LKQ Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013. Figures are unaudited; dollar amounts are in millions unless stated otherwise.
Business context
LKQ distributes alternative vehicle replacement products, including aftermarket, recycled, refurbished and remanufactured parts. It reports North America and Europe as its two reportable segments. The May 2013 acquisition of Sator expanded its European presence into the Netherlands, Belgium and northern France; LKQ also made 16 other acquisitions during the first nine months. In August, it invested in a 49%-owned venture with Suncorp to develop a replacement-parts business in Australia and New Zealand.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $1,298.1 | $1,016.7 | $3,745.8 | $3,055.0 |
| Gross margin | $517.9; 39.9% | $409.7; 40.3% | $1,529.7; 40.8% | $1,279.0; 41.9% |
| Operating income | $123.4 | $91.4 | $396.4 | $333.6 |
| Net income | $73.4 | $54.0 | $233.8 | $199.0 |
| Diluted EPS | $0.24 | $0.18 | $0.77 | $0.66 |
| EBITDA | $146.4; 11.3% of revenue | $109.3; 10.8% | $458.2; 12.2% | $386.8; 12.7% |
Q3 revenue increased 27.7%, reflecting 17.4% acquisition-related growth and 10.8% organic growth, partly offset by currency effects. Nine-month revenue grew 22.6%, driven by 13.2% acquisition-related growth and 9.9% organic growth. Q3 net income rose about 36%; nine-month net income rose about 17%.
For the nine months, operating cash flow was $340.9 versus $182.1 in 2012. Investing cash use was $464.8, including $396.0 for acquisitions and $61.1 for capital expenditures. Financing provided $169.3. Cash ended the period at $107.3.
At September 30, total debt was $1,312.1, net debt was $1,204.7, and current maturities were $61.1. Credit-facility availability was $1,166.9; cash plus facility availability totaled $1,274.3. Total assets were $4,361.1 and current liabilities were $642.5.
Material changes and management commentary
- North American Q3 revenue grew 11.1%; segment EBITDA margin increased to 11.7% from 10.7%, supported by lower warranty expense and improved wholesale salvage margins. Nine-month EBITDA margin declined to 12.6% from 13.0%, in part because a $17.2 million lawsuit settlement gain benefited 2012 and did not recur.
- European Q3 revenue more than doubled to $369.8 million, substantially reflecting Sator; organic growth was also strong. European EBITDA margin declined to 10.3% from 11.1%, with Sator and acquisition costs weighing on margin. Management expects Sator’s negative margin effect to lessen with integration and purchasing synergies.
- Consolidated gross margin fell year over year in both periods, reflecting lower-margin acquisitions and, for the nine-month comparison, the absence of the prior-year settlement gain. Q3 operating margin improved to 9.5% from 9.0%; nine-month operating margin eased to 10.6% from 10.9%.
- Interest expense increased to $15.2 million in Q3 and $36.3 million for the first nine months, partly because of higher debt balances and the 4.75% senior notes. Nine-month results also included a $2.8 million debt-extinguishment loss.
Outlook, risks and unusual items
- For full-year 2013, management estimated net income of $313–$333 million and diluted EPS of $1.03–$1.10, excluding restructuring and acquisition-related expenses and acquisition- or divestiture-related gains or losses, including contingent-consideration fair-value changes. It expected operating cash flow of approximately $340 million and capital expenditures, excluding acquisitions, of $85–$100 million.
- The May refinancing included $600 million of senior notes due 2023 at 4.75% and an amended secured credit agreement with a May 2018 maturity. The company reported compliance with debt covenants at September 30; the agreement sets a maximum net leverage ratio of 3.50:1, with specified acquisition-related flexibility, and minimum interest coverage of 3.00:1.
- LKQ had $49.3 million of current and $5.2 million of noncurrent contingent-consideration liabilities. An amended ECP earnout agreement requires an approximately £27 million payment in Q1 2014. The filing also describes expected 2013-acquisition integration costs of about $4 million, with most related integration work expected to be completed by the end of 2014.
- Key risks include substantial indebtedness and variable-rate exposure, foreign-exchange movements, metal-price fluctuations, integration and acquisition execution, and product-liability claims or recalls. Management noted that a 100-basis-point interest-rate movement would change interest expense by about $1.3 million over the next 12 months. Litigation and other ordinary-course contingencies were not expected by management to materially affect financial position, results or cash flows; the filing lists no legal proceedings under Part II, Item 1.
Important facts for investors to verify
- Whether organic growth and the expected Sator integration benefits can sustain revenue growth while recovering European and consolidated margins.
- How much of reported earnings and cash-flow improvement reflects acquisitions, working-capital timing, favorable tax adjustments and nonrecurring prior-year comparisons.
- Progress toward the stated full-year earnings, operating-cash-flow and capital-expenditure outlook, including the exclusions used in the earnings guidance.
- Debt-service capacity, covenant headroom, facility availability and funding for the approximately £27 million ECP payment due in Q1 2014.
- Final purchase-price allocations, goodwill and contingent consideration for recent acquisitions, along with performance and funding needs of the Suncorp venture.