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Letter to the Editor

LKQ Corporation Q2 Earnings With Operating Income Growth Over 29 Percent

"We exceeded our previously issued earnings estimates for the second quarter. We were highly encouraged by the expansion of our operating income margin to 11.4 percent compared to 10.6 percent in the second quarter of 2006," said Joe Holsten, President and Chief Executive Officer. "In addition, the supply of wholesale salvage vehicles was fairly robust and as such we significantly increased the number of vehicles we purchased in the quarter by over 17 percent from the level we obtained in the second quarter of 2006."

Commenting on business acquisitions, Holsten said "We were particularly pleased with our two recent Canadian business acquisitions that spearhead our entry into the Canadian markets. Of course our primary acquisition efforts over the last few months related to our previously announced signing of a definitive merger agreement on July 16 with Keystone Automotive Industries, Inc., the leading distributor of collision repair aftermarket parts with over $700 million in annual revenue."

For the second quarter of 2007, revenue increased 19.6 percent to $233.3 million compared with $195.0 million for the second quarter of 2006. LKQ organic revenue growth for the quarter was 10.5 percent. Net income for the quarter increased 20.2 percent to $14.0 million compared with $11.7 million for the second quarter of 2006. Diluted earnings per share was $0.25 for the quarter compared with $0.21 for the second quarter of 2006. The company was required to write-off certain deferred tax assets in the second quarter due to an April 2007 state tax law change in a state where LKQ operates. This had the effect of reducing second quarter net income by $600,000.

For the six months ended June 30, 2007, revenue increased 21.0 percent to $468.6 million compared with $387.2 million for the same period in 2006. This included organic revenue growth of 10.1 percent. For the six months ended June 30, 2007, net income increased 25.5 percent to $29.8 million compared with $23.7 million for the same period in 2006.

Consolidated aftermarket collision replacement parts, refurbished wheels, and refurbished lighting revenue for the first six months was $118.1 million. In addition a subsidiary operates an aluminum smelter that melts damaged and unusable wheel cores as a means of product disposal. For the first six months of 2007, the smelter's revenue was $19.9 million at a gross margin of approximately 6.0 percent, compared to $12.2 million of revenue at a gross margin of approximately 5.0 percent for the five months we owned the smelter in the first half of 2006.

In January LKQ acquired Northern Light Refinishing, near Grand Rapids, MI, that refurbishes head and tail lights. While currently a small business, the company believes many of its light cores can be refurbished into high quality replacement lights that can be sold to collision repair and retail customers. Several other acquisitions have been made within the first half of 2007.

On July 16, LKQ signed a definitive merger agreement to acquire Keystone Automotive Industries, a leader in aftermarket vehicle collision replacement parts, for $48.00 per share in cash. The merger, which is subject to approval of the shareholders of Keystone and other customary conditions, is currently expected to close early in the fourth quarter of 2007. Total cash consideration is approximately $811 million on a fully diluted basis. For the twelve months ended March 31, 2007 Keystone reported sales and net income of $714 million and $30 million, respectively.

Excluding any impact of acquiring Keystone, the company expects that 2007 organic revenue growth will be in the low double digits, with the balance of the growth being the full year impact of 2006 business acquisitions and the acquisitions completed so far in 2007. Net income is expected to be within a range of $56.0 million to $58.0 million and diluted earnings per share to be between $0.99 and $1.03.

For the third quarter of 2007, we expect net income to be within a range of $12.5 million to $13.5 million. Net cash provided by operating activities for 2007 is expected to be over $55.0 million. Estimates for full year 2007 capital expenditures related to property and equipment, excluding expenditures for acquiring businesses, will be between $49.0 to $53.0 million. This includes approximately $1.9 million in property and equipment related to businesses acquired to date in 2007 and approximately $5.0 million related to capital expenditures originally planned in late 2006 on projects that became delayed. As of July 25, 2007, LKQ had outstanding debt under its bank credit facility of $158.0 million.

In April 2007 the company increased the capacity of its bank credit facility from $135 million to $205 million with an accordion feature that could increase it to $305 million with the consent of banks participating in such increase. LKQ also extended the maturity date of the facility to April 2012. The company plans to retire its existing credit facility with proceeds from a $1.09 billion senior secured financing from Lehman Brothers Inc. and Deutsche Bank that is related to the closing of the Keystone business acquisition, expected to occur early in the fourth quarter of 2007.

LKQ Corporation is the largest nationwide provider of recycled light vehicle OEM products and related services and the second largest nationwide provider of aftermarket collision replacement products and refurbished wheels, operating over 130 facilities.

©2007 Collision Repair Industry INSIGHT
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