LKQ Corporation — Q3 2019 Form 10-Q
Business context and reporting period. LKQ distributes alternative vehicle replacement parts and specialty products through North America, Europe and Specialty segments. This unaudited report covers the three and nine months ended September 30, 2019, compared with the same 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Revenue | $3.148 billion | $3.122 billion | $9.496 billion | $8.874 billion |
| Gross margin | $1.200 billion; 38.1% | $1.197 billion; 38.3% | $3.656 billion; 38.5% | $3.413 billion; 38.5% |
| Operating income | $231.4 million | $234.7 million | $689.9 million | $718.1 million |
| Net income attributable to LKQ stockholders | $152.3 million | $134.1 million | $400.9 million | $444.1 million |
| Diluted EPS from continuing operations | $0.49 | $0.42 | $1.29 | $1.41 |
| Segment EBITDA | $336.5 million | $326.3 million | $1.015 billion | $963.5 million |
| Operating cash flow | Not presented by quarter in the supplied filing text | $965.2 million | $521.2 million |
Q3 revenue rose 0.8% year over year, while operating income fell 1.4%; net income attributable to LKQ stockholders increased about 14%. For the first nine months, revenue grew 7.0%, largely reflecting the Stahlgruber acquisition, but operating income declined about 3.9% and attributable net income declined about 9.7%. Diluted continuing-operations EPS was up in Q3 and down year to date.
For the first nine months, cash provided by operations increased by $444.0 million. Capital expenditures were $165.6 million, implying operating cash flow less capital expenditures of approximately $799.6 million, versus $349.4 million in the prior-year period. Management attributed much of the cash-flow improvement to inventory reduction and accounts-payable timing, as well as other working-capital movements.
Liquidity, debt and balance sheet
- At September 30, 2019, cash and cash equivalents were $433.4 million; total debt was $3.897 billion, down from $4.348 billion at December 31, 2018.
- Available credit-facility capacity was $2.045 billion, for total liquidity of approximately $2.478 billion. The revolver had $1.146 billion outstanding; the receivables securitization facility had no balance.
- LKQ reported compliance with debt covenants: net leverage ratio 2.6x against a 4.25x maximum; interest coverage 9.9x against a 3.00x minimum.
- Operating lease assets were $1.303 billion and operating lease liabilities totaled $1.355 billion. Adoption of the lease standard added approximately $1.3 billion of lease assets and liabilities; management said adoption did not materially affect liquidity or income and did not affect covenant calculations.
- Cash, cash equivalents and restricted cash totaled $438.6 million at period end. The filing states $256 million of cash was held by foreign subsidiaries, generally intended to be permanently reinvested.
Material changes and operating drivers
- Q3 parts-and-services revenue increased 0.8% as reported; organic growth was 2.3%, including a 1.4% benefit from one additional selling day. Europe revenue declined 1.2% as reported, with currency translation more than offsetting organic and acquisition growth.
- For the first nine months, Europe revenue grew 16.3%, primarily from Stahlgruber, while North America revenue was essentially flat and Specialty revenue grew 0.5%. Foreign-exchange translation reduced consolidated revenue growth by 2.5 percentage points.
- Q3 segment EBITDA increased in North America and Specialty but declined in Europe. North America benefited from wholesale margin initiatives; falling scrap-steel prices had an $8 million adverse year-over-year effect. Europe faced softer economic conditions, especially in Italy and Germany, as well as adverse currency translation.
- Consolidated gross margin was 38.1% in Q3 versus 38.3% a year earlier. European inventory write-downs tied to branch consolidation and brand rationalization contributed to the decline; North America margin improvement partly offset it.
- Equity in unconsolidated subsidiaries was a $33.7 million loss for the first nine months, mainly reflecting $39.6 million of Mekonomen impairment charges. Net impairment charges on assets held for sale were $44.9 million for the nine-month period; Q3 included a $3.6 million net reversal as sale proceeds exceeded prior estimates.
Outlook, management commentary and risks
- The supplied filing text does not state a numerical earnings or revenue guidance range. Management said current liquidity and expected operating cash flow should be sufficient for current operating and capital requirements, but future acquisitions could require additional funding.
- The 2019 global restructuring program is expected to incur a further $15 million to $20 million through 2020. The 1 LKQ Europe program is expected to generate $45 million to $55 million of personnel- and inventory-related restructuring charges through 2024. Management estimates total program costs, including transformation expenses and capital expenditures, of $135 million to $160 million for 2019–2021 and a further $80 million to $100 million through expected completion in 2024.
- Management cited softer European economic conditions and potential Brexit effects, North American claims and demand comparisons, currency movements, and volatility in scrap and other metal prices. A 10% currency movement was estimated to change nine-month consolidated revenue by 5.0% and operating income by 3.0%. A 100-basis-point interest-rate movement would change interest expense by about $4 million over the next 12 months.
- Additional risks include intellectual-property claims involving aftermarket parts, possible restrictions on sales or importation, and uncertainty around the future transition from LIBOR. Management said currently outstanding litigation is not expected to have a material adverse effect.
- LKQ repurchased 10.9 million shares for $291.8 million during the first nine months. On October 25, 2019, the board authorized an additional $500 million repurchase capacity, bringing total authorization to $1.0 billion.
Important facts for investors to verify
- Whether organic revenue and segment-margin trends improve, particularly in Europe and North America, after separating acquisition and foreign-exchange effects.
- How much of the operating-cash-flow increase is sustainable after the benefits of inventory reduction and accounts-payable timing.
- Progress, total costs and realized benefits of the global restructuring and 1 LKQ Europe programs.
- Future performance and carrying value of the Mekonomen investment, and final proceeds or charges from remaining held-for-sale businesses, including the Czech Republic business.
- Debt reduction, covenant headroom and capital allocation, including share repurchases and any acquisition financing needs.
- Exposure to currency, interest-rate and commodity-price changes, and developments in aftermarket-part intellectual-property disputes.