LKQ Corporation — Q1 2021 Form 10-Q Summary
Business context and period. LKQ distributes alternative replacement vehicle parts and specialty automotive products, and operates in North America, Europe and Specialty. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless otherwise noted.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $3.171 billion | $3.001 billion | +5.7% |
| Gross margin | $1.294 billion; 40.8% of revenue | $1.214 billion; 40.4% | Margin +0.4 percentage points |
| Operating income | $371.4 million; 11.7% of revenue | $241.8 million; 8.1% | +53.6% |
| Net income attributable to LKQ stockholders | $265.9 million | $145.1 million | +83.2% |
| Diluted EPS attributable to LKQ stockholders | $0.88 | $0.47 | Up $0.41 |
| Operating cash flow | $522.5 million | $194.6 million | + $327.9 million |
| Free cash flow | $480.7 million | $150.0 million | + $330.7 million |
Total revenue growth included 2.3% organic growth, a 0.6% reduction from acquisitions and divestitures, and a 4.0% foreign-exchange benefit. Parts and services revenue rose 4.2% as reported, but organic growth was 0.6% (2.2% per selling day); other revenue grew 27.0%, principally reflecting higher scrap and precious-metal prices.
SG&A declined to 26.8% of revenue from 30.0%. The effective tax rate was 26.3%, versus 29.2%. Q1 2020 included a $12.8 million debt-extinguishment loss; Q1 2021 did not.
Segments
| Segment | Revenue | Segment EBITDA | EBITDA margin |
|---|---|---|---|
| North America | $1.249 billion, down 3.1% | $249.2 million, up 17.8% | 19.9%, versus 16.4% |
| Europe | $1.463 billion, up 7.3% | $141.0 million, up 80.1% | 9.6%, versus 5.7% |
| Specialty | $458.0 million, up 31.8% | $61.5 million, up 90.7% | 13.4%, versus 9.2% |
Segment EBITDA and its margins are non-GAAP measures. North America results benefited from scrap and precious-metal pricing, operational efficiencies and cost actions, despite weaker parts-and-services demand. Europe’s reported growth included foreign-exchange benefits; EBITDA increased 70.7% on a constant-currency basis. Specialty growth reflected strong demand across product channels.
Liquidity, debt and cash flow
- At March 31, cash was $590.2 million and gross debt was $2.735 billion, compared with $312.2 million and $2.897 billion, respectively, at December 31, 2020. Total liquidity, including available credit facilities, was approximately $3.245 billion.
- Credit-facility availability was approximately $2.655 billion. The company reported a 1.4x net leverage ratio against a 5.00x covenant limit and 16.3x interest coverage against a 3.00x minimum; it was in compliance with covenants.
- Operating cash flow benefited substantially from a $331.4 million increase in accounts payable. Management cited payment timing and extended terms, including supply-chain financing; receivables were a larger cash use year over year. The cash-flow improvement therefore includes working-capital timing effects.
- Capital expenditures were $41.8 million. The company repurchased $57.0 million of stock, with $473.9 million remaining under the repurchase authorization.
- After quarter-end, on April 1, 2021, LKQ redeemed the €750 million 2026 Euro Notes for approximately $915 million, using revolver borrowings and cash. Management expected a $24 million debt-extinguishment loss in Q2 and estimated post-redemption liquidity of approximately $2.3 billion. The company said the transaction should lower its weighted-average borrowing cost.
Outlook, commentary and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected consolidated revenue to rise in Q2 against the prior-year lockdown-affected base, followed by a gradual recovery in the second half of 2021. The pace depends on restrictions, virus conditions and vaccination efforts.
- Q1 parts-and-services organic revenue increased 2.2% per day, but North America remained affected by lower collision activity. Management expected organic growth in Q2 partly because April and May 2020 were particularly weak.
- Management planned to rebuild inventory during 2021 and support growth-related capital spending. Ocean-freight delays and lower pandemic-related production had constrained restocking; salvage vehicle purchases were also lower year over year.
- The multi-year 1 LKQ Europe program targets organizational design and implementation by mid-2021, with remaining projects through 2024. The filing estimates $50–$70 million of total program costs in 2021 and another $80–$100 million from 2022 through completion. Q1 program costs across restructuring, transformation and capital expenditures were $14 million.
- COVID-19 effects remain uncertain and could materially affect demand, customers, suppliers, operations, cash flows and estimates. Management noted that lower costs from prior actions may persist, but some resources may need to return as volumes recover. Q1 included $9 million of foreign-government assistance; management did not anticipate significant additional assistance for the rest of 2021, subject to developments.
- Metal prices are volatile and affect both vehicle acquisition costs and scrap/precious-metal revenue, with timing lags that can help or hurt margins. Management noted strong Q1 sequential price increases and cautioned that expected declines in precious-metal prices could reduce future year-over-year margin benefits.
- Foreign currency translation and variable-rate debt are additional exposures. Only 18% of variable-rate credit-facility debt was fixed through swaps at quarter-end; swaps had $150 million notional and matured in June 2021. A 100-basis-point rate change was estimated to change interest expense by $7 million over the following 12 months.
- In April, the company was advised the EPA planned enforcement letters concerning NPDES stormwater permits at seven facilities. Letters had not yet been received; management did not expect any penalty to materially affect results or financial condition. Management also stated that outstanding litigation and claims were not expected to have a material adverse effect.
Most important facts for investors to verify
- How much of the operating cash-flow increase reflects sustainable earnings versus accounts-payable timing and extended payment terms.
- Whether demand, especially North American collision-related activity, recovers as management expected, and whether Specialty’s exceptional growth persists.
- The durability of margin gains from cost actions and elevated scrap and precious-metal prices.
- Actual cash use, financing and interest savings following the April 1 note redemption, including the expected Q2 extinguishment loss and remaining liquidity.
- Inventory availability and the timing and cost of restocking, alongside the expected spending and benefits of the 1 LKQ Europe program.
- Developments in COVID-19, foreign exchange and interest rates, covenant headroom, and the EPA permit matter.