LKQ CORP annual report, FY2021

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LKQ Corporation — FY2021 Form 10-K

Reporting period: Fiscal year ended December 31, 2021. This is an annual filing, not a standalone fourth-quarter report. LKQ distributes alternative and specialty vehicle parts across North America, Europe and other markets through North America, Europe and Specialty reportable segments.

Financial performance

  • Revenue: $13.09 billion, up 12.6% year over year. Parts and services revenue rose 10.7%; organic parts and services growth was 7.9% for the year. Fourth-quarter organic parts and services revenue increased 7.3% per day.
  • Profitability: Gross margin was 40.7%, versus 39.5% in 2020; operating income was $1.47 billion, versus $986 million. Net income attributable to LKQ stockholders was $1.09 billion, versus $638 million. Diluted EPS attributable to LKQ stockholders was $3.66, versus $2.09.
  • Segment EBITDA: $1.79 billion, compared with $1.37 billion. North America generated $944 million (18.3% margin), Europe $618 million (10.2%), and Specialty $223 million (12.0%). Segment EBITDA is a non-GAAP measure.
  • Cash flow: Operating cash flow was $1.37 billion, down from $1.44 billion. Free cash flow, defined by LKQ as operating cash flow less capital expenditures, was $1.07 billion, versus $1.27 billion. Capital expenditures were $293 million.
  • Debt and liquidity: Gross debt was $2.82 billion, compared with $2.90 billion at year-end 2020. Cash was $274 million and credit-facility availability was $1.19 billion, for reported total liquidity of $1.47 billion, down from $2.86 billion. The credit facility matures in January 2024; the 2024 and 2028 euro notes carry fixed coupons of 3.875% and 4.125%. The company reported covenant compliance and year-end net leverage of 1.4x against a 4.0x maximum.

Changes versus 2020 and notable items

  • Revenue and earnings recovered from pandemic-affected 2020 levels. Revenue growth included 9.8% organic growth overall and a 2.4% foreign-exchange benefit; other revenue rose 42.5%, mainly reflecting higher scrap and precious-metal prices.
  • Profitability improved with margin initiatives, cost reductions and favorable metals pricing. North America EBITDA benefited from higher precious-metals and scrap-steel prices, estimated to add 1.0 percentage point to segment margin. Inflation, freight costs, higher salvage acquisition costs and aftermarket part shortages offset some benefits.
  • Cash generation was lower despite higher operating income, mainly because of inventory and receivables investment. Inventory-related cash outflow increased year over year as LKQ rebuilt stock and bought strategically amid supply constraints.
  • LKQ redeemed its €750 million 2026 notes and repaid its term loan in 2021; the early redemption generated a $24 million extinguishment charge. It also terminated its $110 million receivables securitization facility.
  • Capital returns increased: LKQ repurchased $877 million of shares and paid its first quarterly dividend, $0.25 per share ($73 million aggregate). The repurchase authorization had $654 million remaining at year-end.
  • Government assistance was $16 million in 2021, down from $52 million in 2020. No material goodwill impairment was recorded; goodwill was $4.54 billion, and management reported that a 10% cash-flow decline or 10% higher discount rate would not have triggered impairment.

Outlook, risks and contingencies

  • Management expects organic parts and services revenue growth in future periods, but provided no specific numerical 2022 revenue or earnings guidance in the provided filing text. It expects to increase 2022 inventory purchases to support service levels and fill rates, while noting that continued supply-chain disruption could constrain the rebuild.
  • The multi-year 1 LKQ Europe integration program is scheduled to continue through 2024. LKQ incurred $37 million of program costs in 2021 across expense and capital categories and expects a further $100–$130 million from 2022 through completion. Separately, the 2020 global restructuring program is expected to cost $60–$70 million in total through 2023.
  • Key risks include lingering COVID-19 effects, labor availability and wage inflation, supply-chain and shipping constraints, inflation and freight costs, commodity-price volatility, foreign exchange, competition and OEM intellectual-property efforts, and lower demand for some mechanical parts as electric vehicles gain share. The company also flags cybersecurity, environmental compliance, and execution risks in its European ERP and integration work.
  • Variable-rate exposure increased: $1.89 billion of credit-facility debt was unhedged at year-end; management estimated a 100-basis-point rate increase would raise next-12-month interest expense by $19 million.
  • LKQ disclosed an EPA administrative proceeding concerning certain performance parts alleged to violate Clean Air Act provisions; management did not expect a material financial effect. It also reported stormwater matters, including $130,000 in penalties paid, and anticipated a penalty demand for another matter; management did not expect material effects. Other outstanding claims were not expected to have a material adverse effect.

Most important facts for investors to verify

  • How much of earnings and North America margin improvement is sustainable after favorable scrap and precious-metal price effects fade.
  • Whether supply availability, freight costs and inventory rebuilding support the expected organic growth and customer fill rates.
  • Progress, remaining costs and anticipated benefits of 1 LKQ Europe and other restructuring initiatives.
  • Debt refinancing and interest-rate exposure ahead of the January 2024 credit-facility maturity, including covenant headroom and liquidity after capital returns.
  • Whether the reported free cash flow and Segment EBITDA definitions reconcile to GAAP results and remain comparable across periods.
  • Developments in the EPA and stormwater matters, and any material changes in the company’s broader legal or environmental contingencies.