LKQ Corporation — Q3 2021 Form 10-Q
Business context and period: LKQ distributes alternative vehicle replacement and maintenance parts, operates self-service salvage yards, and distributes specialty vehicle products. This unaudited report covers the three and nine months ended September 30, 2021, compared with the same 2020 periods. Results are not necessarily indicative of full-year performance.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $3.297 billion | $3.048 billion | $9.903 billion | $8.675 billion |
| Gross margin | 40.8% | 39.3% | 40.9% | 39.5% |
| Operating income | $378 million | $296 million | $1.194 billion | $718 million |
| Net income attributable to LKQ stockholders | $284 million | $193 million | $855 million | $457 million |
| Diluted EPS | $0.96 | $0.64 | $2.85 | $1.50 |
| Segment EBITDA | $452 million | $389 million | $1.428 billion | $1.003 billion |
Q3 revenue increased 8.2% year over year; organic parts and services revenue rose 4.0%. Nine-month revenue increased 14.2%, with organic parts and services growth of 8.3% (8.7% per selling day). Other revenue, including scrap and metals, rose 45.3% in Q3 and 54.5% year to date, substantially reflecting higher commodity prices. SG&A was 27.2% of revenue in Q3 versus 26.7% a year earlier, but improved to 26.7% year to date from 28.3%.
Operating cash flow for the first nine months was $1.362 billion, compared with $1.135 billion. Capital expenditures were $133 million, yielding reported free cash flow of $1.229 billion versus $1.025 billion. Cash and cash equivalents were $403 million at September 30. Gross debt was $2.399 billion, down from $2.897 billion at December 31, 2020; total liquidity was approximately $2.040 billion, down $818 million from year-end. Revolving credit availability was $1.638 billion. The company reported compliance with its credit covenants, with a 1.1 net leverage ratio against a 4.25 maximum and 24.4 interest coverage against a 3.00 minimum, as calculated under the credit agreement.
Changes, outlook, and risks
- Performance and segments: Q3 Segment EBITDA increased 16% year over year. Europe led margin improvement, with its Q3 Segment EBITDA margin rising to 11.5% from 9.2%; North America’s margin eased to 17.3% from 17.6%, while Specialty’s declined to 11.1% from 12.1%. Year-to-date margins improved across all three segments. Management attributed gains to pricing and margin initiatives, cost actions, revenue recovery, and favorable scrap and precious-metal prices.
- Costs and unusual financing items: Nine-month restructuring and acquisition-related expenses fell to $15 million from $52 million. The company recorded a $24 million loss on extinguishment of debt after redeeming its Euro Notes due 2026 in April. It repurchased $580 million of shares in the first nine months and had $951 million remaining under its $2 billion authorization at September 30. A quarterly dividend of $0.25 per share was declared October 26, payable in December.
- Management outlook: LKQ expects consolidated parts and services revenue to grow organically in future periods, but provided no specific earnings or revenue guidance in the supplied filing text. It expects to increase inventory purchases in 2022 to support service and fill rates, subject to continuing supply constraints. The 1 LKQ Europe program is scheduled to run through 2024; management estimated $30–$40 million of total program costs in 2021 and a further $100–$130 million from 2022 through completion, including restructuring, transformation expenses, and capital expenditures.
- Risks and contingencies: Management cited COVID-19 uncertainty, supply-chain and inventory availability constraints, inflation in product and freight costs, foreign-exchange exposure, and volatile scrap and precious-metal prices. At September 30, $1.4 billion of variable-rate debt was unhedged; a 100-basis-point rate move was estimated to change interest expense by $14 million over the next 12 months. The company also described reliance on supplier participation in an uncommitted supply-chain financing initiative. EPA enforcement matters included a proposed $130,000 penalty for alleged Clean Water Act violations and pending Region 4 orders for which no potential penalty had been provided; LKQ did not expect a material financial effect. Management reported disclosure controls were effective.
Investor verification points
- Assess how much of revenue and margin growth depends on higher scrap and precious-metal prices, and how results may change if prices reverse.
- Track supply-chain constraints, aftermarket fill rates, inventory rebuilding, and the expected 2022 inventory spending.
- Review the drivers of working-capital cash flows, including the large accounts-payable inflow and inventory-related cash use, and the continuation of supplier financing arrangements.
- Confirm debt, liquidity, covenant headroom, and interest-rate exposure after the Euro Notes redemption, term-loan repayment, and termination of the receivables securitization facility.
- Monitor share repurchases, the new dividend, and the cost and execution of the 1 LKQ Europe program alongside acquisitions and capital expenditures.
- Review subsequent developments in the EPA matters and the company’s broader COVID-19, foreign-exchange, and commodity-price risks.