LKQ Corporation — Q2 2012 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2012, compared with the corresponding 2011 periods. LKQ distributes alternative vehicle replacement parts and operates North American wholesale, self-service and heavy-duty businesses, plus a European wholesale segment established through its 2011 acquisition of Euro Car Parts (ECP). Unless noted, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,006.5 | $759.7 | $2,038.3 | $1,546.3 |
| Gross margin | $421.9; 41.9% | $322.2; 42.4% | $869.3; 42.6% | $665.9; 43.1% |
| Operating income | $108.6; 10.8% | $78.5; 10.3% | $242.2; 11.9% | $185.9; 12.0% |
| Net income | $64.0 | $46.7 | $145.0 | $104.9 |
| Diluted EPS | $0.43 | $0.32 | $0.97 | $0.71 |
| EBITDA | $125.7 | $93.4 | $277.5 | $212.8 |
- Q2 revenue rose 32.5%; first-half revenue rose 31.8%. Management attributed most growth to acquisitions, including ECP, with organic growth of 3.7% in Q2 and 3.5% in the first half.
- Q2 net income increased 37.0%; first-half net income increased 38.2%. Q2 net margin improved to 6.4% from 6.1%; first-half net margin improved to 7.1% from 6.8%.
- Gross margin contracted 0.5 percentage point in both comparative periods. ECP’s lower-margin product mix and weaker scrap prices alongside elevated salvage vehicle costs weighed on margins; supplier settlement gains partly offset the pressure.
- First-half operating cash flow was $121.0, versus $101.1. Investing cash outflow was $161.5, including $120.3 for acquisitions and $41.6 of capital expenditures. Financing provided $51.5; cash increased $11.1 to $59.4.
- At June 30, total long-term obligations were $1,000.4, including $940.2 outstanding under the credit agreement. Revolver availability after letters of credit was $394.6. The weighted-average rate on credit agreement borrowings, after swaps, was 2.6%; the company was in compliance with its debt covenants.
- Total assets were $3,425.4 and stockholders’ equity was $1,813.7. Inventory was $798.8, up from $736.8 at year-end 2011.
Changes, outlook and key considerations
- Acquisitions and segments: LKQ completed 11 North American acquisitions in the first half for total acquisition-date consideration of $129.9. ECP contributed $165.2 of Q2 revenue and $325.9 for the first half; Europe had no prior-year segment comparator. ECP opened 20 U.K. branches during the first half.
- Guidance: Full-year 2012 net income is estimated at $265–$282 and diluted EPS at $1.77–$1.88, excluding restructuring and acquisition-related expenses and acquisition/divestiture gains or losses, including contingent-consideration fair-value changes. Management also forecast operating cash flow of $250–$280 and capital expenditures, excluding acquisitions, of $100–$115.
- Unusual items: Supplier lawsuit settlements generated $16.7 of first-half gains recorded as a reduction of cost of goods sold, including $8.4 in Q2. Claims remain pending against two defendants; further gains were not assured. Q2 included $2.2 of restructuring/acquisition-related expense. The bumper and wheel restructuring was expected to incur up to another $0.5 in the second half.
- Management commentary and risks: Milder winter weather reduced accidents and insurance claims early in 2012, while higher recycled-parts volumes supported organic growth. Falling scrap prices and higher vehicle acquisition costs pressured margins. Results are exposed to seasonality, commodity and salvage-vehicle price movements, variable interest rates, foreign exchange, acquisition integration and execution, and IT-system disruption. A 100-basis-point interest-rate change was estimated to affect annual interest expense by $3.2 on unhedged debt.
- Management stated available cash, operating cash flow and credit facilities were expected to cover current operating and capital needs. Forward-looking estimates remain subject to the risks described in the filing.
Important facts for investors to verify
- How much reported growth and earnings contribution came from acquisitions versus comparable organic performance, especially ECP.
- Underlying margins after considering the $16.7 first-half supplier settlement gains and the impacts of scrap prices, vehicle costs and ECP’s product mix.
- Progress against full-year earnings, operating cash-flow and capital-expenditure outlook, including the stated exclusions from earnings guidance.
- Debt levels, revolver availability, covenant compliance and interest-rate exposure as acquisition and investment needs evolve.
- Final purchase-price allocations and contingent consideration estimates; the filing notes certain acquisition allocations remained preliminary.
- Outcome of the remaining supplier litigation and completion costs and benefits of the bumper and wheel restructuring.