LKQ Corporation — 2016 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. LKQ distributes alternative and specialty vehicle parts across North America and Europe through its North America, Europe and Specialty reportable segments.
Financial performance
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Revenue | $8.584 billion | $7.193 billion | Up 19.3%; organic growth 3.7%, acquisitions 18.0%, foreign exchange reduced growth 2.4%. |
| Gross margin | $3.352 billion; 39.0% | $2.834 billion; 39.4% | Margin declined 0.4 percentage points. |
| Operating income | $763.4 million; 8.9% of revenue | $704.6 million; 9.8% | Income rose, while margin declined. |
| Continuing operations income | $456.1 million | $423.2 million | Up 7.8%. |
| Net income | $464.0 million | $423.2 million | Includes $7.9 million income from discontinued operations. |
| Diluted EPS | $1.50; $1.47 continuing operations | $1.38 continuing operations | Continuing-operations diluted EPS rose from $1.38 to $1.47. |
| Operating cash flow | $635.0 million | $544.3 million | Increase of $90.7 million. |
| Capital expenditures | $207.1 million | $170.5 million | Includes $24.2 million for discontinued glass manufacturing operations. |
| Cash and equivalents | $227.4 million | $87.4 million | $175.4 million was held by foreign subsidiaries. |
| Gross debt | $3.366 billion | $1.600 billion | Increase primarily reflected acquisition funding. |
| Total liquidity | $1.247 billion | $1.425 billion | Cash plus available credit facilities; facility availability was $1.019 billion. |
Segment results
- North America: Revenue $4.471 billion, up 7.8%; Segment EBITDA $596.3 million, up 8.9%, with margin increasing to 13.3% from 13.2%.
- Europe: Revenue $2.920 billion, up 46.4%; Segment EBITDA $283.6 million, up 41.4%. Rhiag contributed substantially; currency translation reduced EBITDA by $17.6 million.
- Specialty: Revenue $1.193 billion, up 13.5%; Segment EBITDA $125.0 million, up 17.3%, with margin increasing to 10.4% from 10.1%.
Segment EBITDA is a non-GAAP measure; the filing reconciles consolidated Segment EBITDA of $1.005 billion to net income.
Fourth quarter
Fourth-quarter revenue was $2.150 billion, versus $1.749 billion in fourth-quarter 2015. Income from continuing operations was $96.3 million and diluted continuing-operations EPS was $0.31. Net income was $86.3 million, including a $10.0 million loss from discontinued operations, primarily reflecting the glass manufacturing impairment.
Material changes and unusual items
- LKQ acquired Rhiag, a European parts distributor, for approximately $602 million net of cash acquired; it assumed approximately $551 million of Rhiag debt. Rhiag contributed $854.2 million of revenue after acquisition.
- LKQ acquired PGW for approximately $662 million, adding automotive glass distribution and manufacturing. The glass manufacturing business was classified as discontinued operations and agreed for sale to Vitro for $310 million, subject to adjustments and approvals; closing was expected in first-quarter 2017.
- LKQ acquired a 26.5% interest in Mekonomen for approximately $181 million and accounted for it under the equity method.
- Acquisition-related and restructuring expenses totaled $37.8 million, versus $19.5 million in 2015. Other notable 2016 items included a $26.7 million pre-tax impairment on the held-for-sale glass manufacturing business, a $26.7 million loss on debt extinguishment, an $18.3 million acquisition-related foreign-exchange gain, and an $8.2 million bargain-purchase gain.
- Gross margin was pressured by Rhiag’s lower margin mix and Specialty mix; operating income also reflected higher depreciation and amortization following acquisitions. The effective tax rate was 32.6%, including an $11.4 million benefit from early adoption of share-based-payment accounting rules.
Liquidity, outlook and risks
- Management said existing liquidity and expected operating cash flow should meet current operating and capital needs, though large future acquisitions could require additional financing. LKQ was in compliance with credit-agreement covenants at year-end.
- Management expected proceeds from the glass manufacturing sale to repay revolver borrowings and increase available liquidity by approximately $310 million. It expected the annual effective tax rate to remain near 35%, absent significant changes in earnings mix or tax law.
- The UK Tamworth distribution center was expected to be fully operational by 2018; duplicate warehouse and start-up costs during construction could be material. Integration of Andrew Page with existing UK operations awaited regulatory approval.
- Key exposures include substantial debt and variable-rate borrowing, foreign currency movements (including Brexit-related uncertainty), scrap-metal prices, imported-part tariffs and supply interruptions, competition and OEM pricing or intellectual-property claims, weather and vehicle-repair demand, and acquisition integration.
- Goodwill subject to future impairment testing was $3.1 billion. The PGW aftermarket reporting unit’s estimated fair value exceeded carrying value by less than 10%, leaving comparatively limited headroom.
- The filing describes a Texas environmental investigation concerning alleged petroleum discharges; any payment was expected to have a de minimis effect. Management said outstanding claims and suits were not expected to have a material adverse effect.
- Management and the auditor reported effective internal control over financial reporting, but controls at Rhiag, PGW and Andrew Page were excluded from the 2016 assessment.
The filing does not provide a clear numerical revenue or earnings forecast for 2017. LKQ paid no cash dividends and said it did not anticipate dividends in the foreseeable future.
Important facts for investors to verify
- Whether the $310 million PGW glass manufacturing sale closed on expected terms, and the resulting cash proceeds, debt reduction and continuing glass-business economics.
- Post-acquisition performance and integration progress for Rhiag, PGW and Andrew Page, including whether anticipated purchasing and distribution synergies materialize.
- Debt, interest expense, covenant headroom and liquidity after acquisitions and the planned asset sale; also assess foreign-subsidiary cash availability.
- Organic growth and margins by segment, separating acquisition contribution, currency effects and one-time items from underlying performance.
- Scrap-metal price sensitivity, supplier/import exposure, Brexit-related currency and operating effects, and the limited goodwill headroom in the PGW aftermarket reporting unit.