LKQ Corporation — FY2011 Form 10-K
Business and reporting period. This is LKQ’s annual report for the fiscal year ended December 31, 2011, not a standalone fourth-quarter filing. LKQ distributes alternative automotive and truck replacement parts, including aftermarket, recycled, refurbished and remanufactured products. Its North American operations were joined by a new European segment after the October 1 acquisition of U.K. distributor Euro Car Parts Holdings Limited (ECP).
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $3.270 billion | $2.470 billion |
| Gross profit / margin | $1.392 billion / 42.6% | $1.093 billion / 44.3% |
| Operating income / margin | $361.5 million / 11.1% | $297.9 million / 12.1% |
| Income from continuing operations | $210.3 million | $167.1 million |
| Diluted continuing-operations EPS | $1.42 | $1.15 |
| Cash from operating activities | $211.8 million | $159.2 million |
| Cash and equivalents at year-end | $48.2 million | $95.7 million |
| Working capital at year-end | $752.0 million | $611.6 million |
- Revenue increased 32.4%; management attributed the increase to acquisitions, higher parts volumes and higher scrap-metal revenue. Reported organic growth was 10.7% overall, including 7.9% in parts and services.
- Profit increased, but gross margin fell 1.7 percentage points and operating margin fell 1.0 point. Management cited aftermarket input costs and competitive pricing, lower-margin product mix and ECP, higher self-service vehicle costs, and fuel and freight expense.
- Net income was $210.3 million, up from $169.1 million; reported net margin was 6.4%, versus 6.8%. Segment EBITDA was $418.1 million, including $405.9 million North America and $12.1 million Europe. EBITDA is a company-defined measure.
- Investing activities used $571.6 million, including $486.9 million net cash spent on acquisitions and $86.4 million for property and equipment. Financing activities provided $311.4 million. Inventory rose to $736.8 million from $492.7 million.
- Year-end long-term obligations were $956.1 million, including current maturities; credit-agreement borrowings were $901.4 million. The company separately cites total indebtedness of $991.4 million when including letters of credit and acquisition notes. Revolver availability was $253.9 million after letters of credit; a further $200 million term-loan facility was drawn in January 2012 to repay part of revolver borrowings. LKQ reported covenant compliance at year-end.
Fourth-quarter snapshot
Q4 2011 revenue was $939.6 million, gross profit $391.8 million, operating income $90.1 million, continuing-operations income $56.1 million and diluted continuing-operations EPS $0.38. The comparable Q4 2010 figures were $674.1 million, $287.5 million, $73.1 million, $41.3 million and $0.28, respectively. Q4 2011 included ECP.
Material developments, outlook and risks
- Expansion and acquisition funding: LKQ acquired ECP and 20 North American businesses in 2011. ECP contributed $138.5 million revenue and $10.1 million operating income from acquisition through year-end. Its contingent consideration could reach £55 million, subject to performance targets; total contingent consideration liabilities were $82.4 million at year-end. Acquisition integration and preliminary purchase-price allocations remain relevant.
- 2012 outlook: Management estimated continuing-operations income of $258–$278 million and diluted EPS of $1.72–$1.85, excluding restructuring and acquisition-related expenses. It forecast operating cash flow of $250–$280 million and capital expenditures, excluding acquisitions, of $100–$115 million. Management expected working-capital cash outflows to continue, but at a lower level than in 2011.
- Unusual items: 2011 included a $5.3 million loss on extinguishment of debt and a $1.4 million gain from reducing estimated contingent consideration liabilities. Restructuring and acquisition-related expenses totaled $7.6 million. The company reported no goodwill impairment.
- Principal risks: Economic weakness, changes in driving and accident activity, competition and OEM pricing, salvage-vehicle availability and cost, scrap-metal prices, fuel and freight costs, and reliance on suppliers, auctions and insurer relationships could affect results. Other stated exposures include acquisition integration, debt covenants and refinancing, foreign exchange, environmental obligations, product liability, regulation of alternative parts, and potential OEM intellectual-property claims. LKQ disclosed a Ford settlement arrangement extending through March 2015. Management did not expect currently outstanding litigation and claims to have a material effect.
- Controls and audit: The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. LKQ’s control assessment excluded ECP, acquired during the year; ECP represented 4% of FY2011 revenue and 19% of year-end total assets.
Most important facts for investors to verify
- Whether margin pressure stabilizes, particularly in aftermarket products, lower-margin product lines and Europe.
- Whether ECP and other acquisitions deliver expected growth, profitability and integration benefits; monitor contingent consideration and final purchase accounting.
- Whether operating cash flow supports planned capital spending, continued inventory investment and acquisition activity while debt remains elevated.
- Debt maturity, covenant headroom, post-January 2012 borrowing levels and the sensitivity of interest expense to rate changes.
- Exposure to scrap-metal and salvage-vehicle pricing, supplier concentration, foreign exchange, environmental liabilities and OEM patent or parts-regulation developments.