LKQ Corporation recently announced results for the first quarter ended March 31, 2020. The company also provided an update on the impact of the coronavirus (“COVID-19”) pandemic on its business and its response designed to mitigate the impact.
COVID-19 Update
“As the COVID-19 pandemic spread rapidly across the globe during the first quarter, our number one priority was, and continues to be, the health and safety of our employees, customers, vendor partners and the communities where we operate. Our businesses got off to an excellent start in January and February, carrying the strong momentum from 2019 on all fronts and reinforcing our key priorities of profitable revenue growth, accretive margins and cash flow generation. Through February, each of our segments was in line with or ahead of our revenue and profit expectations. As the restrictions on movement of people were imposed resulting in the decline of demand for our parts across all business segments, our financial results during the second half of March deteriorated. This reduced level of demand has continued, with April revenue down approximately 40% compared to the prior year, significantly impacting our near-term financial results. We anticipate a gradual improvement in revenue and profitability as governments around the globe begin the process of lifting the restrictions on mobility and opening their economies,” stated Dominick Zarcone, president and CEO of LKQ Corporation.
Zarcone further commented, “To help mitigate the business disruption caused by the COVID-19 pandemic, and to position LKQ for earnings growth when the U.S. and European economies rebound, we have taken decisive action and implemented comprehensive cost reduction plans throughout the enterprise, including substantial staffing adjustments. This focus on our cost structure and the variable nature of certain expenses has resulted in a potential annualized run-rate savings of more than $1 billion. As market conditions improve, we look forward to bringing our people back, so we can both fulfill the anticipated increase in demand and continue to provide industry leading levels of customer service.”
On March 26, 2020, the company filed a current report on Form 8-K (link to 8-K) withdrawing its financial guidance previously issued on February 20, 2020, due to the continued uncertainties from the impact of the COVID-19 pandemic. Given the continuation of these uncertainties, including the timing of the removal of mobility restrictions and the rate at which demand for auto repairs will improve, we are not issuing updated financial guidance at this time. The withdrawal of the company’s guidance also applies to the targets for the 1 LKQ Europe program discussed on the September 10, 2019, investor call. The company historically has not provided quarterly revenue or earnings projections.
First Quarter 2020 Financial Results
Revenue for the first quarter of 2020 was $3.0 billion, a decrease of 3.2% as compared to $3.1 billion in the first quarter of 2019. For the first quarter of 2020, parts and services organic revenue decreased 3.5% (4.7% on a per day basis) while the net impact of acquisition and divestitures revenue was 0.1% and foreign exchange rates was (1.3%), for a total parts and services revenue decline of 4.6%.
Net income for the first quarter of 2020 was $146 million as compared to $98 million for the same period in 2019, an increase of 49% year-over-year. Diluted earnings per share for the first quarter was $0.48 as compared to $0.31 for the same period of 2019, an increase of 55% year-over-year.
On an adjusted basis, net income was $176 million, which was flat as compared to the same period of 2019. Adjusted diluted earnings per share for the first quarter was $0.57 as compared to $0.56 for the same period of 2019, a 2% increase.
Zarcone further commented, “Despite the negative impact of the COVID-19 pandemic on our March 2020 monthly results, we were able to achieve year-over-year growth in earnings per share, a testament to the strength of our business coming into 2020. Of particular note, during the first quarter of 2020 our North American segment achieved a Segment EBITDA margin of 16.4%, the highest level in a decade.”
Cash Flow and Balance Sheet
Cash flow from operations totaled $195 million during the first quarter of 2020, up 10% from a year ago. Free cash flow totaled $150 million, up 21%, year-over-year. The company made $230 million of net repayments on its borrowings during the quarter. As of March 31, 2020, LKQ’s balance sheet reflected net debt of $3.5 billion. Net leverage as defined in the credit facility decreased to 2.5x EBITDA. As of March 31, 2020, the company had approximately $1.9 billion in available liquidity, composed of approximately $1.53 billion available under its credit facilities and $333 million of cash and cash equivalents.
During the first quarter of 2020, the company repurchased 3.3 million shares of common stock for a total consideration of $88 million. We suspended share repurchases on March 16, 2020. Since initiating the share repurchase program in October 2018, the company has repurchased 16.5 million shares for a total of approximately $440 million.
Varun Laroyia, executive VP and CFO, commented, “We are responding to this global macroeconomic challenge by actively aligning our cost structure to the prevailing demand, efficiently managing our cash flows, and thoughtfully balancing our capital allocation priorities. We are confident that our current liquidity and continued positive cash flow from operations in future periods will be sufficient to meet our ongoing operating and capital requirements.”
Non-GAAP Financial Measures
This release contains and management’s presentation on the conference call will refer to non-GAAP financial measures within the meaning of Regulation G promulgated by the Securities and Exchange Commission. Included with this release are reconciliations of each non-GAAP financial measure with the most directly comparable financial measure calculated in accordance with GAAP.
