LKQ Corporation — Q2 2021 Form 10-Q
Business context and reporting period. LKQ distributes alternative and aftermarket vehicle parts, services, recycled products, and specialty vehicle products. This unaudited filing covers the quarter and six months ended June 30, 2021. Reportable segments are North America, Europe, and Specialty.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $3.435bn | $2.626bn | $6.606bn | $5.627bn |
| Gross margin | $1.416bn; 41.2% | $1.011bn; 38.5% | $2.709bn; 41.0% | $2.225bn; 39.5% |
| Operating income | $445m | $180m | $816m | $422m |
| Net income attributable to LKQ stockholders | $305m | $119m | $571m | $264m |
| Diluted EPS attributable to LKQ stockholders | $1.01 | $0.39 | $1.89 | $0.86 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $933m | $913m |
| Free cash flow | Not separately stated for quarter | Not separately stated for quarter | $845m | $836m |
Q2 revenue rose 30.8%; six-month revenue rose 17.4%. Q2 SG&A was 26.2% of revenue versus 28.1% a year earlier; operating margin was 12.9% versus 6.9%. Six-month SG&A was 26.5% versus 29.1%, and operating margin was 12.4% versus 7.5%. Segment EBITDA was $524m in Q2, up 80% year over year, and $975m for the first half, up 59%.
Balance sheet, debt, and liquidity
- At June 30, cash was $329m and gross debt was $2.466bn, down from $2.897bn at December 31, 2020. Current maturities of debt were $91m.
- Total liquidity, defined as cash plus credit-facility availability, was $2.082bn, compared with $2.858bn at year-end. Credit-facility availability was approximately $1.754bn.
- Long-term obligations included $1.435bn drawn on revolving credit facilities, $593m of 2024 Euro Notes, and $296m of 2028 Euro Notes. The term loan was repaid in Q2. The 2026 Euro Notes were redeemed in April, producing a $24m debt-extinguishment loss.
- The company reported compliance with its credit covenants; its reported net leverage ratio was 1.2 against a maximum of 4.50, and interest coverage was 20.8 against a minimum of 3.00.
Material changes and unusual items
- Results rebounded from pandemic-affected 2020 comparisons. Organic parts-and-services revenue increased 21.9% in Q2 and 10.6% for the first half; the company noted that Q2 growth reflected both recovery and a depressed prior-year base.
- Higher precious-metals and scrap-steel prices materially benefited North America Segment EBITDA: management estimated a $40m Q2 and $60m first-half benefit from precious metals, plus a $31m first-half benefit from sequential scrap-steel price increases.
- Other revenue more than doubled in Q2, primarily because of higher scrap and precious-metals prices and volumes. Price movements can affect margins with a lag between selling scrap and acquiring vehicles.
- Six-month operating cash flow was broadly stable year over year despite higher earnings. Working-capital movements included a $438m greater inventory cash outflow, a $456m higher accounts-payable cash inflow, and a $156m greater receivables outflow versus the prior-year period. Management said inventory rebuilding was delayed by shipping constraints and lower production volumes.
- LKQ repurchased $361m of shares in the first half. At June 30, $170m remained under the then-current authorization; the board subsequently increased total authorization to $2bn and extended it through October 2024.
Outlook, commentary, and risks
- Management expected consolidated revenue to continue recovering gradually in the second half of 2021. It expected Q3 organic revenue growth, but at a lower rate than Q2, in part because Q3 2020 also reflected pandemic restrictions. No full-year revenue or EPS guidance is stated in this filing.
- Management said Q2 profitability was the highest in the company’s history. It expected permanent cost actions and productivity measures to support lower costs, while noting some resources may be restored as volumes grow.
- The 1 LKQ Europe program was expected to continue through 2024. Management estimated $50m–$70m of total program costs in 2021 and a further $80m–$100m from 2022 through completion. The filing separately estimated $45m–$55m of restructuring charges under the program through 2024.
- Key uncertainties include COVID-19 developments and recovery in miles driven, inflation and supply constraints affecting parts, freight and salvage costs, fluctuating scrap and precious-metals prices, foreign-exchange movements, and variable-rate borrowing exposure. A 100-basis-point interest-rate change was estimated to alter interest expense by $15m over the following 12 months.
- In July 2021, the EPA initiated enforcement actions involving 12 company facilities. Penalty amounts had not been communicated; management did not expect proposed penalties to have a material financial effect. Management also said outstanding litigation and claims were not expected to materially affect financial position, results, or cash flows.
Important facts for investors to verify
- How much of revenue and margin growth persists after pandemic-affected comparisons normalize, and how much depends on commodity prices.
- Whether inventory availability, freight constraints, and rising acquisition and product costs affect service levels or margins as inventory is rebuilt.
- Whether working-capital cash flows—particularly accounts payable, receivables, and inventory—remain supportive of reported operating cash flow.
- How debt repayment, share repurchases, and the expanded buyback authorization affect liquidity and leverage; note that the receivables facility was terminated effective July 30, 2021.
- The eventual scope and outcome of EPA actions at the 12 facilities, as penalty amounts were not provided in the filing.