LKQ Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. LKQ distributes vehicle replacement parts and specialty products through Wholesale - North America, Europe, Specialty, and Self Service segments. Results are unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Revenue | $3.341 billion | $3.435 billion | $6.689 billion | $6.606 billion |
| Gross margin | $1.367 billion; 40.9% | $1.415 billion; 41.2% | $2.724 billion; 40.7% | $2.709 billion; 41.0% |
| Operating income | $559 million | $445 million | $930 million | $816 million |
| Net income attributable to LKQ stockholders | $420 million; diluted EPS $1.49 | $305 million; diluted EPS $1.01 | $693 million; diluted EPS $2.44 | $571 million; diluted EPS $1.89 |
| Segment EBITDA | $475 million | $523 million | $922 million | $975 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $737 million | $933 million |
| Free cash flow | Not stated for quarter | Not stated for quarter | $638 million | $845 million |
- Q2 reported revenue fell 2.7%; organic revenue grew 3.3%, offset by a 5.2% adverse foreign-exchange effect and a 0.9% net reduction from acquisitions and divestitures. First-half revenue rose 1.3% as reported, with 4.9% organic growth and a 3.9% FX headwind.
- Reported operating income and net income benefited from the $155 million pretax ($127 million after-tax) gain on the April sale of PGW Auto Glass. Excluding that gain, operating income was approximately $404 million in Q2 and $775 million for the first half; reported profit growth should therefore be assessed with this unusual item in mind.
- Q2 Segment EBITDA declined $48 million year over year, and first-half Segment EBITDA declined $53 million. Self Service was particularly weak: EBITDA fell 43.7% in Q2 and 36.2% in the first half, chiefly due to lower precious-metals prices and unfavorable metals-price movements. Europe EBITDA also declined as reported, but grew on a constant-currency basis.
- SG&A was 26.8% of revenue in Q2 versus 26.2% a year earlier, and 27.2% in the first half versus 26.5%. Reported operating margin was 16.7% in Q2 and 13.9% in the first half, including the PGW gain.
Balance sheet, liquidity and capital allocation
- At June 30, 2022, cash was $265 million and total debt was $2.369 billion, down from $2.824 billion at December 31, 2021. Current maturities were $47 million. Cash plus available credit-facility capacity totaled $1.852 billion, including $1.587 billion available under the facilities.
- Revolving-credit borrowings were $1.494 billion; the facility’s weighted-average borrowing rate was 1.7%. Overall weighted-average borrowing rate, including senior notes, was 2.5%. A 100-basis-point rate increase was estimated to raise interest expense by $15 million over the next 12 months.
- First-half operating cash flow declined to $737 million from $933 million. The filing attributes much of the deterioration to $266 million of incremental inventory cash outflows and higher receivables outflows, partly offset by increased accounts-payable cash inflows. Capital expenditures were $99 million; free cash flow was $638 million.
- LKQ repurchased 10.8 million shares for $548 million in the first half and paid $142 million in dividends. The remaining repurchase authorization was $606 million at June 30. The board declared a further $0.25-per-share dividend payable September 1, 2022.
- Credit ratios were 1.2x net leverage against a 4.0x maximum and 32.7x interest coverage against a 3.0x minimum. S&P and Moody’s upgrades to investment grade led to release of credit-facility collateral requirements and suspension of certain restrictive covenants.
Outlook, commentary and risks
- Management said current liquidity and expected operating cash generation should cover operating and capital needs. Its 2022 plan includes rebuilding inventory, growth-related capital projects, strategic acquisitions, dividends and share repurchases. It expects inventory purchases to increase in 2022, while noting continued supply-chain constraints could limit the planned build. No specific full-year revenue or EPS guidance is provided in the filing text.
- The 1 LKQ Europe program is expected to continue through 2024. Management estimated total program costs of $25–$45 million in 2022 and a further $50–$70 million in 2023–2024; it expects restructuring and transformation expenses to be funded by Europe-segment working-capital initiatives. Separately, remaining restructuring costs under global programs were estimated at $108–$115 million in total through completion.
- Management cited inflation in product, labor, freight and overhead costs, supply-chain pressures, foreign-exchange exposure and volatile scrap and precious-metals prices. Price increases and productivity initiatives may not fully offset cost inflation or avoid effects on demand and margins.
- The Ukraine/Russia conflict disrupted some Ukrainian operations and restricted Russian sales and collections. LKQ said it did not expect a material impact on results or cash flow, but warned estimates could change as developments are uncertain. Ukraine represented less than 1% of annual revenue and operating profit; Russian-customer revenue was less than 0.3% of total revenue.
- On July 7, 2022, the company received an EPA Region 4 demand seeking $787,750 in penalties for alleged stormwater violations at facilities in Alabama, Georgia and Tennessee. Management did not expect a material expense or liability. It also stated that outstanding litigation and contingencies were not expected to materially affect financial position, results or cash flows.
Most important facts for investors to verify
- How much of earnings growth reflects recurring operations versus the $155 million PGW disposal gain.
- Whether operating cash flow and free cash flow recover as inventory is rebuilt, and whether inventory investment converts into sales and margins.
- Trends in Self Service profitability and commodity prices, alongside inflationary costs and pricing effectiveness across segments.
- Foreign-exchange effects on European revenue and earnings, and the financial impact of continued Ukraine/Russia developments.
- Debt refinancing and interest-rate exposure, use of liquidity for buybacks and dividends, and progress and costs of the 1 LKQ Europe program.