LKQ Corporation — Q3 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2023. LKQ distributes vehicle replacement and specialty aftermarket products through Wholesale–North America, Europe, Specialty and Self Service. On August 1, LKQ completed its acquisition of Uni-Select, expanding its paint distribution and Canadian automotive parts businesses. The acquired U.K. GSF Car Parts business was classified as discontinued operations and sold on October 25, 2023.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3,568 million | $3,104 million | $10,365 million | $9,793 million |
| Gross margin | $1,390 million; 39.0% | $1,276 million; 41.1% | $4,176 million; 40.3% | $4,000 million; 40.9% |
| Operating income | $308 million | $358 million | $1,080 million | $1,288 million |
| Net income attributable to LKQ stockholders | $208 million | $262 million | $759 million | $955 million |
| Diluted EPS | $0.78 | $0.95 | $2.83 | $3.40 |
| Segment EBITDA | $422 million | $424 million | $1,363 million | $1,346 million |
Quarterly revenue rose 15.0%, with 2.0% organic growth; acquisitions and divestitures contributed 9.6% and foreign exchange 3.4%. Parts and services revenue increased, while other revenue declined with lower precious-metals and scrap prices. Nine-month revenue grew 5.8%, including 3.8% organic growth. Nine-month diluted EPS and net income were lower than in 2022, which included a $159 million pretax gain on business disposals.
Profitability weakened in Q3: gross margin fell 2.1 percentage points and operating margin declined to 8.6% from 11.5%. Higher acquisition-related costs, depreciation and amortization, and interest expense contributed to lower earnings. Quarterly net income also benefited from a $3 million acquisition-related foreign-exchange-contract gain; the nine-month gain was $49 million.
Cash flow and liquidity. Nine-month operating cash flow was $1,144 million versus $1,010 million; capital expenditures were $233 million versus $148 million, giving reported free cash flow of $911 million versus $862 million. Investing cash flow was a $2,389 million outflow, principally reflecting $2,199 million of acquisitions. At September 30, cash was $401 million and total debt was $4,369 million; available credit was $845 million, for reported total liquidity of $1,246 million. Current debt maturities were $574 million, including €500 million of notes due April 2024, which LKQ said it intends to refinance on or before maturity. The company reported compliance with its debt covenants: leverage ratio 2.3 against a 4.0 maximum and interest coverage 7.4 against a 3.0 minimum. Overall weighted-average borrowing rate was 5.6%.
Material changes and management commentary
- Uni-Select financing increased debt and interest expense. Uni-Select contributed $239 million of revenue and an operating loss of $13 million from acquisition through September 30; that loss included $20 million of restructuring expenses and $12 million of acquired-intangible amortization.
- Segment trends were mixed. Nine-month Segment EBITDA rose in Wholesale–North America and Europe, but fell in Specialty to $113 million from $176 million and in Self Service to $28 million from $76 million. Specialty cited softer RV demand, product mix and competitive pricing; Self Service cited lower precious-metals revenue and margin pressure from commodity prices and vehicle procurement costs.
- Europe reported Q3 Segment EBITDA of $147 million versus $155 million. Results included an $11 million charge to settle a prior-year Italian VAT issue and an estimated $8 million EBITDA impact from German labor strikes. Management expected additional October strike activity to affect Q4.
- The 1 LKQ Europe program was extended to the end of 2027; the filing cites an $85 million increase to the overall cost estimate and total expected costs of $125–$155 million through completion. Management expects further margin benefits, but cautions that implementation is extended.
Outlook, risks and contingencies
The filing provides no numerical consolidated earnings or revenue guidance. Management said current liquidity, expected operating cash flow and capital-market access should be sufficient for current operating and capital requirements, while noting that additional financing may not be available on attractive terms or at all. It expects to refinance the 2024 Euro notes. The board declared a quarterly dividend of $0.30 per share payable November 30, 2023.
Key exposures include foreign exchange, variable interest rates, commodity prices and inflation. LKQ estimated that a 100-basis-point interest-rate change would alter interest expense by $14 million over the next 12 months, based on $1,361 million of unhedged variable-rate debt. A 10% currency move would change nine-month consolidated revenue by 5.1% and operating income by 3.8%, according to the filing. Rapid metals-price movements can create a lag between vehicle acquisition costs and scrap revenue; management warned inflation may not be fully offset by pricing or productivity efforts. A Uni-Select subsidiary is addressing a Canadian environmental compliance order alleging excessive VOC concentrations and failure to comply with the order; management stated outstanding claims and suits were not expected to have a material adverse effect. The filing also notes that Uni-Select integration into LKQ’s systems and control environment remained in progress.
Investor facts to verify
- Whether Uni-Select integration delivers expected synergies and improves margins without further material costs.
- Progress on refinancing the €500 million notes due April 2024 and the effect of higher rates on debt service and liquidity.
- Whether German labor disruptions persist into Q4 and how Specialty and Self Service performance responds to demand and commodity-price changes.
- Actual costs, timing and benefits of the extended 1 LKQ Europe program.
- Resolution of the environmental compliance matter and completion of integration-related control work.