LKQ Corporation — FY 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual filing, not a standalone fourth-quarter report. LKQ distributes alternative vehicle replacement parts and specialty products through four reportable segments: Wholesale–North America, Europe, Specialty, and Self Service.
Financial performance
Amounts are in U.S. dollars; financial figures are in millions except per-share data.
| Metric | 2022 | 2021 | Change / context |
|---|---|---|---|
| Revenue | $12,794 | $13,089 | Down 2.3% reported; organic growth was 4.1% |
| Gross margin | $5,223; 40.8% | $5,322; 40.7% | Margin up 0.1 percentage point |
| Operating income | $1,581; 12.4% | $1,474; 11.3% | 2022 included a $159 pretax gain on business disposals |
| Net income attributable to LKQ stockholders | $1,149 | $1,091 | Diluted EPS was $4.13 versus $3.66 |
| Net cash from operating activities | $1,250 | $1,367 | Down $117 |
| Free cash flow | $1,028 | $1,074 | Down $46; defined as operating cash flow less capital expenditures |
| Total debt / cash | $2,662 / $278 | $2,824 / $274 | Year-end 2022 debt; reported liquidity was $1,573 |
- Parts and services revenue was $11,933, down 1.7% reported, reflecting 5.0% organic growth offset by foreign exchange and divestitures. Other revenue was $861, down 9.2%, primarily reflecting lower metals-related revenue.
- Segment EBITDA, a non-GAAP measure, totaled $1,719 versus $1,785. Segment results: Wholesale–North America $852 (18.7% margin), Europe $585 (10.2%), Specialty $199 (11.1%), and Self Service $83 (11.7%).
- Cash used for share repurchases was approximately $1,040; dividends paid to LKQ stockholders were $284. Year-end shares outstanding were 267.3 million, compared with 287.0 million a year earlier.
- Current assets were $4,258 and current liabilities $2,271. Inventory increased to $2,752 from $2,611.
Material changes versus 2021
- Reported revenue declined 2.3%, but organic revenue grew 4.1%. Foreign exchange reduced total revenue growth by 5.1 percentage points; divestitures reduced it by 1.2 points.
- Wholesale–North America revenue rose 4.1% reported and Segment EBITDA increased 10.7%. Europe revenue declined 5.4% reported, principally due to currency translation; Europe Segment EBITDA increased 6.1% on a constant-currency basis.
- Specialty revenue declined 4.1% and Segment EBITDA declined 10.9%, reflecting weaker organic demand and inflationary operating costs. Self Service revenue declined 9.1% and Segment EBITDA fell 52.3%, substantially affected by lower precious-metal and scrap-steel prices.
- Operating cash flow and free cash flow decreased, while capital expenditures declined to $222 from $293.
Outlook, commentary, and risks
- The filing does not provide a clear numerical revenue or earnings forecast for 2023. Management said it expects available liquidity and future operating cash generation to meet current operating and capital requirements.
- Management projected $45–$55 of additional 2023 interest expense compared with 2022, citing higher benchmark rates and the potential for further increases.
- The 1 LKQ Europe transformation incurred $34 of costs across expense and capital categories in 2022. Management expected $50–$80 of further program costs through its projected completion in 2025, with expenses expected to be funded by Europe working-capital initiatives.
- A global restructuring plan began in late 2022, with estimated total costs of $30–$40 and substantial completion targeted for 2024. The separate 2019/2020 global restructuring plan was expected to conclude in 2023.
- On January 5, 2023, LKQ replaced its prior credit agreement with an unsecured facility comprising a $2.0 billion revolving credit facility maturing in 2028 and a $500 million term loan maturing in 2026. The filing also reports February 2023 interest-rate swaps covering $700 million of variable-rate borrowings.
- Key risks include inflation and labor costs, interest-rate and foreign-exchange exposure, commodity-price volatility, supply-chain and freight disruptions, competition and OEM restrictions on alternative parts, regulatory and environmental requirements, cybersecurity, and execution of the Europe integration and restructuring programs.
- The Ukraine conflict affected some operations and generated $3 of direct impacts included in the Segment EBITDA reconciliation. LKQ reported its Ukraine operations represented less than 1% of 2022 revenue and operating profit and did not expect a material ongoing impact, while noting uncertainty remained.
Unusual items and contingencies
- LKQ sold its PGW aftermarket glass business in April 2022 for $361, recording a $155 pretax gain ($127 after tax). A Self Service business sale generated $25 of proceeds and a $4 pretax gain.
- LKQ settled an EPA stormwater matter for a $465,000 penalty. It also disclosed a separate EPA notice concerning facilities in Idaho, Oregon, and Washington; management did not then expect a material liability from those matters.
- The annual goodwill impairment test found no impairment. Goodwill was $4,319 at year-end; management stated that a 10% decline in projected cash flows or 10% increase in discount rates would not have resulted in impairment.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of earnings and operating-margin growth was attributable to the $159 disposal gain, and what were ongoing operating results excluding that item?
- Whether organic growth, pricing, and productivity can offset inflation, soft Specialty demand, and weaker commodity-related results.
- 2023 interest expense, debt refinancing and repayment needs, and liquidity under the new credit agreement.
- Progress and total costs of the 1 LKQ Europe program and the new global restructuring plan, including whether working-capital actions fund the Europe program as expected.
- Trends in inventory, operating cash flow, free cash flow, supplier-finance obligations (reported at $248 at year-end), and capital returns.
- Commodity prices, foreign-exchange movements, supply availability, and developments in environmental and other regulatory matters.