LKQ Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; filed February 27, 2020. LKQ distributes alternative collision and mechanical vehicle parts, recycled parts, and specialty vehicle accessories. Its reportable segments are North America, Europe, and Specialty. The filing also reports unaudited quarterly results, including the fourth quarter.
Financial performance
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $12.506 billion | $11.877 billion |
| Gross margin | $4.852 billion; 38.8% | $4.575 billion; 38.5% |
| Operating income | $896.6 million; 7.2% | $882.2 million; 7.4% |
| Net income attributable to LKQ stockholders | $541.3 million; diluted EPS $1.74 | $480.1 million; diluted EPS $1.52 |
| Cash from operating activities | $1.064 billion | $710.7 million |
| Capital expenditures | $265.7 million | $250.0 million |
| Cash and cash equivalents at year-end | $523.0 million | $331.8 million |
| Total debt, gross | $4.072 billion | $4.348 billion |
| Working capital | $2.492 billion | $2.831 billion |
- Revenue increased 5.3%. Parts and services revenue rose 5.7%, while other revenue declined 2.3%. Acquisitions contributed 7.3 percentage points to total revenue growth; organic growth was 0.1%, and foreign exchange reduced growth by 2.1 percentage points.
- Gross margin improved 0.3 percentage points, but operating margin declined 0.2 points as SG&A rose to 28.6% of revenue from 28.2%. The effective tax rate was 27.2%, compared with 25.7%.
- Operating cash flow increased by $353 million, with inventory reduction and other working-capital movements contributing to the increase. Investing activities used $264.9 million, including $265.7 million of capital spending and $27.3 million of net cash paid for acquisitions. Financing activities used $600.7 million, including $291.8 million for share repurchases.
- Year-end liquidity was approximately $2.446 billion, comprising $523 million of cash and $1.923 billion available under credit facilities. The company reported compliance with its debt covenants; its credit-agreement net leverage ratio was 2.6 against a maximum of 4.25.
Fourth-quarter results
Unaudited Q4 2019 revenue was $3.010 billion, compared with $3.003 billion in Q4 2018. Operating income was $206.8 million versus $164.1 million; income from continuing operations was $140.8 million versus $42.5 million; and diluted EPS from continuing operations was $0.46 versus $0.13. Q4 2018 included a $33 million Aviation goodwill impairment and a $48 million Mekonomen investment impairment; Q4 2019 included a $2 million held-for-sale impairment and a $2 million net impairment reversal, as well as $23 million of Mekonomen impairment in Q3 2018 and $40 million in Q1 2019.
Segments and material changes
- North America: Revenue was $5.209 billion, up 0.5%; Segment EBITDA was $713.0 million, up 8.0%, and its margin improved to 13.7% from 12.7%. Management cited margin initiatives and higher precious-metal prices. Lower collision and liability claims, less favorable weather, and weak scrap-steel pricing constrained results; scrap-steel price movements had a $23 million unfavorable year-over-year EBITDA impact.
- Europe: Revenue was $5.838 billion, up 11.8%, primarily reflecting the Stahlgruber acquisition; organic revenue growth was 0.1% and foreign exchange reduced growth by 4.6 points. Segment EBITDA rose 7.5% to $454.2 million, but margin fell to 7.8% from 8.1%. On a constant-currency basis, EBITDA increased 12.4%.
- Specialty: Revenue was $1.459 billion, down 0.9%; Segment EBITDA fell 4.4% to $161.2 million and margin declined to 11.0% from 11.4%. Lower online wholesale drop-ship sales following supplier policy changes and weaker Canadian volumes offset U.S. product-line growth.
Segment EBITDA is a company-defined non-GAAP measure and excludes specified items; it should not be treated as equivalent to GAAP operating income or net income.
Outlook, risks, contingencies, and unusual items
- The filing provides no clear numerical full-year 2020 earnings or revenue guidance. Management said existing liquidity and expected operating cash flows should cover current operating and capital needs, but may not cover future acquisitions depending on their size.
- The multi-year “1 LKQ Europe” program is intended to centralize operations, implement a common ERP platform, rationalize products, and establish a European headquarters. Estimated program costs were $100–$125 million for 2020–2021 and a further $80–$100 million from 2022 through projected completion in 2024. Separately, the company estimated $45–$55 million of personnel and inventory-related restructuring charges through 2024. A Swiss ERP pilot launched in Q1 2020.
- Other notable items included $47 million of impairment charges on businesses classified as held for sale, $40 million of impairment on the Mekonomen equity investment, and a nonrecurring $12 million gain from resolution of an acquisition-related matter. No goodwill impairment was recorded in the 2019 annual test; reporting-unit fair values exceeded carrying amounts by at least 25%.
- On January 10, 2020, after year-end, LKQ redeemed its $600 million 4.75% U.S. notes due 2023 for approximately $614 million including premium and accrued interest. The company expected to record a $13 million extinguishment loss in Q1 2020.
- Management highlighted competition, dependence on insurer acceptance of alternative parts, acquisition integration and restructuring execution, supplier and salvage-vehicle availability, tariffs and intellectual-property disputes, commodity-price volatility, foreign-exchange exposure, labor costs, environmental and product-liability matters, cybersecurity, and substantial debt as key risks. Approximately 50.3% of 2019 revenue came from outside the U.S.; foreign currency translation reduced diluted EPS by $0.03 versus 2018.
- An EPA notice alleged that certain Specialty performance parts sold from 2015 to 2017 violated Clean Air Act provisions. The matter was under negotiation; management did not expect any likely penalty to materially affect financial position, results, or cash flows. Management said other outstanding claims were not expected to have a material adverse effect.
- The company adopted the new lease standard in 2019, recognizing $1.3 billion of operating lease assets and liabilities. The auditor issued unqualified opinions on the financial statements and internal controls; the audit identified goodwill impairment assessment as a critical audit matter.
Investor facts to verify
- How much of revenue and earnings growth is sustainable organically, given 0.1% consolidated organic revenue growth and the substantial acquisition contribution?
- Whether European restructuring and ERP investment deliver the stated efficiencies, and whether actual program costs remain within disclosed estimates.
- The earnings and cash-flow effects of commodity prices, foreign exchange, inventory levels, and the 2020 redemption financing; confirm post-redemption debt and interest costs in subsequent filings.
- Progress and final costs of held-for-sale business divestitures, the Czech Republic disposal, and resolution of the EPA matter.
- Debt capacity and liquidity under changing operating conditions, including facility availability, lease commitments, and the company’s continued share-repurchase activity.