LKQ Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited consolidated results. LKQ distributes alternative automotive replacement parts through North American and European operations. Comparisons are with Q1 2012 unless otherwise noted.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Revenue | $1.196 billion | $1.032 billion | Up 15.9%; organic growth 8.2%, acquisition growth 8.0%, and foreign exchange reduced growth 0.3% |
| Gross margin | $501.9 million; 42.0% | $447.4 million; 43.4% | Margin down 1.4 percentage points |
| Operating income | $141.6 million; 11.8% of revenue | $133.6 million; 12.9% | Income grew, but margin declined |
| Net income | $84.6 million | $81.0 million | Up 4.4% |
| Diluted EPS | $0.28 | $0.27 | Up $0.01; basic EPS was $0.28 in both periods |
| EBITDA | $159.4 million; 13.3% of revenue | $151.7 million; 14.7% | Up 5.1%; margin down 1.4 percentage points |
| Operating cash flow | $106.4 million | $110.2 million | Down $3.7 million |
| Investing cash flow | $(34.3) million | $(46.0) million | Included capital expenditures of $21.5 million and net acquisition cash use of $13.3 million |
| Cash and equivalents | $63.0 million at March 31 | $59.8 million at December 31, 2012 | Quarter-end cash increased $3.2 million |
Margins, liquidity, and debt
- Cost of goods sold rose to 58.0% of revenue from 56.6%. Management attributed the pressure to the nonrecurrence of an $8.3 million prior-year lawsuit settlement gain, lower margins at the acquired precious-metals business, and weaker scrap-metal margin dynamics.
- At March 31, total long-term obligations were $1.068 billion, including $987.979 million excluding current maturities. Credit-agreement borrowings were $922.5 million; the receivables securitization facility balance was $80 million.
- Revolver availability was $390.8 million after letters of credit. The company reported compliance with credit-agreement covenants; its maximum net leverage covenant was 3.00x, subject to a permitted-acquisition step-up, and minimum interest coverage was 3.00x.
- Working-capital movements included a $48.0 million operating cash outflow from receivables, partly reflecting revenue growth and collection timing. Management said first-quarter operating cash flow is seasonally high.
- Interest expense was $8.6 million, versus $7.4 million. The weighted-average rate on credit-agreement borrowings, after swaps, was 2.89%. A 100-basis-point rate increase was estimated to raise annual interest expense by $3.8 million.
Changes and operating trends
- North American revenue rose 12.9% to $983.4 million; EBITDA increased to $135.3 million, while EBITDA margin declined to 13.8% from 15.2%. The prior-year settlement gain and acquisition-related margin pressures were important comparability factors.
- European revenue grew 32.3% to $212.6 million, supported by 33 branch openings since Q1 2012 and same-store growth. European EBITDA rose to $24.1 million, but its margin declined to 11.3% from 12.2%, partly due to contingent-consideration expense, transaction costs, and currency effects.
- Foreign-currency translation produced an $19.0 million loss in other comprehensive income, contributing to total comprehensive income of $66.3 million versus $89.8 million a year earlier.
- Cash used in financing was $67.9 million. The company made a $33.9 million payment related to the 2012 ECP earnout and reported net repayments under credit facilities.
Outlook, transactions, and risks
- 2013 adjusted guidance was net income of $305 million–$330 million and diluted EPS of $1.00–$1.09, excluding restructuring and acquisition-related expenses and acquisition/divestiture gains or losses, including contingent-consideration fair-value changes. Guidance excluded the pending Sator acquisition and possible credit-agreement changes.
- Management expected 2013 operating cash flow of approximately $300 million and capital expenditures, excluding acquisitions, of $100 million–$115 million. These estimates also excluded Sator and possible credit-facility changes.
- LKQ agreed in April 2013 to acquire Netherlands-based Sator for an expected approximately €210 million, with closing anticipated around May 1. Management expected to fund the purchase with a revolver draw and estimated approximately $115 million of revolver capacity afterward. Discussions about changes to the credit facility were ongoing, with no assurance an amendment would be completed.
- Conditional on Sator closing, LKQ agreed to waive an ECP 2013 performance condition for one seller and expects to pay that seller approximately £27 million in Q1 2014. Management said the waiver was not expected to materially affect financial results because the existing liability already reflected a high probability of maximum payment.
- Key disclosed risks include changes in accident frequency and repair demand, restrictions on aftermarket or recycled parts, product recalls and liability claims, commodity-price timing effects, foreign-exchange exposure, acquisition execution and financing availability, and new conflict-minerals compliance costs. Management noted that rapid metal-price movements can compress margins.
- Other notable items: contingent-consideration fair-value changes were an $0.8 million expense versus a $1.3 million gain in Q1 2012; the effective tax rate declined to 35.8% from 36.8%. Management reported effective disclosure controls and no significant changes in internal control over financial reporting.
Investor verification points
- Check whether revenue growth and the lower gross and EBITDA margins persisted beyond a quarter affected by acquisition mix, commodity pricing, and the prior-year settlement gain.
- Verify Sator’s closing, final purchase price, financing terms, post-close revolver capacity, and any credit-agreement amendment.
- Track receivables growth and cash conversion, and compare actual operating cash flow and capital spending with management’s 2013 estimates.
- Monitor debt, interest-rate exposure, covenant headroom, and the expected £27 million ECP-related payment if Sator closes.
- Assess whether foreign exchange, salvage-vehicle costs, scrap-metal prices, and regulation of replacement parts materially affect future margins or demand.