LKQ Corporation — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing also reports fourth-quarter results. LKQ distributes alternative collision and mechanical vehicle parts, recycled and refurbished products, and specialty vehicle accessories through North America, Europe, and Specialty segments.
Financial performance
| Metric | FY 2015 | FY 2014 | Change |
|---|---|---|---|
| Revenue | $7.193 billion | $6.740 billion | +6.7% |
| Gross margin | $2.834 billion; 39.4% | $2.652 billion; 39.3% | +6.9% amount |
| Operating income | $704.6 million; 9.8% margin | $649.9 million; 9.6% margin | +8.4% |
| Net income | $423.2 million; 5.9% margin | $381.5 million; 5.7% margin | +10.9% |
| Diluted EPS | $1.38 | $1.25 | +10.4% |
| Operating cash flow | $529.8 million | $370.9 million | +$158.9 million |
| Capital expenditures | $170.5 million | $141.0 million | +$29.5 million |
| Gross debt | $1.600 billion | $1.865 billion | -$264.9 million |
Cash and equivalents were $87.4 million, down from $114.6 million. Working capital was $1.589 billion versus $1.491 billion. Credit-facility availability was $1.338 billion; total liquidity, including cash, was $1.425 billion. Net debt was $1.512 billion. The company reported compliance with its credit covenants at year-end.
Fourth-quarter revenue was $1.749 billion versus $1.684 billion; net income was $95.1 million versus $80.5 million, and diluted EPS was $0.31 versus $0.26.
Changes and segment results
- Parts and services revenue rose 10.3% overall, reflecting 7.0% organic growth and 7.1% acquisition contribution, partly offset by a 3.8% foreign-exchange impact. Other revenue fell 26.7%, chiefly because of lower scrap-metal prices.
- North America revenue increased 1.4% to $4.146 billion; Segment EBITDA was nearly flat at $547.4 million. Lower scrap and metal prices reduced North American Segment EBITDA by an estimated $34.4 million year over year.
- Europe revenue rose 8.1% to $1.995 billion, including 9.3% organic growth, while currency translation reduced growth by 9.7%. Segment EBITDA increased 20.0% to $200.6 million; on a constant-currency basis, it rose 29.4%.
- Specialty revenue increased 30.6% to $1.051 billion, with organic growth of 7.8% and acquisition contribution of 24.6%. Segment EBITDA grew 34.1% to $106.6 million.
- Consolidated Segment EBITDA, a non-GAAP measure, was $854.5 million versus $790.6 million; margin was 11.9% versus 11.7%.
Outlook, risks, and notable items
- For FY 2016, management forecast adjusted net income of $490–$520 million and adjusted diluted EPS of $1.59–$1.69. These are adjusted measures excluding restructuring and acquisition costs, acquired-intangible amortization, and specified acquisition or divestiture gains and losses.
- Management expected FY 2016 operating cash flow of $520–$550 million and capital expenditures, excluding acquisitions, of $170–$180 million.
- LKQ signed an agreement to acquire Rhiag, with completion expected in the first half of 2016, subject to customary conditions and regulatory approvals. Expected consideration included approximately $616 million cash and $500 million assumed debt. The January 2016 credit-facility amendment increased capacity to $3.2 billion and extended maturity to January 2021.
- Scrap and other metal prices had fallen 56% since the fourth quarter of 2014. Management expected depressed scrap-steel prices to pressure Self Service margins in 2016; its year-end goodwill test showed only an approximately 11% fair-value cushion for that reporting unit. No impairment was recorded.
- Other key exposures include competition and OEM pricing, acceptance of alternative parts by insurers, salvage-vehicle supply and costs, commodity and foreign-exchange volatility, acquisition integration, environmental and product-liability claims, and variable-rate debt. A 100-basis-point rate increase was estimated to increase annual interest expense by $6.9 million on unhedged variable-rate debt.
- The filing disclosed an ongoing Texas environmental investigation; management expected any monetary resolution to have a de minimis financial effect. The financial-statement and internal-control audits received unqualified opinions.
Investor verification priorities
- Track scrap-metal pricing and its effect on North American results and Self Service goodwill headroom.
- Assess the quality and sustainability of organic growth separately from acquisitions, foreign exchange, and pricing; review Specialty gross-margin and integration trends.
- Confirm Rhiag closing, financing, assumed debt, and realized synergies against the announced transaction expectations.
- Compare FY 2016 adjusted guidance with reported GAAP results, including excluded acquisition, restructuring, and amortization items.
- Monitor debt reduction, cash conversion, capital spending, credit-facility capacity, and covenant compliance.