LKQ Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; fourth-quarter figures below are unaudited. LKQ distributes aftermarket, recycled, refurbished and remanufactured vehicle parts, plus specialty vehicle products, through North America, Europe and Specialty reportable segments.
Financial performance
| Metric | FY2020 | FY2019 | Change / context |
|---|---|---|---|
| Revenue | $11.629 billion | $12.506 billion | Down 7.0% |
| Gross profit / margin | $4.593 billion / 39.5% | $4.852 billion / 38.8% | Margin expanded 0.7 percentage points |
| Operating income / margin | $986 million / 8.5% | $897 million / 7.2% | Income increased despite lower revenue |
| Net income attributable to LKQ stockholders | $638 million | $541 million | Up approximately 18% |
| Diluted EPS attributable to LKQ stockholders | $2.09 | $1.74 | Up approximately 20% |
| Operating cash flow | $1.444 billion | $1.064 billion | Up $380 million |
| Free cash flow | $1.271 billion | $798 million | Operating cash flow less capital expenditures; non-GAAP |
Parts and services revenue fell 7.7%; other revenue increased 5.9%, supported in North America by higher precious-metals revenue. COVID-19-related reductions in driving and repair activity were the primary cause of the parts and services decline. Total Segment EBITDA rose to $1.369 billion from $1.328 billion; it is a company-defined non-GAAP measure.
Segments: North America revenue was $4.631 billion, down 11.1%, while Segment EBITDA rose to $779 million and margin to 16.8% from 13.7%. Europe revenue was $5.492 billion, down 5.9%; Segment EBITDA fell to $428 million from $454 million, with margin steady at 7.8%. Specialty revenue rose 3.1% to $1.505 billion; Segment EBITDA was $163 million versus $161 million, and margin eased to 10.8% from 11.0%.
Fourth quarter: Revenue was $2.954 billion versus $3.010 billion in Q4 2019. Operating income was $267 million versus $207 million; net income was $182 million versus $141 million. Diluted EPS from continuing operations was $0.59 versus $0.46.
Liquidity, debt and capital
- Cash and cash equivalents were $312 million at year-end, compared with $523 million a year earlier. Total debt was $2.897 billion, down from $4.072 billion; the company reported approximately $1.4 billion of net borrowings repaid during 2020.
- Available credit-facility capacity was $2.546 billion; cash plus facility availability totaled approximately $2.858 billion. Working capital was $2.046 billion.
- Credit-agreement covenant ratios at December 31 were 1.9x net leverage against a 5.0x maximum and 14.6x interest coverage against a 3.0x minimum. The company amended the leverage covenant in June 2020 as a precaution during the pandemic and reported compliance at year-end.
- Capital expenditures were $173 million, down from $266 million. The company repurchased $117 million of shares during the year; $531 million remained authorized. It paid no cash dividends.
- Contractual obligations totaled $6.312 billion, including $1.878 billion of operating lease payments and $832 million of purchase obligations. These totals include future interest in the long-term debt schedule.
Material changes, outlook and risks
- Management reported full-year organic parts and services revenue down 8.2% per day. After a sharp April decline, activity improved but weakened again amid renewed restrictions; Q4 organic parts and services revenue was down 6.1% per day year over year.
- Cost reductions, including staffing and route actions, and lower inventory purchases supported margins and cash generation. Inventory reductions contributed materially to operating cash flow, so the year’s cash conversion may not recur at the same level.
- Management expected revenue to remain lower year over year in Q1 2021, increase in Q2 against a low comparison base, and recover gradually in the second half. It expected 2021 consolidated profit margins to remain above 2020 levels. The filing does not provide a specific numerical revenue or earnings forecast.
- The multi-year 1 LKQ Europe integration is targeted to complete organizational design and implementation by mid-2021, with remaining projects through 2024. Costs across restructuring, transformation and capital spending were expected to be $60–$80 million in 2021 and another $80–$100 million from 2022 through expected completion. Execution, systems integration and expected savings remain important variables.
- COVID-19 uncertainty, vehicle miles and accident rates, customer and supplier financial health, imported-parts availability and freight delays, OEM competition and intellectual-property claims, alternative-parts acceptance, commodity prices, foreign exchange, labor, environmental compliance and significant debt are key disclosed risks. Management noted expected downward pressure on North American salvage and self-service margins from higher vehicle acquisition costs, partly offset in the near term by commodity prices.
- Goodwill was $4.592 billion. No impairment was recorded in 2020; year-end testing found each reporting unit’s estimated fair value at least 30% above carrying value. These estimates depend on forecasts, market multiples and discount rates.
- Government assistance of $52 million was recorded in 2020, primarily as a reduction in SG&A. A $13 million debt-extinguishment loss related to early redemption of the 2023 U.S. notes, and $66 million of restructuring and acquisition-related expenses were recorded.
- Legal matters include an EPA proceeding concerning certain performance parts and Clean Air Act allegations; management did not expect the likely penalty to be material. LKQ settled stormwater matters at three Massachusetts facilities for approximately $0.3 million and was responding to EPA information requests about additional locations.
Investor verification priorities
- Track 2021 revenue recovery, especially the effect of renewed restrictions, miles driven and repairable collision claims.
- Assess whether operating cash flow remains strong after inventory levels and purchasing normalize; 2020 cash generation benefited substantially from inventory reductions.
- Monitor North American salvage vehicle availability and acquisition costs, freight delays, commodity prices and their effects on margins and product fill rates.
- Review progress, spending and realized benefits from the 1 LKQ Europe program and broader restructuring initiatives.
- Reassess leverage, covenant headroom, debt maturities and refinancing exposure, including variable-rate and foreign-currency risks.
- Follow goodwill valuation assumptions and the EPA matters, as well as customer credit losses and supplier continuity.