Acquisitions Drove LKQ Corporation's Q2 Earnings

By Markets Fool.com

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Despite some headwinds to organic growth,LKQ (NASDAQ: LKQ) delivered a strong second-quarter report before the market opened on Thursday. Acquisitionsdrove the quarter, pushing sales and earnings up more than 30% year over year. As a result of the company's ability to quickly integrate its latest acquisitions, it is accelerating its profit outlook for the full year.

LKQ Corporation results: The raw numbers

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Sales

$2.5 billion

$1.8 billion

33.3%

Adjusted Net Income

$169.2 million

$126.3 million

34%

Adjusted EPS

$0.55

$0.41

34.1%

Data source: LKQ Corporation.

What happened with LKQ Corporation this quarter?

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Acquisitions drove growth this quarter:

  • The recent additions of Rhiag and Pittsburgh Glass Works (PGW) were the big story this quarter, with those transactions driving 30.8% of the company's revenue growth. Without those additions, companywide revenue would have only been up 3.8% on an organic basis.
  • Growth was strongest in Europe, with sales up 61.8% year over year to $823 million thanks to Rhiag. That was followed by an 18.5% increase in specialty sales to $336 million. Meanwhile, the recent addition of PGW created the company's glass segment, which added $210 million to the top line. Finally, sales in North America were up a solid 5.6% to $963 million.
  • LKQ is poised to continue growing after completing two strategic initiatives during the quarter. On the acquisition side, it sealed a deal for an aftermarket auto productsdistributorin Belgium. Meanwhile, itsEuropean operations opened seven new Euro Car Parts branches during the quarter to drive incremental organic growth.
  • Earnings grew a bit faster than sales thanks to a 40 basis point improvement in gross margin. In North America, margins improved thanks to the aftermarket procurement initiatives the company implemented this year. Meanwhile, in the European segment, margins improved despite the added costs of the company's new distribution facility in England.

What management had to say

CEO Robert Wagman,commenting on the company's results, said:

Despite tough comparable periods and the carryover impact of the mild winter in North America, organic revenue growth for parts and services was a respectable 5.4% during the quarter, demonstrating the resiliency of our operating and diversification strategy [...] I am also pleased with the overall earnings growth achieved in the quarter, which is partly attributable to the smooth integration of the Rhiag and PGW acquisitions we completed earlier this year.

While the company's organic growth initiatives performed well in the second quarter, recent acquisitions stole the show. In the first quarter, the company closed the purchase of leading European aftermarket spare parts distributor Rhiag, which is expected to deliver $1 billion in annualized revenue as well as being accretive to earnings on a per share basis this year.

Meanwhile, the company acquired PGW from private equity company Kohlberg and coatings maker PPG Industries (NYSE: PPG) in April, which added the glass segment to its operations. PGW is the leading distributor and manufacturer of automotive glass products and had $1.07 billion in revenue over the past 12 months. Like Rhiag, PGW is expected to be accretive to earnings this year. Since PPG Industries and Kohlberg partnered to turn around PGW in 2008, they have doubled its EBITDA and repositioned it as a global leader in its segment. In doing so, they have set LKQ's latest addition up to succeed in the years ahead.

Looking forward

With those two recent acquisitions performing a bit better than expected, LKQ is boosting its full-year outlook for earnings. The company provided the following chart to detail the changes in its guidance ranges:

Updated Guidance

Prior Guidance

Organic revenue growth (parts & services)

5.5% to 7%

6% to 8%

Adjusted net income*

$555 million to $580 million

$545 million to $575 million

Adjusted diluted EPS*

$1.79 to $1.87

$1.76 to $1.86

Cash flow from operations

$585 million to $635 million

$575 million to $625 million

Capital expenditures

$200 million to $225 million

$200 million to $225 million

Data source: LKQ Corporation.

It's worth noting that the company is trimming its organic revenue growth outlook while boosting both the top and bottom ends of its earnings expectations. That implies its recent acquisitions are really picking up the slack.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends LKQ. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.