LKQ Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results for the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. LKQ distributes alternative automotive replacement parts and operates North American and European reportable segments. The European segment reflects the October 2011 acquisition of Euro Car Parts (ECP).
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior balance date |
|---|---|---|
| Revenue | $1,031.8 million | $786.6 million; up 31.2% |
| Gross margin | $447.4 million; 43.4% of revenue | $343.6 million; 43.7% |
| Operating income | $133.6 million; 12.9% margin | $107.4 million; 13.6% |
| Net income / diluted EPS | $81.0 million / $0.54 | $58.2 million / $0.39 |
| EBITDA | $151.7 million | $119.4 million |
| Operating cash flow | $110.2 million | $77.3 million |
| Cash and equivalents | $55.2 million | $48.2 million at Dec. 31, 2011 |
| Long-term obligations, including current portion | $896.6 million | $956.1 million at Dec. 31, 2011 |
Investing cash outflow was $46.0 million, including $21.3 million of property and equipment purchases and $24.9 million for acquisitions, net of cash acquired. Financing cash outflow was $57.7 million. Cash increased $6.9 million during the quarter. The company reported $503.7 million available under its revolving facility after letters of credit. Facility borrowings carried a 2.91% weighted-average rate after swaps; 74% of variable-rate facility debt was fixed through swaps. LKQ reported compliance with its credit covenants.
Material changes and drivers
- Revenue growth included $220.3 million from acquisitions and 3.6% organic growth in parts and services. Organic recycled and remanufactured revenue grew 8.5%; aftermarket, other new and refurbished organic revenue was flat.
- North America revenue was $871.1 million; Europe contributed $160.7 million. ECP opened nine U.K. branches in the quarter and, compared with its unaudited prior-year quarter, reported revenue growth above 20%.
- Gross margin declined 0.3 percentage points. ECP’s lower-margin product mix and rising salvage vehicle acquisition costs weighed on margin; an $8.3 million supplier-lawsuit settlement gain partially offset those pressures.
- Operating expenses rose in dollars, while facility and warehouse expense declined as a share of revenue. Distribution and SG&A expenses increased as shares of revenue.
- Interest expense rose $1.0 million as average credit-facility borrowings increased, partly offset by lower average effective borrowing rates. Prior-year other expense included a $5.3 million debt-extinguishment loss; Q1 2012 included a $1.3 million gain from remeasurement of contingent consideration.
- Four North American acquisitions were completed. The company borrowed $200 million under its new term-loan facility and used the proceeds to reduce revolver borrowings.
Outlook, commentary, and risks
- 2012 net income guidance is $262–$282 million and diluted EPS guidance is $1.75–$1.88, excluding restructuring and acquisition-related expenses and acquisition or divestiture gains and losses, including contingent-consideration fair-value changes.
- Management expects 2012 operating cash flow of $250–$280 million and capital expenditures, excluding acquisitions, of $100–$115 million. It expects additional supplier-settlement gains of about $8 million in the last nine months of 2012.
- Management expects about $0.2 million of further integration charges for 2011 acquisitions and about $0.8 million for Q1 2012 acquisitions; these activities were expected to be completed during 2012. Management stated current cash, operating cash flow, and credit availability should meet current operating and capital requirements.
- Risks include seasonal and weather-driven demand, rising salvage vehicle costs, scrap-metal price volatility, reliance on a concentrated group of aftermarket suppliers and salvage auctions, foreign-exchange exposure, variable interest rates, and acquisition integration and valuation uncertainty. Management cautioned that interim results may not indicate full-year performance.
- The company is a plaintiff in a supplier class action; it recognized an $8.3 million settlement gain in Q1 and expected further gains only when remaining settlement amounts and timing were sufficiently certain. Management said other litigation, environmental, and regulatory contingencies were not expected to materially affect results.
Important facts for investors to verify
- Whether organic growth and ECP performance support guidance, particularly given flat organic aftermarket product revenue.
- How gross margins develop as salvage acquisition costs, product mix, and scrap prices change; Q1 included an $8.3 million settlement gain.
- Whether operating cash flow meets the $250–$280 million outlook after taxes, working-capital needs, acquisitions, and planned capital spending.
- Debt, interest-rate exposure, covenant headroom, and the fair-value assumptions behind $82.9 million of contingent consideration liabilities; actual covenant ratios are not provided in the filing text.
- Integration progress and costs for recent acquisitions, along with the realization and timing of expected remaining supplier-settlement gains.