LKQ Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. LKQ distributes vehicle replacement parts and related products through Wholesale–North America, Europe, Specialty and Self Service. Amounts below are in U.S. dollars and millions, except per-share data and percentages.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $3,348 | $3,171 | +5.6% |
| Gross margin | $1,357; 40.5% | $1,294; 40.8% | Margin down 0.3 percentage points |
| Operating income | $371 | $371 | Flat |
| Income from continuing operations | $269 | $266 | +1.1% |
| Net income | $273 | $266 | +2.6% |
| Diluted EPS | $0.95 | $0.88 | Up $0.07 |
| Segment EBITDA | $447 | $452 | Down $5 |
| Operating cash flow | $409 | $523 | Down $114 |
| Free cash flow | $350 | $481 | Down $131 |
SG&A rose to 27.6% of revenue from 26.8%, while operating margin declined to 11.1% from 11.7%. The effective tax rate was 25.0%, versus 26.3%. Foreign currency translation reduced reported revenue growth by 2.5 percentage points; organic revenue growth was 6.5%, including a 1.3-point benefit from one additional selling day.
Segments and material changes
- Wholesale–North America: Revenue increased 14.3% to $1,201; Segment EBITDA rose 12.4% to $218, with margin easing to 18.1% from 18.4%. Pricing and productivity helped counter freight, labor and fuel inflation. Supply constraints weighed on aftermarket collision volumes.
- Europe: Revenue increased 1.7% to $1,488, including 6.8% organic growth but a 5.5% foreign-exchange headwind. Segment EBITDA fell 6.8% to $131; constant-currency EBITDA declined 1.5%. Inventory reserves, inflation and higher credit-loss provisions pressured margins.
- Specialty: Revenue increased 0.4% to $460, as acquisition contributions offset an 8.3% organic decline. Segment EBITDA fell 5.5% to $58 amid lower organic sales and overhead inflation.
- Self Service: Revenue was nearly flat at $199. Segment EBITDA fell 28.5% to $40, largely reflecting weaker precious-metals prices and a smaller favorable scrap-steel price effect than in the prior-year quarter.
LKQ presented Wholesale–North America and Self Service as separate reportable segments beginning in 2022 and retrospectively adjusted prior-period segment information.
Cash flow, debt and liquidity
- Cash and cash equivalents were $327 at March 31, 2022, up from $274 at year-end. Total debt was $2,721, down from $2,824; current maturities were $31.
- Available revolving-credit capacity was $1,268, resulting in reported total liquidity of $1,595. The $3,150 revolving facility matures in January 2024. Credit-facility borrowings were $1,813 at a weighted average rate of 1.2%; total borrowing weighted average rate, including notes, was 2.1%.
- Cash flow from operations declined principally due to working-capital investment, including inventory and receivables, and the timing of tax payments. Capital expenditures were $59, versus $42, contributing to lower free cash flow.
- The company returned capital through $144 of share repurchases and $71 of dividends in the quarter. It declared a further $0.25-per-share dividend in April, payable in June.
- Credit-covenant ratios were within limits at quarter-end: net leverage ratio 1.3 versus a 4.00 maximum; interest coverage ratio 32.6 versus a 3.00 minimum.
Outlook, risks and unusual items
- The filing does not provide a clear consolidated full-year earnings or revenue guidance figure. Management said it expects to increase 2022 inventory purchases to support demand and service levels, while noting continuing supply-chain constraints could limit restocking. The 2022 plan also includes growth-related capital projects and strategic acquisitions.
- In March, LKQ agreed to sell PGW Auto Glass, its aftermarket glass business. The sale closed in April 2022 for $362 gross proceeds, subject to customary post-closing adjustments. At quarter-end, $290 of assets and $127 of liabilities were classified as held for sale.
- The Russia–Ukraine conflict and sanctions disrupted Ukrainian operations and restricted sales and collections from Russian customers. Management did not expect a material effect on results or cash flows, but highlighted uncertainty; Ukraine represented less than 1% of annual revenue and operating profit, and Russia less than 0.3% of revenue. The quarter included $6 of identified direct conflict-related impacts in the Segment EBITDA reconciliation.
- Other key exposures include inflation and supply-chain disruption, commodity-price volatility, foreign-exchange movements, and variable-rate debt. A 100-basis-point interest-rate change was estimated to affect interest expense by $18 over the next 12 months. At quarter-end, $1,813 of variable-rate debt was unhedged.
- Management expects total 1 LKQ Europe program costs of $30–$50 in 2022 and a further $50–$70 in 2023–2024; the remaining program is scheduled through 2024. Separately, expected restructuring charges under that program are estimated at $40–$50 through 2024.
- Management stated that outstanding litigation and ordinary-course contingencies were not expected to materially affect financial position, results or cash flows. Disclosure controls were concluded effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether revenue and pricing gains can be sustained as supply constraints, inflation and foreign-exchange movements evolve—and whether margin pressure continues.
- Whether operating cash flow and free cash flow recover as inventory is rebuilt and working-capital requirements change.
- Final PGW sale proceeds after purchase-price adjustments and how the proceeds are applied to debt, investment or capital returns.
- Developments in Ukraine and Russia, including effects on operations, receivables, inventory recoverability and the wider European business.
- Debt refinancing needs ahead of the January 2024 revolving-facility maturity, variable-rate exposure and continued covenant headroom.
- Actual progress and costs for the 1 LKQ Europe program, and the durability of share repurchases and dividends relative to cash generation.