LKQ Corporation

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LKQ Corporation

120 N. LaSalle St., Suite 3300
Chicago, Illinois 60602
U.S.A.
Telephone: (312) 621-1950
Toll Free: (877) 557-2677
Fax: (312) 621-1969
Web site: http://www.lkqcorp.com

Public Company
Incorporated: 1998
Employees: 2,800
Sales: $424.76 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: LKQX
NAIC: 441310 Automotive Parts and Accessories Stores

LKQ Corporation is the largest supplier of used auto parts in the United States. The firm operates a network of more than 40 salvage yards where wrecked vehicles are dismantled and usable parts sold to repair shops or parts reconditioning companies. The remainder of each vehicle, including scrap metals, batteries, fluids, and tires, is sold to recycling firms. LKQ also owns a growing number of self-service facilities at which customers remove parts themselves, and sells aftermarket parts via subsidiaries Global Trade Alliance and Bodymaster.

Beginnings

LKQ Corporation was founded in February 1998 by former Waste Management executive Donald Flynn, who had left that firm when it was acquired by USA Waste Services, Inc. Seeking a fragmented industry to consolidate in much the same way that his former employer had done with garbage hauling, Flynn looked at several possibilities, including scrap metal, before settling on used auto parts.

This $8 billion industry consisted of an estimated 11,000-plus junkyards across the United States, which served more than 200,000 collision and mechanical repair shops by recycling parts from 11 million junked autos per year. Many were old, family-owned businesses, fewer than a third of which had computer inventory systems. A large number still fit the stereotypical image of a desolate place where "shade-tree mechanics" were eyed by a menacing dog while removing a part from a rusting wreck.

With financial backing from Waste Management founder H. Wayne Huizenga's new AutoNation car dealership chain (which would be one of the firm's first customers), and Waste Management cofounder and former CEO Dean L. Buntrock, Flynn began looking at acquisition targets around the United States. He sought out the best-run companies in each region, not simply the largest, as he wanted the firm to gain a reputation for the consistency and quality of used parts it offered. With this in mind, his new company took the name LKQ, which was auto industry shorthand for "like, kind, and quality," a standard designation for used parts that were considered as good as new.

Late 1990s Acquisitions

LKQ's first purchase, in July 1998, was Triplett Automotive Recycling of Akron, Ohio, a 50-year old, family-owned firm. Triplett was run by Stuart P. Willen, who in over three decades in the business had developed sophisticated methods of salvaging and recycling parts, resulting in revenue growth of 20 percent-plus for seven years running. Willen was especially concerned about quality, and bought only late-model cars that had been declared "totaled" by insurance companies but still had many reusable interior, exterior, and engine parts.

Triplett's buyers would typically attend 15 wrecked vehicle auctions per week, bringing their purchases to a facility with six service bays where approximately 20 cars per day could be dismantled. All reusable parts were removed down to the bare frame, then inspected for remaining service life, reconditioned if necessary, bar-coded, entered into a computer database, and stored systematically. Other recyclers bought batteries, fluids, and tires, while the stripped hulks were flattened by an outside contractor and sold as scrap.

A team of some 20 sales representatives worked with repair shops and auto insurers in northwestern and central Ohio to sell the parts, which generally cost half as much as new ones. Popular items included engines, transmissions, fenders, front-end assemblies, doors, trunk lids, bumpers, wheels, tail and headlamp assemblies, mirrors, and axles. Key to Triplett's success was its reputation for quality, established over the years through personal relationships with customers.

Stuart Willen, like others who would sell their businesses to LKQ, received stock in the new company to help give him incentive to work hard for his firm's new owners. He took the title of vice-president of the Midwest region, and began working with Floyd to select other companies to acquire. In November 1998 the firm also hired former Waste Management COO Joseph M. Holsten to serve as CEO. The company was now busy striking deals in markets all over the United States.

In September 1999 LKQ bought its 35th parts recycling firm. Hunts Point Auto parts of the Bronx, New York, became LKQ Hunts Point, and as with most of the firm's acquisitions, existing management remained in charge of its operations. The aggregate earnings of LKQ's network now gave the firm total revenues of more than $200 million. The company's facilities served three-fourths of the top 50 markets in the country, and it was in the process of setting up a number of parts distribution centers around the United States.

Some in the industry doubted that a new national conglomerate could successfully, and cost-effectively, win the hard-earned reputation for quality that the best salvage yards had built up. Though the size and national reach of a junkyard network would offer the advantages of a deeper stock of parts for a wider range of vehicles, it was as yet unclear whether customers in one part of the country would have faith that parts shipped from a supplier they did not personally know would be good.

Despite such concerns, LKQ's rapid growth began inspiring competition from several clusters of regional salvage operators, as well as, beginning in April 1999, from a unit of Ford Motor Company called Greenleaf Acquisitions, which began assembling a similar network. In the fall of 1999 the used-parts industry got a boost when a court fined State Farm Insurance $1.2 billion for using aftermarket parts (ones similar to original equipment but manufactured by outside companies) to repair vehicles it insured, rather than original equipment manufacturer (OEM) sourced ones.

In December 1999 LKQ announced it was offering a six month free-replacement guarantee for most parts, the longest in the industry, as well as free parts and labor for any repairs needed on many engines and transmissions. Other parts were guaranteed against rust for life. With only about 10 percent of parts purchased by repair shops coming from salvage sources, LKQ was seeking to improve this percentage with methods including the warranty upgrade and by educating the consumer and the repair industry on the value of used parts. The company was now pulling back from acquisitions to focus on integrating its network of businesses into a cohesive whole.

In early 2000 the firm signed an agreement with parts distributor Keystone Automotive Industries, Inc., to serve as its exclusive supplier of damaged alloy wheels for remanufacturing, while Keystone was named LKQ's exclusive source of remanufactured wheels for resale. The firm was also moving to form relationships with insurance companies, who were the most influential players in the auto-repair industry. LKQ was named the preferred supplier of used parts for both Allstate and Nationwide Insurance companies.

In 2001 the company's annual sales reached an estimated $250 million, and though revenues ticked upward to $287 million for 2002, LKQ recorded a loss of nearly $39 million during the year. In the summer of 2003 the company, which now had 38 recycling facilities and 12 distribution centers, announced it would make an initial public offering of stock on the NASDAQ to fund further expansion and pay down debt. At this time Donald Flynn held 15 percent of the firm's stock, while Dean Buntrock had 13.4 percent, and several directors owned more than 10 percent. AutoNation, Inc. held just under 10 percent, having sold half of its original 20 percent stake back to LKQ earlier in the year.

The IPO took place in October, and raised $91 million. A short time afterwards, AutoNation disposed of its remaining stake in the company. For 2003, revenues increased to $328 million, with earnings jumping to $14.6 million.

Move into Aftermarket Parts in 2004

In January 2004 LKQ acquired Metro East Salvage, Inc. of Caseyville, Illinois, which was located near St. Louis, Missouri, and in February the company opened a new salvage yard in Pennsylvania and bought four self-service used parts outlets in Tampa, Florida. The firm also paid $30 million to buy Global Trade Alliance, Inc. (GTA), a supplier of aftermarket replacement parts to 15 states in the Midwest. The GTA purchase marked LKQ's first move into aftermarket parts, which cost less than OEM parts, but were considered by some to be of inferior quality. The advantage to LKQ was that it could generally sell aftermarket parts in place of used ones it did not have in stock, and GTA carried many of the frequently damaged body parts it had a short supply of. The replacement parts market at this time was made up of 75 percent OEM, 13 percent aftermarket, and 12 percent recycled OEM.

Early 2004 saw the firm secure a new $75 million line of credit, and in the spring LKQ bought two self-service used parts facilities in Guatemala and one in Costa Rica, as well as Albert Lea Auto Salvage, Inc. of Minnesota. By now several GTA operations had been merged into LKQ facilities, and the company was preparing to expand sales of aftermarket parts to the East and West Coasts. Newly built "greenfield" salvage yard facilities were also in the planning stages for Texas and Louisiana.

Company Perspectives:

We are expanding our markets by educating the collision and mechanical repair industries, insurance providers and consumers on the quality and value of recycled auto parts, and by raising standards for customer service, warranty support and environmental compliance.

Sales of used parts dropped during the summer when hurricanes in Florida and along the Eastern seaboard impacted the car repair business. One bright spot for the firm at this time was the increasing number of parts being sold via eBay and other online vendors.

In October the company paid $19 million for Foster Auto Parts, Inc. of Portland, Oregon, which operated seven self-service used auto parts facilities in Oregon and Washington. This segment of the market, in which customers removed their own parts from wrecked vehicles, was a new growth area for the industry. The cars involved were typically older models, which were not generally worth the time it took to fully disassemble. A rival firm called Pick-n-Pull had already built a chain of nearly 30 such operations. For 2004, LKQ's revenues topped out at just under $425 million, while earnings hit $20.6 million.

In early 2005 the company bought East Coast aftermarket auto parts supplier Bodymaster Auto Parts, Inc. for $15.4 million. Bodymaster served customers in New Jersey, Delaware, Philadelphia, Baltimore, and Washington, D.C. The firm also boosted its credit facility to $100 million, with options for further increases. In April LKQ acquired A&R Auto Parts, Inc., operator of a salvage yard near Duncan, South Carolina, and a few weeks later bought a self-service auto parts operation near Memphis, Tennessee.

In seven short years LKQ Corporation had built up the largest network of automotive salvage yards in the United States, one that gave it a presence in the majority of the country's top markets. In addition to selling used parts, the company was expanding the amount of aftermarket parts it offered, as well as boosting the number of "remove-it-yourself" used parts facilities.

Principal Subsidiaries

Bodymaster Auto Parts, Inc.; Global Trade Alliance, Inc.; LKQ

Holding Co.; Damron Holding Company LLC.

Principal Competitors

Greenleaf Auto Recyclers; Quality Replacement Parts (QRP); Schnitzer Steel Industries, Inc.

Key Dates:

1998:: Donald Flynn founds LKQ Corporation to buy auto salvage yards.
1999:: Acquisitions reach 35.
2003:: Company completes its initial public offering (IPO) on the NASDAQ.
2004:: Sales of aftermarket parts begin with acquisition of Global Trade Alliance.