluted continuing-operations EPS was $0.28 versus $0.25.
Material changes and unusual items
- Revenue growth reflected acquisitions, higher product volume and a 67.5% increase in other revenue, principally from higher scrap-metal prices and volume. Organic growth was 8.2% for aftermarket products and 4.2% for recycled products.
- Salvage-vehicle purchases rose to approximately 198,000 from 166,500, and inventory increased to $492.7 million from $385.7 million. Management attributed pressure on salvage costs to higher auction demand, including the end of the Cash for Clunkers program.
- 2010 acquisitions had total consideration of $170.4 million and contributed approximately $83.7 million of revenue and $2.9 million of operating income after their acquisition dates. Acquisition-related goodwill increased to $1.033 billion; no goodwill impairment was recorded.
- Discontinued operations contributed $2.0 million of income, including a $1.7 million after-tax gain from selling two self-service facilities in January 2010.
- Operating cash flow remained positive but declined despite higher earnings, as working-capital outflow increased, particularly from inventory, and income-tax payments were higher.
Outlook, risks and contingencies
- For 2011, management estimated continuing income of $194–$208 million and diluted continuing-operations EPS of $1.31–$1.39, excluding restructuring costs. It forecast operating cash flow of approximately $195 million and capital expenditures of $85–$95 million, excluding acquisitions.
- Management cited acquisition-led and organic expansion as growth priorities. Four additional businesses were acquired in January and February 2011. Cross Canada integration was expected to generate approximately $1.3 million of restructuring charges, with completion anticipated in 2011.
- Key risks include economic conditions and driving/accident trends; competition and OEM pricing or intellectual-property claims; availability and cost of salvage vehicles and aftermarket inventory; scrap-metal and freight-price volatility; reliance on supplier, auction and insurer relationships; and acquisition integration.
- The credit agreement matures in October 2013, contains financial covenants and restrictions, and had $50.0 million of term-loan maturities classified as current at year-end. The company reported covenant compliance. Interest-rate swaps hedge part of variable-rate debt; management estimated a 100-basis-point rate move would change interest expense by $2.1 million over 12 months after the stated hedge effects.
- Environmental liabilities, product claims and other litigation are possible; management did not expect currently outstanding claims to have a material adverse effect. The Ford design-patent settlement permitting distribution of specified aftermarket parts expires in September 2011. Goodwill impairment remains a risk if business performance or management projections weaken.
Important facts for investors to verify
- Whether organic growth, margins and operating cash generation can be sustained as acquisition contributions and salvage-inventory costs evolve.
- Debt repayment capacity and refinancing plans ahead of the October 2013 credit-facility maturity, including covenant headroom and the broader $627.8 million indebtedness measure.
- Realization of the 2011 earnings and cash-flow outlook, planned capital spending, and integration results for Cross Canada and other acquisitions.
- Exposure to scrap-metal prices, salvage-vehicle auction costs, foreign currency and interest rates, and any post-expiration changes to the Ford settlement.
- The filing reports an unqualified audit opinion and effective internal controls. It states the stock trades under “LKQX”; verify the ticker against current exchange records, as the filing text may contain an error.