LKQ Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted. LKQ distributes alternative replacement parts and services for vehicle repairs. Its North America and Europe segments grew through organic activity and acquisitions, including the May 2013 acquisition of Sator, which expanded LKQ into continental Europe.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,251.7 | $1,006.5 | $2,447.7 | $2,038.3 |
| Gross margin | $509.9; 40.7% | $421.9; 41.9% | $1,011.8; 41.3% | $869.3; 42.6% |
| Operating income | $131.4 | $108.6 | $273.0 | $242.2 |
| Net income | $75.7 | $64.0 | $160.3 | $145.0 |
| Diluted EPS | $0.25 | $0.21 | $0.53 | $0.48 |
| Operating cash flow | Not separately provided | Not separately provided | $209.5 | $121.0 |
- Q2 revenue grew 24.4% year over year, reflecting 14.1% acquisition-related growth and 10.8% organic growth, partly offset by 0.5% unfavorable foreign exchange. First-half revenue increased 20.1%, with 11.0% acquisition-related growth and 9.5% organic growth, partly offset by 0.4% unfavorable foreign exchange.
- Q2 net income increased about 18%; first-half net income rose about 11%. Q2 diluted EPS increased from $0.21 to $0.25; first-half diluted EPS rose from $0.48 to $0.53.
- Gross margin as a share of revenue declined year over year in both periods. The prior-year periods included lawsuit-settlement gains of $8.4 million in Q2 and $16.7 million in the first half; Sator and the acquired precious-metals business also carried lower gross margins. Lower North American vehicle costs provided a partial offset.
- First-half operating cash flow was $209.5 million, up from $121.0 million. Investing cash outflow was $347.5 million, including $308.6 million for acquisitions; capital expenditures were $40.2 million. Financing cash inflow was $241.2 million, including proceeds from the senior-note issuance.
- At June 30, cash was $161.6 million and total debt was $1,376.5 million, versus $1,118.5 million at December 31, 2012. Net debt was $1,214.9 million. Revolver availability was $1,112.4 million; total liquidity, including cash, was $1,273.9 million.
- Current assets were $1,658.5 million and current liabilities $559.1 million. The filing reports current maturities of debt of $65.0 million. LKQ stated it was in compliance with its credit agreement covenants at quarter-end.
- Segment revenue and EBITDA: North America Q2 revenue was $953.9 million and EBITDA $118.6 million (12.4% margin); Europe revenue was $297.8 million and EBITDA $33.8 million (11.3% margin). The prior-year North American EBITDA included the supplier-settlement gain.
Material changes, outlook, and risks
- Acquisitions and financing: LKQ acquired Sator for approximately $272.8 million net of cash acquired and completed nine other acquisitions in the first half. The Sator purchase-price allocation is preliminary, and $139.2 million of goodwill was recorded for Sator, which LKQ does not expect to be tax-deductible. LKQ issued $600 million of 4.75% senior notes due 2023 and amended its credit agreement, extending maturity to May 2018 and increasing total facility availability. The amended agreement has a maximum net leverage covenant of 3.50:1, which may rise to 4.00:1 for qualifying acquisitions; actual leverage is not stated here.
- Guidance: Full-year 2013 net income is estimated at $313–$333 million and diluted EPS at $1.03–$1.10, excluding restructuring and acquisition-related expenses and acquisition- or divestiture-related gains or losses, including changes in contingent consideration fair value. Capital expenditures are expected to be $100–$115 million, excluding acquisitions, and operating cash flow approximately $300 million.
- Management commentary: LKQ expects Sator’s initial negative effect on European EBITDA margin to diminish as integration and purchasing synergies develop. European growth also reflected same-store sales and branch openings. Management said available liquidity and expected operating cash flow should meet current operating and capital needs, but may not cover future acquisitions depending on their size.
- Debt and market risks: Borrowings include variable-rate debt, partly hedged with swaps. A 100-basis-point rate movement was estimated to change interest expense by $1.9 million over 12 months. Other exposures include foreign exchange, salvage-vehicle and scrap-metal prices, and potential delays or unfavorable terms in refinancing the receivables facility. A 10% currency movement, as described in the filing, would change first-half consolidated revenue by 3% and operating income by 2%.
- Unusual items and contingencies: Q2 and first-half results included a $2.8 million loss on debt extinguishment and Sator-related acquisition costs. LKQ also became obligated to pay approximately £27 million to a seller of ECP in Q1 2014 following an amended contingent-payment agreement. The filing says existing litigation and other contingencies are not expected to materially affect results; a supplier class action remains pending against two defendants.
- Results are subject to seasonality, weather-driven repair demand, insurer influence on repair choices, acquisition integration, and changes in product, vehicle, fuel, and commodity costs. The filing says interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether full-year guidance is achieved, noting its stated exclusions and the distinction between reported and adjusted results.
- Sator’s ongoing revenue, margins, integration progress, synergy realization, and final purchase-price allocation.
- Debt levels, covenant headroom, interest costs after the refinancing, and the ability to refinance or extend the receivables facility.
- Cash conversion and working-capital needs alongside acquisition spending and planned capital expenditures.
- How gross margins perform absent the prior-year lawsuit-settlement gains, and how scrap-metal prices and salvage-vehicle costs affect profitability.
- Settlement of the approximately £27 million ECP contingent payment and the outcome of the remaining supplier litigation.