LKQ Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless noted. LKQ distributes vehicle replacement parts and specialty products through its North America, Europe and Specialty segments. Results include the full-quarter contribution of Stahlgruber, acquired in May 2018.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Revenue | $3.100 billion | $2.721 billion | Up 13.9%; organic growth was down 0.3%, acquisition contribution was 17.3%, and foreign exchange reduced growth by 3.0%. |
| Gross margin | $1.208 billion; 39.0% | $1.054 billion; 38.7% | Margin improved 0.3 percentage points. |
| Operating income | $222.4 million; 7.2% of revenue | $226.6 million; 8.3% | Declined despite higher revenue; SG&A rose to 28.9% of revenue from 28.2%, and Q1 2019 included a $15.0 million held-for-sale impairment. |
| Net income attributable to LKQ stockholders | $98.0 million | $153.0 million | Diluted EPS was $0.31 versus $0.49. |
| Cash from operations | $177.2 million | $145.2 million | Higher year over year; receivables used $205.0 million of cash, partly offset by a $71.8 million inventory-related inflow. |
| Capital expenditures | $53.0 million | $62.2 million | Investing cash outflow was $57.8 million, including $4.8 million net cash used for acquisitions. |
| Gross debt | $4.264 billion | $3.339 billion at March 31, 2018 | Down from $4.348 billion at December 31, 2018. Cash was $316.1 million. |
| Liquidity | $2.068 billion | $1.758 billion at March 31, 2018 | Includes $316.1 million cash and $1.752 billion available under credit facilities. |
Segments and material changes
- Europe: Revenue increased 38.9%, primarily reflecting Stahlgruber; organic growth was 1.3% and currency reduced growth by 7.3%. Segment EBITDA rose to $105.3 million from $75.5 million, with a 7.3% margin in both periods.
- North America: Revenue declined 2.1% and Segment EBITDA declined 0.6% to $176.6 million. Management cited lower collision claims, one fewer selling day, weaker scrap-metal revenue and a less favorable scrap-price comparison. Per-day organic parts-and-services growth was 0.1%.
- Specialty: Revenue increased 0.5%, while Segment EBITDA declined 9.6% to $38.0 million and margin fell to 10.7% from 11.9%, mainly due to product costs and customer incentives.
- Q1 included a $39.6 million other-than-temporary impairment of the Mekonomen investment, contributing to a reported $39.5 million equity loss from unconsolidated subsidiaries. Q1 2018 had $1.4 million of equity earnings.
- LKQ classified certain North American and European businesses as held for sale, recorded a $15.0 million impairment, and reported $88 million of assets and $8 million of liabilities held for sale. The businesses generated approximately $170 million of annualized revenue and were expected to be sold within 12 months; they were not classified as discontinued operations.
Liquidity, outlook and risks
- Management stated current liquidity and expected operating cash flows should meet current operating and capital requirements, though future acquisitions may require additional funding. No quantified earnings or revenue guidance is provided in the filing text.
- Credit agreement covenant calculations showed net leverage of 2.9x against a maximum of 4.5x and interest coverage of 9.1x against a minimum of 3.0x; LKQ reported compliance at March 31, 2019. Revolver availability was approximately $1.7 billion after letters of credit.
- Debt carries both fixed and variable rates. The company reported an overall weighted-average borrowing rate of 3.1%; approximately $741 million of variable-rate debt was unhedged. A 100-basis-point rate move was estimated to change interest expense by $7 million over the next 12 months.
- Currency translation reduced Q1 revenue growth by 3.0%; management also identified exposure to foreign exchange, interest rates and scrap-metal prices. Rapid metal-price changes can affect margins because revenue and vehicle acquisition costs adjust at different times. Management cited softening European conditions and potential Brexit-related pressure in the U.K.
- Management expected approximately $20 million of additional acquisition integration and restructuring costs. It also disclosed $103 million of future operating lease payments for leases not yet commenced. Routine litigation and other contingencies were not expected to materially affect financial position, results or cash flows.
- Adoption of the lease standard added $1.3 billion of operating lease assets and liabilities to the balance sheet from January 1, 2019; the filing states adoption did not materially affect liquidity, income or cash flows. The company repurchased 2.6 million shares for $70.5 million in Q1, with approximately $370 million of authorization remaining.
Important facts for investors to verify
- Whether organic growth improves, particularly in North America, and how much future revenue growth depends on acquisitions and currency movements.
- Whether Stahlgruber integration delivers expected procurement and operating benefits, while monitoring European demand, margins and currency exposure.
- The outcome, timing and final proceeds from the planned business disposals, including any additional impairment.
- The effect of Mekonomen’s impairment and subsequent performance on reported earnings and the carrying value of the investment.
- Debt, interest-rate exposure, covenant headroom, working-capital movements and the impact of lease obligations on financial flexibility.