LKQ Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; compared with Q1 2015. LKQ distributes aftermarket, recycled, refurbished and remanufactured vehicle parts, along with specialty vehicle products. Amounts below are U.S. dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Revenue | $1,921.5 million | $1,773.9 million; up 8.3% |
| Gross margin | $760.4 million; 39.6% of revenue | $699.5 million; 39.4% |
| Operating income | $185.7 million; 9.7% of revenue | $185.9 million; 10.5% |
| Net income | $107.7 million | $107.1 million; up 0.6% |
| Diluted EPS | $0.35 | $0.35 |
| Operating cash flow | $130.2 million | $180.1 million |
| Capital expenditures | $50.4 million | $26.1 million |
| Cash and equivalents | $229.2 million | $87.4 million at Dec. 31, 2015 |
| Total debt, gross | $2,836.7 million | $1,599.7 million at Dec. 31, 2015 |
| Net debt | $2,607.5 million | $1,512.3 million at Dec. 31, 2015 |
| Available credit facilities | $1,092.6 million | $1,337.7 million at Dec. 31, 2015 |
| Total liquidity | $1,321.8 million | $1,425.1 million at Dec. 31, 2015 |
Gross margin improved modestly, but operating and net margins declined. Operating cash flow fell as receivables and other operating assets and liabilities used more cash; working-capital outflows in receivables, inventory and payables totaled $38.9 million, versus $7.3 million in Q1 2015. Investing cash use was $625.0 million, principally the Rhiag acquisition. Financing provided $637.8 million, including substantial borrowings.
The effective tax rate was 34.8%, versus 35.5%. Segment EBITDA was $236.6 million, up from $221.3 million, while its margin was 12.3%, down from 12.5%. North America segment EBITDA declined 1.3%; Europe and Specialty segment EBITDA rose 23.6% and 24.9%, respectively.
Material changes versus Q1 2015
- Revenue rose 8.3%, comprising 4.1% organic growth, 6.0% acquisition-related growth and a 1.7% foreign-exchange headwind. Parts and services revenue increased 10.5%; other revenue declined 20.0%, primarily due to lower scrap-metal prices.
- Reported operating income was nearly flat despite higher revenue. Facility and warehouse costs rose to 8.2% of revenue from 7.5%; restructuring and acquisition-related expenses increased to $14.8 million from $6.5 million.
- Net income was nearly unchanged, with the benefit of an $18.3 million acquisition-related foreign-exchange-contract gain offset in part by a $26.7 million loss on debt extinguishment. The latter included a $23.8 million Rhiag debt call premium and $2.9 million of credit-agreement-related expense.
- Debt increased substantially to fund Rhiag and related refinancing. Total assets rose to $7.36 billion from $5.65 billion at year-end, substantially reflecting acquisition-related goodwill and intangibles.
Outlook, significant events and risks
- 2016 outlook: Adjusted net income of $545–$575 million and adjusted diluted EPS of $1.76–$1.86, excluding specified restructuring and acquisition costs, acquired-intangible amortization, acquisition/divestiture gains or losses and debt-extinguishment losses. Management estimated operating cash flow of $575–$625 million and capital expenditures of $200–$225 million, excluding acquisitions.
- Acquisitions: LKQ acquired Rhiag on March 18 for approximately $602.0 million net cash consideration and assumed about $550.8 million of debt. Rhiag contributed $33.9 million revenue and a $3.4 million operating loss through quarter-end, including acquisition costs. Its purchase accounting and $739.7 million of goodwill were preliminary. On April 21, after quarter-end, LKQ acquired Pittsburgh Glass Works for approximately $660.3 million net of cash acquired.
- Post-quarter financing: LKQ issued €500 million of 3.875% senior notes in April, used partly to repay revolver borrowings. Management stated that, after the PGW acquisition and Euro Notes issuance, available credit was approximately $1.0 billion.
- Debt and market exposure: At quarter-end, approximately $1.6 billion of variable-rate debt was unhedged; a 100-basis-point rate change was estimated to alter annual interest expense by $15.9 million. Credit-agreement covenants include leverage and interest-coverage tests; LKQ reported compliance at March 31. Management cited substantial leverage and future financing availability as risks.
- Operating risks and contingencies: Scrap and metal prices, foreign exchange, weather, economic conditions, acquisition integration and international operations may affect results. The filing specifically notes potential disruption or currency and market effects if the U.K. were to leave the EU. Management said pending litigation and other contingencies were not expected to materially affect financial position, results or cash flows. Future minimum operating lease commitments were $911.5 million.
- Management reported no material change in internal control over financial reporting and concluded disclosure controls were effective. The filing provides no quantified full-year GAAP earnings forecast.
Investor verification priorities
- Review the quality and sustainability of organic growth, especially the effect of scrap-metal prices and weather on revenue and margins.
- Track Rhiag and PGW integration, realized synergies, acquired-business profitability and completion of preliminary purchase accounting.
- Reconcile post-quarter debt, Euro Notes proceeds, PGW funding and remaining revolver availability; monitor leverage, covenants and interest-rate sensitivity.
- Assess the gap between rising net income and lower operating cash flow, including receivables, inventory, payment timing and planned capital spending.
- Compare actual results with adjusted guidance and confirm the exclusions used in the adjusted net income and EPS measures.