LKQ updates guidance after disappointing Q2

Chicago-based auto parts recycler LKQ Corp. has reported second quarter financial results for the year, and despite an 8 percent increase in year-over-year revenue to $3.7 billion for the quarter, the company has revised its outlook downward for the remainder of the year.

“Our second quarter performance did not meet expectations as lower repairable claims in North America and difficult macroeconomic conditions in Europe led to declines in overall volumes,” LKQ President and CEO Justin Jude says in comments accompanying the company’s earnings.

“We believe current market headwinds are temporary in nature but expect them to persist for the balance of the year."

Jude says LKQ will continue to prioritize its strategic pillars of profitable revenue growth, margin enhancement and cash flow generation this year, while working to maximize performance.

“Guided by our strategic pillars, we will continue to evaluate our portfolio to determine if we are the right owners of our various businesses, and we have placed a pause on any large-scale acquisitions and have raised the bar for approving tuck-in acquisitions,” he adds.

“I am confident that these actions, combined with a capital allocation policy that will prioritize returning value to shareholders while maintaining our investment grade status will enhance shareholder value to reflect LKQ’s unique strengths and market-leading positions in our core segments.”

Q2 results

The company’s parts and services organic revenue decreased 2.1 percent during the quarter, while the net impact of acquisitions and divestitures increased revenue by 11.8 percent and foreign exchange rates decreased revenue by 0.6 percent year over year, for a total parts and services revenue increase of 9 percent.

Other revenue for the second quarter of 2024 fell 16.2 percent primarily because of weaker precious metals prices and lower scrap steel volumes relative to the same period in 2023.

Net income for the second quarter was $185 million compared with $281 million for the second quarter of 2023. Quarterly diluted earnings per share were 70 cents compared with $1.05 year over year, a decrease of 33.3 percent.

On an adjusted basis, net income for the second quarter totaled $261 million compared with $291 million in 2023’s second quarter, a decrease of 10.4 percent. Adjusted diluted earnings per share were 98 cents in the recently completed quarter compared with $1.09 a year ago, a decrease of 10.1 percent.

Cash flow and balance sheet

Cash flow from operations and free cash flow were $213 million and $133 million, respectively, for the second quarter of 2024 and $466 million and $320 million, respectively, for the six months ended June 30. As of June 30, LKQ says its balance sheet reflected total debt of $4.3 billion and total leverage, as defined in its credit facility, was 2.3x EBITDA.

Stock repurchase and dividend programs

During the second quarter, LKQ says it returned more than $200 million to its shareholders by investing $125 million to repurchase 2.9 million shares of its common stock and distributing approximately $80 million in cash dividends.

For the six months ended June 30, the company repurchased 3.5 million shares of its common stock for $155 million. Since initiating the stock repurchase program in late October 2018, LKQ has repurchased approximately 59 million shares of its common stock for a total of $2.6 billion through June 30 of this year, at which time $921 million remained on the authorization.

The board of directors declared a quarterly cash dividend of 30 cents per share of common stock, payable Aug. 29 to stockholders of record at the close of business Aug. 15.

Divestitures and other events

During the recently completed quarter, LKQ entered into definitive agreements to divest its operations in Slovenia, which closed in April; Poland, which it expects to close in the third quarter; and Bosnia, which it expects to close in the second half of 2024, having determined these operations did not align with its long-term strategy and financial return objectives. Terms of the transactions were not disclosed.

On June 21, LKQ announced a new collective bargaining agreement with the trade union Verdi. The agreement covers approximately 5,000 employees of LKQ Europe in Germany, including 730 colleagues at LKQ’s Sulzbach-Rosenberg distribution center. The collective bargaining agreement expires April 30, 2026. The tariff agreement includes a mandatory peace obligation, which immediately ends all strike activity throughout the term of the agreement.

Earlier this month, LKQ appointed Andrew Clarke to its board of directors. Clarke brings logistics, transportation, operations and financial expertise, having most recently served as chief financial officer at C.H. Robinson, the largest freight broker in the U.S. and one of the biggest third-party logistics providers in the world, from 2015 to 2019. While with the company, he helped C.H. Robinson achieve total revenue growth of $3 billion and return $2 billion to shareholders.

2024 outlook

“Based on a projected continuation of the revenue headwinds we experienced in the first half of 2024, we are lowering our full-year guidance,” says Rick Galloway, LKQ senior vice president and chief financial officer. “While we have taken actions to reduce costs and protect our margins and cash flows, the benefits are not expected to offset the full impact of the lower revenue expectation. We are confident in LKQ’s ability to deliver on these expectations given our market-leading businesses, successful operational excellence strategy and the strength of our team.”