LKQ Corporation — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports unaudited fourth-quarter results. LKQ distributes alternative collision and mechanical vehicle parts, recycled parts, and specialty vehicle products. Its reportable segments are North America, Europe, and Specialty.
Financial performance and liquidity
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $11.877 billion | $9.737 billion |
| Gross profit / margin | $4.575 billion / 38.5% | $3.800 billion / 39.0% |
| Operating income / margin | $882 million / 7.4% | $845 million / 8.7% |
| Net income attributable to LKQ stockholders | $480 million | $534 million |
| Diluted EPS attributable to LKQ stockholders | $1.52 | $1.72 |
| Cash from operating activities | $711 million | $519 million |
| Capital expenditures | $250 million | $179 million |
Revenue grew 22.0%: 5.3% organic growth, 15.3% acquisition contribution, and 1.4% foreign-exchange impact. Parts and services revenue increased 22.0%; other revenue rose 21.8%, largely reflecting higher scrap and catalytic-converter metal revenue. Operating cash flow less capital expenditures was approximately $461 million.
At year-end, cash and cash equivalents were $332 million, total debt was $4.348 billion, and reported availability under credit facilities was $1.698 billion, for total liquidity of approximately $2.029 billion. Working capital was $2.831 billion. The company reported a 3.1% weighted-average borrowing rate across debt and compliance with its credit agreement covenants; actual net leverage was 2.9 versus a 4.5 maximum.
Material changes and unusual items
- Stahlgruber, acquired May 30, 2018, added $1.1 billion of revenue after acquisition. The transaction’s stated enterprise value was €1.5 billion and was financed with debt, cash, and 8.1 million newly issued LKQ shares. Europe revenue rose 43.6%, primarily from acquisitions; its Segment EBITDA increased 32.4% to $423 million, while its margin declined to 8.1% from 8.8%.
- North America revenue increased 8.0% to $5.182 billion, while Segment EBITDA was nearly flat at $660 million and its margin fell to 12.7% from 13.7%. Specialty revenue rose 13.2% to $1.473 billion; Segment EBITDA increased 18.5% to $169 million and margin improved to 11.4%.
- Gross margin declined 0.5 percentage point and SG&A increased to 28.2% of revenue from 27.9%. Higher costs, product mix, acquisition integration, and operating expenses contributed to margin pressure.
- Interest expense increased to $146 million from $102 million, reflecting higher debt and rates. The effective tax rate declined to 25.7% from 30.7%, primarily reflecting U.S. tax reform.
- LKQ recorded $71 million of impairment charges on its Mekonomen equity investment ($48 million in Q4 and $23 million in Q3), and a $33 million goodwill impairment for Aviation. The Aviation charge followed a weaker outlook tied to competition, customer financial difficulties, and changing market conditions.
- Fourth-quarter revenue was $3.003 billion versus $2.470 billion a year earlier, but operating income was $164 million versus $166 million. Continuing-operations income was $42 million versus $123 million, and diluted continuing-operations EPS was $0.13 versus $0.39, with the Mekonomen and Aviation impairments among the significant items.
Outlook, risks, and contingencies
The filing does not provide a clear numerical revenue or earnings guidance range. Management said current liquidity and expected operating cash flows should meet current operating and capital requirements, while noting that future acquisitions could require additional funding. It expected less than $15 million of further acquisition-integration costs in 2019. Adoption of the new lease standard in 2019 was expected to add $1.2 billion to $1.4 billion of lease assets and liabilities, without a notable liquidity or income-statement effect.
Key risks include acquisition integration and execution, leverage and variable interest rates, foreign exchange exposure, Brexit and European economic conditions, tariffs and reliance on imported inventory, OEM competition and intellectual-property claims, changing vehicle technology including electric vehicles and accident-avoidance systems, commodity-price volatility, labor, cybersecurity and privacy, and environmental and product-liability matters. Management identified the Mekonomen share-price decline after year-end as a potential source of further impairment in 2019. An EPA notice alleged that certain Specialty performance parts sold from 2015 to 2017 violated Clean Air Act provisions; negotiations were ongoing, and management did not expect any likely penalty to be material.
The company authorized a $500 million share-repurchase program in October 2018 and repurchased $60 million of shares during the year. It paid no cash dividends and stated it did not anticipate dividends in the foreseeable future. The independent auditor issued unqualified opinions on the financial statements and internal control; management and the auditor excluded Stahlgruber from the internal-control assessment because it was acquired during 2018.
Important facts for investors to verify
- How much of reported growth and future earnings depends on acquisitions, especially Stahlgruber, versus organic growth and realized synergies.
- Whether margin pressure in North America and Europe improves, and how scrap prices, vehicle acquisition costs, freight, labor, and product mix affect profitability.
- The sustainability of operating cash flow and debt repayment capacity given $4.348 billion of debt, acquisition spending, and lease commitments.
- Developments in Mekonomen’s share price and operating performance, and any resulting additional impairment; also monitor Aviation performance after its goodwill write-off.
- Progress integrating Stahlgruber and the European ERP program, including the acquired business’s financial controls, which were outside the 2018 internal-control audit scope.
- Potential outcomes of the EPA matter, Brexit and tariff developments, and other material litigation or regulatory matters.