LKQ Corporation — Q1 2014 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2014, compared with Q1 2013. LKQ distributes vehicle replacement parts and related products. The quarter includes Keystone Specialty, acquired January 3, 2014, and the Specialty segment it created. Unless noted, dollar amounts are in millions.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $1,625.8 | $1,196.0 | +35.9% |
| Gross profit | $651.9 | $501.9 | +29.9% |
| Operating income | $173.8 | $141.6 | +22.8% |
| Net income | $104.7 | $84.6 | +23.7% |
| Diluted EPS | $0.34 | $0.28 | +21.4% |
| Operating cash flow | $97.0 | $106.4 | Down $9.4 |
| Capital expenditures | $33.7 | $21.5 | Up $12.3 |
Gross margin fell to 40.1% from 42.0%; operating margin declined to 10.7% from 11.8%, and net margin to 6.4% from 7.1%. Management attributed lower gross margin mainly to acquisitions with lower-margin distribution models and product lines; excluding acquisitions, North American gross margins improved. The effective tax rate declined to 34.0% from 35.8%, chiefly due to a greater share of earnings from lower-tax jurisdictions and lower U.K. statutory rates.
Revenue growth included 29.2% acquisition-related growth, 6.0% organic growth, and 0.7% favorable currency impact. Organic parts-and-services revenue grew 10.3%, partly offset by a 19.2% decline in other revenue. Segment EBITDA was $205.1 million, or 12.6% of revenue, versus $161.7 million, or 13.5%. North America EBITDA margin improved to 14.2% from 13.8%; Europe declined to 9.8% from 12.1%. Specialty contributed $177.0 million in revenue and $17.8 million in Segment EBITDA, with no prior-year segment comparator.
Cash and equivalents were $113.2 million at quarter-end, versus $150.5 million at year-end 2013. Total debt was $1,730.7 million, up from $1,305.8 million; net debt increased to $1,617.5 million from $1,155.3 million. Total liquidity, including cash and available credit facilities, was reported as $1,360.6 million. The current portion of debt was $35.1 million. Operating cash flow was below net income, with working-capital outflows in receivables, inventory, and payables totaling $78.0 million.
Material changes and notable transactions
- Keystone Specialty was acquired for consideration valued at $471.9 million; it contributed approximately $177.0 million in revenue and $6.2 million in net income after acquisition. Four other Q1 acquisitions added $20.3 million revenue and $0.5 million net income after acquisition.
- Acquisition-related cash outflow was $486.7 million, compared with $13.3 million in Q1 2013. The acquisition was funded substantially through borrowings.
- Long-term obligations rose, including revolver borrowings of $542.2 million, term loans of $450.0 million, $600.0 million of 2023 senior notes, and $80.0 million drawn on the receivables facility.
- The March 27 credit agreement amendment increased total facility availability to $2.3 billion, extended maturity to May 2019, and reduced applicable margins and commitment fees. Revolver availability was approximately $1.2 billion at quarter-end; LKQ reported compliance with covenants.
Outlook, commentary, and risks
Management forecast full-year 2014 net income of $400–$430 million and diluted EPS of $1.30–$1.40, excluding restructuring and acquisition-related expenses, acquisition or divestiture gains or losses (including contingent-consideration fair-value changes), and debt-extinguishment losses. The company expected 2014 operating cash flow of approximately $375 million and capital expenditures of $110–$140 million, excluding acquisitions.
Management cited severe winter weather and improved fill rates as contributors to North American parts demand; mild winter weather weighed on European sales. Keystone integration restructuring costs were $3.1 million in Q1; remaining Keystone integration costs were expected to be below $5 million, with European integration costs not expected to exceed $1 million. Five proposed Netherlands acquisitions were under letters of intent, subject to definitive agreements and Dutch merger-control authorization; completion was not assured.
Key exposures include variable-rate debt, foreign exchange, and scrap-metal prices. A 100-basis-point interest-rate move was estimated to change interest expense by $5.5 million over the next 12 months. The company noted that rapid metals-price changes can affect margins and that currency movements may affect foreign operations and inventory costs. Operating leases entailed future minimum payments of $707.2 million. Management expected ordinary-course litigation and environmental contingencies would not materially affect results; no legal proceedings were listed in Part II.
Important facts for investors to verify
- Whether the $1.30–$1.40 adjusted EPS outlook is achieved, and how excluded items reconcile to reported earnings.
- Keystone Specialty integration, expected synergies, margins, and the final purchase-price allocation, which remained preliminary.
- Cash conversion and working-capital needs as inventory and receivables expand; Q1 operating cash flow declined despite higher earnings.
- Debt growth, interest costs, facility availability, covenant headroom, and the ability to refinance or extend the receivables facility.
- Whether European margin pressure, planned branch openings, and the proposed Netherlands transactions change regional profitability or acquisition risk.