LKQ Corporation — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing. LKQ distributes alternative vehicle replacement parts and specialty vehicle products through North America, Europe and its newly established Specialty segment.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $6.740 billion | $5.063 billion | +33.1% |
| Gross margin | $2.652 billion; 39.3% | $2.075 billion; 41.0% | Margin down 1.7 percentage points |
| Operating income | $649.9 million; 9.6% of revenue | $530.2 million; 10.5% | +22.6% |
| Net income | $381.5 million | $311.6 million | +22.4% |
| Diluted EPS | $1.25 | $1.02 | +22.5% |
| Cash from operations | $370.9 million | $428.1 million | Down $57.2 million |
| Capital expenditures | $141.0 million | $90.2 million | Up $50.8 million |
- Revenue growth included 25.5% from acquisitions, 7.1% organic growth and 0.6% foreign exchange, as reported by the company. The January 2014 Keystone Specialty acquisition contributed a new segment; LKQ also completed 22 other acquisitions during the year.
- Cost of goods sold rose to 60.7% of revenue from 59.0%. Management attributed the deterioration primarily to lower gross margins at acquired businesses, including Specialty, partly offset by improved North American wholesale margins.
- Segment EBITDA was $790.6 million, or 11.7% of revenue, versus $628.6 million, or 12.4%. North America’s margin improved to 13.3% from 12.8%; Europe declined to 9.1% from 11.3%; Specialty reported a 9.8% margin in its first year.
- At year-end, cash was $114.6 million, total debt was $1.865 billion and net debt was $1.750 billion. Working capital was $1.567 billion. Reported total liquidity—cash plus facility availability—was $1.242 billion.
- Investing cash outflow was $921.0 million, including $775.9 million for acquisitions. Net cash from operations less capital expenditures was approximately $229.9 million, compared with $337.9 million in 2013.
Material changes and fourth-quarter data
- Keystone Specialty was acquired for approximately $471.9 million in total consideration. From acquisition through year-end it generated approximately $771.1 million revenue and $26.5 million net income.
- European revenue increased 46.6%, reflecting acquisitions, U.K. organic growth and favorable currency effects for much of the year. Management expected foreign exchange to weigh on 2015 revenue based on early-2015 rates and projections.
- Fourth-quarter 2014 revenue was $1.684 billion versus $1.317 billion in the fourth quarter of 2013; net income was $80.5 million versus $77.9 million. Fourth-quarter gross margin was approximately 39.5%, compared with 41.4% a year earlier. The 2014 quarter included Specialty results.
- Scrap and other metal prices fell 15% sequentially in the fourth quarter, negatively affecting revenue and margins; management noted a lag before vehicle inventory costs adjust.
Outlook, risks and contingencies
- For 2015, LKQ forecast net income of $420–$450 million and diluted EPS of $1.36–$1.46, excluding restructuring and acquisition-related expenses and specified acquisition or divestiture gains and losses. It expected operating cash flow of approximately $425 million and capital expenditures of $150–$180 million, excluding acquisitions.
- Management’s strategy includes continued acquisitions, expanding product lines and markets, integrating Specialty with North American distribution, and moving continental Europe toward a direct-to-repair-shop distribution model. The European transition may initially increase operating costs; management expects it to support margins over time.
- Key risks include acquisition integration and execution, margin pressure, competition and OEM design-patent claims, dependence on insurer acceptance of alternative parts, salvage vehicle supply and cost, commodity prices, foreign exchange, environmental regulation, and information-system or distribution disruptions.
- Debt-related risks include variable-rate exposure, restrictive credit covenants and reliance in part on the receivables securitization program. LKQ reported compliance with credit covenants at year-end. A 100-basis-point interest-rate increase was estimated to raise annual interest expense by $6.7 million on unhedged variable-rate debt.
- The company reported $2.3 billion of goodwill and $245.5 million of net other intangible assets. Its 2014 goodwill impairment test identified no impairment; management said a 10% decline in estimated reporting-unit fair values would not have changed that conclusion.
- A Harris County, Texas investigation concerning alleged petroleum discharges at two facilities was under negotiation; management expected a monetary payment with a de minimis financial effect. Management stated outstanding claims and lawsuits were not expected to have a material adverse effect.
- The filing reports an unqualified audit opinion and effective internal control over financial reporting. The assessment excluded six acquired Netherlands businesses, each acquired in 2014, which collectively represented no more than 3% of specified consolidated measures.
Important facts for investors to verify
- Whether acquired businesses, particularly Keystone Specialty and European distributors, deliver expected synergies and improve gross and segment margins.
- Whether operating cash flow recovers as working-capital investment moderates, given the 2014 decline despite higher earnings.
- How much fourth-quarter metal-price weakness persists and whether scrap prices, salvage vehicle costs and inventory valuations move together.
- Progress against 2015 earnings, cash-flow and capital-expenditure guidance, including the guidance exclusions.
- Debt levels, facility availability, covenant headroom, variable-rate exposure and continued access to receivables-securitization funding.
- Developments in aftermarket design-patent licensing, including the Ford license scheduled to expire in March 2015, and the continuing effect of insurance-company policies on alternative-parts usage.