LKQ Corporation — Q2 2010 Form 10-Q
Business context and period: LKQ supplies recycled, aftermarket, refurbished and other vehicle replacement products and services. This unaudited filing covers the quarter and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. The company reports one aggregated reportable segment.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $584.7 million | $486.4 million | $1,188.2 million | $997.2 million |
| Gross margin | $261.3 million; 44.7% | $220.2 million; 45.3% | $544.6 million; 45.8% | $449.8 million; 45.1% |
| Operating income | $69.6 million; 11.9% | $54.8 million; 11.3% | $159.5 million; 13.4% | $115.7 million; 11.6% |
| Income from continuing operations | $37.9 million | $28.5 million | $89.9 million | $60.5 million |
| Net income | $37.9 million | $28.9 million | $91.8 million | $61.2 million |
| Diluted EPS from continuing operations | $0.26 | $0.20 | $0.62 | $0.42 |
| Operating cash flow | Not separately stated | Not separately stated | $101.2 million | $87.0 million |
- Growth and drivers: Revenue rose 20.2% in Q2 and 19.2% year to date. Management attributed growth to higher sales volumes, acquisitions and stronger scrap and other metal sales. Organic parts-and-services revenue growth was 5.5% for Q2 and 5.6% year to date; total organic growth was 12.2% and 11.4%, respectively.
- Margins and costs: Q2 gross margin percentage declined 0.6 percentage points, primarily from higher salvage vehicle acquisition prices and lower scrap-aluminum margins. Year-to-date gross margin percentage increased 0.7 points, reflecting favorable aftermarket acquisition costs and improved self-service vehicle margins. Operating margin improved in both comparisons, with lower facility and SG&A costs as a percentage of revenue contributing.
- Cash flow and investment: First-half operating cash flow was $101.2 million. Investing used $22.4 million, including $20.8 million of property and equipment purchases and $13.7 million net cash for five acquisitions, partly offset by $12.0 million from the sale of two facilities. Cash increased to $190.5 million from $108.9 million at year-end 2009.
- Debt and liquidity: Long-term obligations totaled $594.4 million, including $587.8 million of term loans; $27.1 million was classified as current. The company had no revolving-credit borrowings and approximately $79.9 million available under its $100 million revolver after letters of credit. It reported compliance with debt covenants. The weighted-average credit-facility rate, after swaps, was 4.41% before debt-issuance-cost amortization.
Changes, outlook and risks
- Net income for the first half included $1.7 million, net of tax, from the sale of two self-service facilities; Q2 had no discontinued-operations income. The facilities sold or closed are presented as discontinued operations.
- Five acquisitions were completed in the first half, and three more were completed in July. Greenleaf integration is ongoing; management anticipated approximately $1.5 million of additional restructuring charges and expected integration work to continue through 2011.
- Management estimated full-year 2010 continuing-operations income of $158 million–$167 million and diluted continuing-operations EPS of $1.08–$1.14, excluding restructuring expenses. It expected more than $160 million of operating cash flow for 2010 and $64 million–$74 million of remaining-2010 capital expenditures, excluding acquisitions.
- Management expected salvage vehicle costs to remain above prior-year levels in the second half, citing strong demand and the absence of lower-cost Cash for Clunkers vehicles. Higher overseas freight costs for aftermarket products were also anticipated.
- Risks include fluctuating salvage and scrap-metal prices, unhedged commodity and certain foreign-currency exposures, variable-rate debt as swaps expire, and execution of acquisitions and integration. A 100-basis-point interest-rate increase was estimated to change interest expense by $3.5 million over the next 12 months, after giving effect to hedge expirations.
- The company stated that litigation, claims and environmental contingencies were not expected to materially affect financial position, results or cash flows. It disclosed approximately $250.3 million of future minimum operating lease payments. No legal proceedings were reported. Management said disclosure controls were effective and identified no significant change in internal control over financial reporting.
Key facts for investors to verify
- Whether reported revenue growth is sustained by core parts-and-services demand rather than acquisitions and volatile scrap-metal revenue.
- Whether salvage procurement costs, aftermarket freight and scrap-aluminum margins affect gross margin in the second half.
- Progress and remaining costs of Greenleaf integration, and the financial contribution of recent acquisitions.
- Delivery of the full-year earnings, cash-flow and capital-expenditure outlook, including the stated exclusion of restructuring costs from earnings guidance.
- Debt amortization and refinancing needs ahead of the credit agreement’s October 2013 maturity, plus exposure as interest-rate swaps expire.