LKQ Corporation — FY2013 Form 10-K
Business context and reporting period. This is an annual report for the fiscal year ended December 31, 2013, not a standalone Q4 filing. LKQ distributes alternative automotive replacement parts, including aftermarket, recycled, refurbished and remanufactured products, through North American and European wholesale operations and North American self-service facilities. FY2013 includes Sator from its May 1, 2013 acquisition and other acquired businesses from their respective acquisition dates.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $5.063 billion | $4.123 billion | +22.8% |
| Gross margin | $2.075 billion; 41.0% | $1.724 billion; 41.8% | Margin down 0.8 percentage points |
| Operating income | $530.2 million; 10.5% of revenue | $438.0 million; 10.6% | +21.1% |
| Net income | $311.6 million; 6.2% | $261.2 million; 6.3% | +19.3% |
| Diluted EPS | $1.02 | $0.87 | +$0.15 |
| Cash from operations | $428.1 million | $206.2 million | More than doubled |
| Capital expenditures | $90.2 million | $88.3 million | +$1.9 million |
Q4 selected results (unaudited): Revenue was $1.317 billion versus $1.068 billion in Q4 2012; gross margin was $545.7 million versus $445.1 million; operating income was $133.8 million versus $104.3 million; net income was $77.9 million versus $62.2 million; and diluted EPS was $0.26 versus $0.21.
Balance sheet and liquidity at year-end: Cash and equivalents were $150.5 million; total debt was $1.306 billion and net debt was $1.155 billion. Working capital was $1.122 billion. Reported total liquidity, including cash and available credit facilities, was $1.301 billion. Long-term obligations included $600 million of senior notes bearing fixed interest at 4.75% and maturing in 2023. The company reported compliance with credit-agreement covenants.
Net cash used in investing was $505.6 million, including $408.4 million for acquisitions and $90.2 million for property and equipment. Net cash provided by financing was $165.9 million. The effective tax rate declined to 34.5% from 36.2%.
Material changes versus FY2012
- Revenue grew 22.8%, reflecting 13.8% acquisition-related growth and 9.3% organic growth, partly offset by a 0.4% adverse currency effect. Parts-and-services revenue grew organically; other revenue declined.
- Europe revenue increased 81.0% to $1.260 billion, mainly reflecting Sator and organic growth. North America revenue increased 11.0% to $3.803 billion.
- Gross margin declined as a share of revenue, partly due to lower-margin acquisitions and the absence of $17.9 million of supplier-litigation settlement gains recorded in 2012. Salvage operations delivered improved margins.
- Operating cash flow rose to $428.1 million, helped by higher earnings, lower tax payments and less adverse working-capital outflows than in 2012.
- Debt increased to $1.306 billion from $1.118 billion. In May 2013, LKQ issued $600 million of senior notes and amended and expanded its secured credit facilities.
Outlook, commentary and risks
- For 2014, management forecast net income of $400–$430 million and diluted EPS of $1.30–$1.40, excluding restructuring and acquisition-related expenses and acquisition/divestiture gains or losses, including contingent-consideration remeasurements. It expected operating cash flow of approximately $375 million and capital expenditures of $110–$140 million, excluding acquisitions.
- LKQ completed its $455.4 million net-of-cash acquisition of Keystone Specialty on January 3, 2014; the filing describes expected market expansion, cross-selling and cost-synergy opportunities. The company also completed other acquisitions in January and February 2014.
- Principal risks include dependence on insurer acceptance of alternative parts; competition and OEM pricing or intellectual-property claims; salvage-vehicle supply and purchase costs; scrap-metal prices; acquisition integration and goodwill impairment; foreign exchange and interest-rate exposure; environmental compliance; and debt service and covenant constraints.
- A Chrysler Group lawsuit filed in January 2014 alleges that certain aftermarket parts infringe design patents; the case was pending at filing. A Texas investigation into alleged petroleum discharges was under negotiation; management expected any payment to have a de minimis financial effect. Management said outstanding claims and suits were not expected to materially affect the financial statements.
- Management reported no goodwill impairment in 2013; goodwill was $1.937 billion. The filing notes that environmental liabilities, product-liability or recall claims, and potential regulatory restrictions could nonetheless result in costs. No cash dividends were paid, and none were expected in the foreseeable future.
Most important facts for investors to verify
- Whether acquired businesses, particularly Sator and Keystone Specialty, deliver the anticipated growth, integration benefits and synergies—and how acquisition-related adjustments affect reported versus guided earnings.
- Whether operating cash flow and liquidity remain adequate after the Keystone acquisition, contingent payments and planned capital spending; review subsequent debt balances and covenant headroom.
- How gross-margin pressure develops, including the effects of lower-margin European distribution, vehicle acquisition costs, scrap-metal prices and the nonrecurrence of 2012 settlement gains.
- The outcome and potential financial exposure of the Chrysler patent case, the Texas environmental matter and other product, environmental or regulatory contingencies.
- The 2014 forecast’s stated exclusions and the scope of the audit: Deloitte issued an unqualified opinion, but internal-control testing excluded Sator, whose reported amounts represented 5% of revenue and 9% of total assets.