LKQ Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
LKQ distributes alternative automotive replacement parts, specialty vehicle products and automotive glass products across North America and Europe. This unaudited report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016; balance-sheet comparisons are to December 31, 2016.
Growth included the effects of prior acquisitions, notably Rhiag and PGW’s aftermarket glass distribution business. In March 2017, LKQ sold PGW’s glass manufacturing business and retained its aftermarket glass distribution operations.
Financial and operating metrics
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $2,342.8 million | $1,921.5 million; up 21.9% |
| Gross profit / gross margin | $930.1 million / 39.7% | $760.4 million / 39.6% |
| Operating income / margin | $235.7 million / 10.1% | $185.7 million / 9.7% |
| Continuing-operations income | $140.8 million | $112.2 million |
| Net income | $136.3 million | $112.2 million |
| Diluted EPS from continuing operations | $0.45 | $0.36 |
| Segment EBITDA | $290.3 million | $236.6 million |
| Operating cash flow | $172.3 million | $134.8 million |
| Capital expenditures | $44.4 million | $50.4 million |
- Revenue growth comprised 5.7% organic growth, 18.9% acquisition-related growth and a 2.7% negative foreign-exchange effect. Parts and services accounted for approximately 94% of revenue.
- Segment revenue was $1,208.0 million in North America, $820.9 million in Europe and $313.9 million in Specialty. Segment EBITDA margins were 14.6%, 9.6% and 11.3%, respectively. North America and Specialty margins were level or higher year over year; Europe’s declined from 10.5%.
- Cash and equivalents were $264.6 million at March 31, up from $227.4 million at year-end. Total debt was $3,048.2 million, down from $3,365.7 million; cash less total debt implies net debt of approximately $2,783.6 million. Revolver availability was $1.36 billion and reported total liquidity was $1.62 billion.
- Current assets were $3,318.1 million and current liabilities were $1,159.7 million. The company reported compliance with its credit agreement covenants.
Material changes versus the prior comparable period
- Europe revenue grew 50.1%, principally reflecting Rhiag and other acquisitions; organic revenue growth was 8.6% as reported before currency effects. North America revenue grew 11.8%, including 7.5% acquisition-related growth. Specialty revenue grew 6.7%, primarily organically.
- Operating income rose 26.9%; operating margin improved 0.4 percentage points. Lower restructuring and acquisition-related expenses helped, while depreciation and amortization increased by $17.0 million, largely due to acquisitions.
- Interest expense increased to $24.0 million from $14.6 million, mainly due to acquisition financing. The prior-year quarter included a $26.7 million debt-extinguishment loss and an $18.3 million acquisition-related foreign-exchange-contract gain; neither recurred in Q1 2017.
- Receivables and inventory used cash overall as working capital grew. Receivables cash outflow was $108.9 million; management cautions that working-capital cash flows can vary between periods.
- Debt decreased during the quarter, with net repayments under credit facilities of $353.5 million. Sale proceeds from the glass manufacturing business were a major source of the increase in available liquidity.
Outlook, management commentary, risks and unusual items
- The filing does not provide a specific earnings or revenue guidance figure. Management expects current liquidity and future operating cash flows to meet current operating and capital needs, while noting that larger acquisitions could require additional funding.
- Management expects its annual effective tax rate to remain near 35% absent significant changes in geographic earnings mix or tax laws. Q1 effective tax rates were 33.9% in 2017 and 32.1% in 2016, including favorable share-based-payment tax items.
- The March 1 sale of the glass manufacturing business generated $301.3 million of reported proceeds and an $8.6 million pretax loss on sale. Discontinued operations, including that loss, produced a $4.5 million net loss for the quarter. LKQ also entered into transition-services and supply arrangements with the buyer.
- LKQ completed three Q1 acquisitions for total consideration of $91.2 million, including cash paid net of acquired cash of $77.1 million. Purchase-price allocations were preliminary. The Andrew Page acquisition remained subject to U.K. Competition and Markets Authority review; LKQ said integration with its existing U.K. operations was restricted pending approval.
- Management expects less than $5 million of additional integration costs to complete certain plans in 2017. It expects adoption of the new lease standard to materially affect the balance sheet and disclosures, given its operating leases; future income-statement impact was not expected to be material at the time of filing.
- Key exposures include competition, vehicle accident and repair trends, weather and seasonality, commodity prices, foreign exchange and interest rates. A 100-basis-point interest-rate change was estimated to affect interest expense by $8.3 million over the next 12 months on unhedged variable-rate debt. The company had $1.24 billion of future minimum operating lease payments. Management expected litigation and other contingencies not to materially affect results, financial position or cash flows.
Important facts for investors to verify
- How much of reported growth and profitability is sustainable organically versus attributable to acquisitions, and how foreign-exchange movements affect future results.
- Whether segment margins—particularly Europe’s lower margin after Rhiag—and the elevated depreciation and amortization burden evolve as management integrates acquired businesses.
- The final purchase-price allocations for recent acquisitions, the CMA outcome for Andrew Page, and any related integration or contingent-consideration costs.
- The use of glass-sale proceeds, debt repayment trajectory, covenant headroom and sensitivity to interest rates and foreign currencies.
- The financial and operating effects of the glass manufacturing sale and related supply and transition-service agreements, including whether continuing glass distribution achieves expected synergies.
- Working-capital cash conversion, the impact of scrap-metal price changes, and the balance-sheet effect of recognizing operating lease assets and liabilities under the new accounting standard.