LKQ Corporation — Q3 2022 Form 10-Q
Business context and period. LKQ distributes alternative vehicle replacement parts, specialty products and accessories, and operates self-service salvage yards. This unaudited report covers the quarter and nine months ended September 30, 2022; amounts are in U.S. dollars unless noted. The company reports four segments: Wholesale - North America, Europe, Specialty and Self Service.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $3.104B | $3.297B | $9.793B | $9.903B |
| Gross margin | $1.276B; 41.1% | $1.344B; 40.8% | $4.000B; 40.9% | $4.053B; 40.9% |
| Operating income | $358M | $378M | $1.288B | $1.194B |
| Net income | $262M | $284M | $955M | $856M |
| Diluted EPS | $0.95 | $0.96 | $3.40 | $2.85 |
| Segment EBITDA | $424M | $453M | $1.346B | $1.428B |
| Operating cash flow | — | $1.010B | $1.362B | |
| Free cash flow | — | $862M | $1.229B |
Segment EBITDA and free cash flow are non-GAAP measures; free cash flow is operating cash flow less purchases of property, plant and equipment. Q3 gross margin improved, while SG&A rose to 27.8% of revenue from 27.2%; operating margin was 11.5% in both quarters. Nine-month operating margin rose to 13.2% from 12.1%.
At September 30, cash was $269M and gross debt was $2.447B, versus $274M and $2.824B at year-end 2021. Revolver availability was $1.460B, for total liquidity of $1.729B. Current assets were $4.202B and current liabilities $2.351B. The company reported covenant ratios of 1.3 net leverage against a 4.0 maximum and 31.1 interest coverage against a 3.0 minimum. Nine-month capital expenditures were $148M.
Material changes versus comparable periods
- Q3 revenue fell 5.9%; organic revenue increased 3.2%, offset by foreign exchange (-6.9%) and divestitures (-2.1%). Nine-month revenue declined 1.1%, despite 4.3% organic growth, principally due to foreign exchange (-4.9%).
- Q3 net income declined to $262M from $284M, and diluted EPS was $0.95 versus $0.96. Nine-month net income rose to $955M from $856M; results included a $159M pretax gain on business disposals, principally the PGW Auto Glass sale.
- Nine-month operating cash flow fell $352M year over year, mainly reflecting $296M of incremental inventory cash outflows and lower other operating cash flows. Free cash flow fell to $862M from $1.229B.
- Segment results diverged. Q3 Wholesale - North America EBITDA increased to $216M from $190M, while Europe declined to $155M from $175M, Specialty to $49M from $52M, and Self Service to $4M from $36M. The Self Service decline was driven largely by lower metals revenue and adverse scrap-price timing.
- Foreign currency translation reduced Q3 diluted EPS by an estimated $0.06 and nine-month diluted EPS by $0.11. Nine-month foreign currency translation loss in other comprehensive income was $391M.
Outlook, commentary, risks and unusual items
- Management said available liquidity and expected operating cash generation should be sufficient for current operating and capital needs. The 2022 plan includes inventory rebuilding, growth-related capital projects, tuck-in acquisitions, dividends and share repurchases. The filing provides no specific full-year earnings or revenue guidance.
- The $3.150B revolving credit facility matures in January 2024; management expects to refinance it before maturity. A $2.119B debt maturity is scheduled in 2024. Variable-rate credit-facility debt was $1.621B; a 100-basis-point rate change would affect interest expense by an estimated $16M over the next 12 months.
- Management cited inflation in product, labor, shipping, freight and overhead costs, and said pricing and productivity actions may not fully offset continued cost pressure. Commodity-price shifts can affect Self Service margins because vehicle acquisition costs and metal-sale revenue adjust with a lag. A stronger U.S. dollar also weighed on reported results.
- The 1 LKQ Europe transformation is expected to continue through 2025. Estimated program costs across restructuring, transformation expenses and capital spending are $25M–$35M in 2022 and a further $50M–$80M in 2023 through completion; management expects transformation and restructuring expenses to be funded by Europe working-capital initiatives.
- Operations in Ukraine were less than 1% of annual revenue and operating profit; management described the conflict’s impact to date as immaterial but noted future effects remain uncertain. PGW was sold for $361M in April, producing a $155M pretax gain; a Self Service business sale generated a further $4M pretax gain.
- The company repurchased $891M of stock during the first nine months and paid $210M in dividends. The repurchase authorization was increased to $3.5B after quarter-end. A $0.275-per-share dividend was declared October 25, 2022. EPA settlements included $2.5M for an alleged Clean Air Act matter and a $465,000 stormwater penalty; management does not expect the matters to be material.
Key facts for investors to verify
- Whether organic growth and pricing continue to offset currency translation, divestitures and any softening in demand.
- Whether Self Service margins recover as scrap and precious-metal prices and vehicle procurement costs change.
- How inventory rebuilding and supplier-finance arrangements affect working capital and cash conversion.
- Progress and cost control in the Europe transformation, and the actual benefits achieved from its initiatives.
- Plans and terms for refinancing the January 2024 credit facility and managing the 2024 debt maturities and variable-rate exposure.
- How continued repurchases and dividends affect leverage, liquidity and per-share results; also assess earnings excluding the divestiture gains.