LKQ Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. LKQ distributes alternative vehicle replacement parts and operates in North America and, following its October 2011 acquisition of Euro Car Parts (ECP), the United Kingdom. The company completed a two-for-one stock split in September 2012; share and per-share figures are split-adjusted.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1,016.7 million | $783.9 million | $3,055.0 million | $2,330.2 million |
| Gross margin | $409.7 million; 40.3% | $334.3 million; 42.6% | $1,279.0 million; 41.9% | $1,000.2 million; 42.9% |
| Operating income | $91.4 million; 9.0% | $85.5 million; 10.9% | $333.6 million; 10.9% | $271.3 million; 11.6% |
| Net income | $54.0 million | $49.2 million | $199.0 million | $154.1 million |
| Diluted EPS | $0.18 | $0.17 | $0.66 | $0.52 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $182.1 million | $159.2 million |
- Q3 revenue increased 29.7%, primarily from acquisitions; management reported 1.6% organic growth. Nine-month revenue rose 31.1%, with 2.9% organic growth. ECP contributed substantially to reported growth and had no comparable prior-year segment period.
- Q3 net income rose about 9.8%, slower than revenue. Gross margin fell 2.3 percentage points, reflecting weaker scrap-metal economics, lower-margin ECP mix, warranty claims, and other mix factors. Distribution expense also increased as a share of revenue.
- For the nine months, operating cash flow improved by $22.9 million. Investing used $193.1 million, including $133.1 million for acquisitions and $60.6 million for property and equipment. Financing provided $31.3 million; cash ended at $69.2 million.
- At September 30, current assets were $1,296.3 million and current liabilities $464.5 million. Long-term obligations were $981.8 million, including $52.1 million classified current. Credit-agreement borrowings were $845.9 million; the receivables facility added $77.3 million. Revolver availability, after letters of credit, was $482.9 million.
Changes, outlook, and notable items
- Q3 operating income rose 6.9%, while nine-month operating income rose 23.0%. North American Q3 EBITDA declined to $89.3 million from $98.4 million; nine-month North American EBITDA increased to $331.1 million from $311.1 million. Europe contributed $20.1 million of Q3 EBITDA and $55.7 million for nine months.
- Nine-month results included a $17.2 million gain from supplier lawsuit settlements, recorded as a reduction of cost of goods sold; Q3 included $0.5 million. The remaining case against two defendants was not expected to be material. Contingent-consideration remeasurement generated $1.9 million of Q3 expense and $1.8 million of nine-month expense.
- Management forecast 2012 net income of $265–$272 million and diluted EPS of $0.88–$0.91, excluding restructuring and acquisition-related expenses and acquisition/divestiture gains or losses, including contingent-consideration changes. It expected operating cash flow of $240–$270 million and capital expenditures, excluding acquisitions, of $90–$100 million.
- Management cited weaker scrap-metal prices, a lag between metal revenue and vehicle acquisition costs, warranty-claim variability, and higher delivery costs in Europe. Other exposures include floating interest rates, currency movements, seasonality, and acquisition integration. A 100-basis-point rate increase was estimated to change interest expense by about $3 million over the following 12 months; 74% of credit-agreement variable-rate debt was fixed through swaps.
- The company entered a three-year receivables securitization facility in September, with up to $80 million of capacity; the initial $77.3 million proceeds repaid revolver borrowings. The company reported compliance with credit-agreement covenants. A Texas environmental investigation concerning alleged petroleum discharges was under negotiation; expected payments were described as de minimis.
Most important facts for investors to verify
- Whether organic growth and ECP expansion can sustain revenue gains as acquisition-driven comparisons change.
- Whether gross margins recover from scrap-metal pressure, warranty costs, and the acquired business mix; assess the effect of the $17.2 million settlement gain on nine-month comparisons.
- Whether management meets its full-year earnings, operating-cash-flow, and capital-expenditure outlook, noting that earnings guidance excludes specified unusual items.
- How acquisition spending, contingent payments, and debt levels affect liquidity, covenant headroom, and interest expense.
- Developments in the remaining supplier litigation, Texas environmental matter, and warranty claims experience.