LKQ Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. LKQ distributes vehicle replacement parts and specialty products across North America, Europe and Specialty markets. Results were affected by COVID-19 disruption and related cost and cash-preservation actions.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $3.048bn | $3.148bn | $8.675bn | $9.496bn |
| Operating income | $296.0m | $231.4m | $718.3m | $689.9m |
| Net income attributable to LKQ stockholders | $193.5m | $152.3m | $457.4m | $400.9m |
| Diluted EPS attributable to LKQ stockholders | $0.64 | $0.49 | $1.50 | $1.28 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $1.135bn | $965.2m |
| Free cash flow | Not separately stated for quarter | Not separately stated for quarter | $1.025bn | $799.6m |
Q3 revenue declined 3.2% year over year; organic parts and services revenue declined 4.5%. Operating income rose about 28% and LKQ-attributable net income about 21%. Gross margin improved to 39.3% from 38.1%, operating margin to 9.7% from 7.4%, and net income margin to 6.4% from 4.8%.
For the first nine months, revenue fell 8.6%, while operating income increased about 4% and LKQ-attributable net income about 14%. Reported free cash flow increased about 28%; lower inventory and capital spending contributed materially to cash generation.
Segments
- North America: Q3 third-party revenue fell 10.6%, including an 11.3% organic decline in parts and services; Segment EBITDA rose 23% to $205.0m, with margin increasing to 17.6% from 12.8%. Lower collision claims weighed on sales; efficiency measures and precious-metals pricing supported profit.
- Europe: Q3 revenue rose 2.2%, including 4.5% foreign-exchange benefit, while organic parts and services revenue declined 0.7%. Segment EBITDA increased 9.2% to $136.2m, including a $6m currency benefit; constant-currency EBITDA rose 4.7%.
- Specialty: Q3 revenue increased 1.4% and Segment EBITDA rose 6.3% to $48.3m. Demand for recreational vehicle products was strong, but supplier availability constrained sales.
Liquidity, debt and capital
At September 30, cash was $421.4m and gross debt was $3.133bn, down from $4.072bn at December 31, 2019. Total liquidity was approximately $2.692bn, comprising cash and $2.271bn of credit-facility availability. Current maturities were approximately $98m. The company reported a $2.0 net leverage ratio against a temporarily amended 5.0 maximum and 13.1 interest coverage against a 3.0 minimum; it stated that it was in compliance with covenants.
Nine-month cash from operations was $1.135bn; capital expenditures were $109.9m. The company repaid the $600m 2023 U.S. Notes in January, recording a $12.8m debt-extinguishment loss, and made substantial net debt repayments. It repurchased $88m of stock in the first nine months but made no repurchases in Q3; management said it intended to recommence buybacks. The repurchase authorization had $560m remaining.
Changes, outlook and risks
- COVID-19 reduced driving, collision claims and demand. North American repairable collision claims were down 24.4% in Q3, according to cited industry data. Organic parts and services revenue improved from the steep Q2 decline, but recovery flattened during Q3.
- Management expected Q4 revenue to remain below the prior year as COVID-19 continued to affect economic activity. It expected margins to remain above prior-year levels from cost and productivity actions, and full-year 2020 free cash flow to exceed 2019. The filing gives no quantified full-year revenue or earnings guidance.
- Cost reductions included workforce actions, reduced hours, route consolidation and project deferrals. Q3 SG&A was 10% below the Q1 2020 run rate. Management said some savings should persist, while resources may be restored as demand recovers.
- Foreign-government assistance was $45m for the first nine months, principally personnel-cost grants; management did not expect significant additional assistance in Q4 at the time of filing. COVID-related uncertainty could affect revenue, customer and supplier liquidity, collections, inventory availability, staffing, asset valuations and covenant headroom.
- The 2020 global restructuring program had estimated total costs of $65m–$75m through 2022. The 1 LKQ Europe program was estimated to cost $100m–$125m in 2020–2021 and a further $80m–$100m through 2024; management was reviewing these estimates. Q3 also included an $8m acquisition-related adjustment for a Stahlgruber purchase-price matter and a $4m U.S. pension settlement loss.
- Management reported no goodwill impairment in its Q1 interim test; the Europe reporting unit’s estimated fair value exceeded carrying value by at least 12%. It identified no subsequent-quarter trigger for another test. Litigation was not expected by management to have a material financial effect.
Key investor verification points
- Track COVID-19-driven demand, especially collision claims in North America, and the pace of recovery by geography.
- Assess whether margin improvements and cost savings persist as volumes recover, and whether higher salvage-vehicle purchase costs pressure North American margins.
- Monitor cash conversion: the nine-month working-capital benefit was substantially supported by inventory reductions, while inventory purchases are expected to rise.
- Review debt, covenant terms and buyback resumption, including the temporary leverage covenant amendment and the $560m remaining repurchase capacity.
- Reassess restructuring and Europe transformation cost estimates, government assistance, credit-loss reserves, and COVID-related asset impairment assumptions.