LKQ CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Statements and information in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the “safe harbor” provisions of such Act. Forward-looking statements include, but are not limited to, statements regarding our outlook, guidance, expectations, beliefs, hopes, intentions and strategies. Words such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” “project” and similar words or expressions are used to identify these forward-looking statements. These statements are subject to a number of risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different. All forward-looking statements are based on information available to us at the time the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should not place undue reliance on our forward-looking statements. Actual events or results may differ materially from those expressed or implied in the forward-looking statements. The risks, uncertainties, assumptions and other factors that could cause actual results to differ from the results predicted or implied by our forward-looking statements include factors discussed in our filings with the SEC, including those disclosed under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Form 10-K and our Quarterly Reports on Form 10-Q (including this Quarterly Report). Overview We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by OEMs; new products produced by companies other than the OEMs, which are referred to as aftermarket products; recycled products obtained from salvage and total loss vehicles; recycled products that have been refurbished; and recycled products that have been remanufactured. We distribute a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical products; recycled collision and mechanical products; refurbished collision products such as wheels, bumper covers and lights; and remanufactured engines and transmissions. Collectively, we refer to the four sources that are not new OEM products as alternative parts. We are a leading provider of alternative vehicle collision replacement products and alternative vehicle mechanical replacement products, with our sales, processing, and distribution facilities reaching most major markets in the United States and Canada. We are also a leading provider of alternative vehicle replacement and maintenance products in Germany, the United Kingdom, the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Austria, Slovakia, Poland, and various other European countries. In addition to our wholesale operations, we operate self service retail facilities across the U.S. that sell recycled automotive products from end-of-life-vehicles. We are also a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada. We are organized into four operating segments: Wholesale - North America; Europe; Specialty; and Self Service, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change. Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Please refer to the factors referred to in Forward-Looking Statements above. Due to these factors and others, which may be unknown to us at this time, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance. 27 Acquisitions and Investments Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. Through 2018, our acquisition strategy was focused on consolidation to build scale in fragmented markets across North America and Europe. We targeted companies that were market leaders, expanded our geographic presence and enhanced our ability to provide a wide array of vehicle products through our distribution network. In the last few years, we have shifted our focus from larger transactions to tuck-in acquisitions that target high synergies and/or add critical capabilities. Additionally, we have made investments in various businesses to advance our strategic objectives. See "Investments in Unconsolidated Subsidiaries" in Note 2, "Financial Statement Information," to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our investments. Sources of Revenue We report our revenue in two categories: (i) parts and services and (ii) other. Our parts revenue is generated from the sale of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories used to improve the performance, functionality and appearance of vehicles. Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, and diagnostic and repair services. Revenue from other sources includes scrap and other metals (including precious metals - platinum, palladium and rhodium - contained in recycled parts such as catalytic converters) sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold. See Note 3, "Revenue Recognition" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our sources of revenue. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our 2021 Form 10-K includes a summary of the critical accounting estimates we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting estimates that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the nine months ended September 30, 2022. Financial Information by Geographic Area See Note 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our revenue and long-lived assets by geographic region. 1 LKQ Europe Program We have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under this multi-year program, we expect to recognize the following: • Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will derive no ongoing benefit. See Note 4, "Restructuring and Transaction Related Expenses” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. • Transformation expenses — Period costs incurred to execute the 1 LKQ Europe program that are expected to contribute to ongoing benefits to the business (e.g. non-capitalizable implementation costs related to a common ERP system). These expenses are recorded in Selling, general and administrative expenses. • Transformation capital expenditures — Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the 1 LKQ Europe program. 28 Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses, Restructuring and transaction related expenses and Purchases of property, plant and equipment in our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2025. During the three and nine months ended September 30, 2022 we incurred $6 million and $20 million , respectively, in costs across all three categories noted above. We expect that costs of the program, reflecting all three categories noted above, will range between $25 million and $35 million in 2022 with an additional $50 million to $80 million in 2023 through the projected program completion date in 2025. In the future, we may also identify additional initiatives and projects under the 1 LKQ Europe program that may result in additional expenditures, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. We expect the transformation and restructuring expenses will be entirely funded by trade working capital initiatives across our Europe segment. Ukraine/Russia Conflict The Russian invasion of Ukraine and resulting global governmental response have impacted, and are expected to continue to impact, our business in 2022. Governmental sanctions imposed on Russia have restricted our ability to sell to and collect from customers based in Russia, and Russian military activity in Ukrainian territory has temporarily changed the way in which we operate in Ukraine. Many of our branches in Ukraine have remained open, although operating at less than full capacity, during the conflict, while others have closed temporarily. As military operations shifted to the eastern part of the country, we were able to increase capacity in branches in the central and western territory, including our central warehouse in Kyiv. We expect to continue operating in this manner unless conditions change. To date, we have experienced an immaterial negative impact from the consequences of this conflict, and we do not expect it to have a material impact on our ongoing results of operations or cash flows. Our operations in Ukraine represent les s than 1% of b oth our total annual revenue and total annual operating profit and comprised approxi mately $50 million of total assets as of September 30, 2022. In addition, LKQ r evenue from customers in Russia represented less than 0.3% of our total revenue in 2021 . As future developments in the conflict are difficult to project and outside of our control, it is possible that the estimates underlying our financials may change significantly in future periods. Key Performance Indicators We believe that organic revenue growth, Segment EBITDA and free cash flow are key performance indicators for our business. Segment EBITDA is our key measure of segment profit or loss reviewed by our chief operating decision maker. Free cash flow is a financial measure that is not prepared in accordance with U.S. generally accepted accounting principles (“non-GAAP”). • Organic revenue growth - We define organic revenue growth as total revenue growth from continuing operations excluding the effects of acquisitions and divestitures (i.e., revenue generated from the date of acquisition to the first anniversary of that acquisition, net of reduced revenue due to the disposal of businesses) and foreign currency movements (i.e., impact of translating revenue at different exchange rates). Organic revenue growth includes incremental sales from both existing and new (i.e., opened within the last twelve months) locations and is derived from expanding business with existing customers, securing new customers and offering additional products and services. We believe that organic revenue growth is a key performance indicator as this statistic measures our ability to serve and grow our customer base successfully. • Segment EBITDA - See Note 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of the calculation of Segment EBITDA. We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results. • Free Cash Flow - We calculate free cash flow as net cash provided by operating activities, less purchases of property, plant and equipment. Free cash flow provides insight into our liquidity and provides useful information to management and investors concerning cash flow available to meet future debt service obligations and working capital requirements, to make strategic acquisitions, to repurchase stock, and to pay dividends. These three key performance indicators are used as targets in determining incentive compensation at various levels of the organization, including senior management. By using these performance measures, we attempt to motivate a balanced approach to the business that rewards growth, profitability and cash flow generation in a manner that enhances our long-term prospects. 29 Results of Operations—Consolidated The following table sets forth statements of income data as a percentage of total revenue for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 58.9 % 59.2 % 59.1 % 59.1 % Gross margin 41.1 % 40.8 % 40.9 % 40.9 % Selling, general and administrative expenses 27.8 % 27.2 % 27.4 % 26.7 % Restructuring and transaction related expenses 0.1 % 0.1 % 0.1 % 0.2 % (Gain) on disposal of businesses and impairment of net assets held for sale (0.1) % — % (1.6) % — % Depreciation and amortization 1.9 % 1.9 % 1.8 % 2.0 % Operating income 11.5 % 11.5 % 13.2 % 12.1 % Total other expense, net 0.4 % 0.4 % 0.4 % 0.7 % Income from continuing operations before provision for income taxes 11.2 % 11.1 % 12.7 % 11.4 % Provision for income taxes 2.8 % 2.7 % 3.1 % 2.9 % Equity in earnings of unconsolidated subsidiaries 0.1 % 0.2 % 0.1 % 0.2 % Income from continuing operations 8.4 % 8.6 % 9.7 % 8.6 % Net income from discontinued operations — % — % 0.1 % — % Net income 8.4 % 8.6 % 9.8 % 8.6 % Less: net income attributable to continuing noncontrolling interest — % — % — % — % Net income attributable to LKQ stockholders 8.4 % 8.6 % 9.7 % 8.6 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Revenue The following table summarizes the changes in revenue by category (in millions): Three Months Ended September 30, Percentage Change in Revenue 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 2,909 $ 3,061 4.8 % (2.3) % (7.4) % (5.0) % Other revenue 195 236 (17.1) % — % (0.4) % (17.4) % Total revenue $ 3,104 $ 3,297 3.2 % (2.1) % (6.9) % (5.9) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. The decline in parts and services revenue of 5.0% represented decreases in segment revenue of 9.4% in Europe and 2.8% in Specialty, partially offset by increases of 7.2% in Self Service and 0.1% in Wholesale - North America. Parts and services revenue increased by 4.8% organically, so the overall decrease was attributable to negative effects from fluctuations in foreign exchange rates of 7.4% and the net reduction from divestitures of 2.3%. The decrease in other revenue of 17.4% was primarily driven by a decrease in organic revenue of $40 million, of which our Self Service segment contributed a $35 million decrease. Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment during the third quarter of 2022 compared to the prior year period. 30 Cost of Goods Sold Cost of goods sold decreased to 58.9% of revenue in the three months ended September 30, 2022 from 59.2% of revenue in the three months ended September 30, 2021. The cost of goods sold decrease primarily reflects an impact of 0.7% in our Wholesale - North America segment, partially offset by an increase of 0.5% in our Self Service segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Selling, General and Administrative Expenses Our selling, general and administrative ("SG&A") expenses as a percentage of revenue increased to 27.8% in the three months ended September 30, 2022 from 27.2% in the three months ended September 30, 2021. The SG&A expense increase primarily reflects impacts of 0.3% in our Self Service segment and 0.2% in our Europe segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. Restructuring and Transaction Related Expenses The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions): Three Months Ended September 30, 2022 2021 Change Restructuring expenses $ 2 (1) $ 2 (2) $ — Transaction related expenses 1 1 — Restructuring and transaction related expenses $ 3 $ 3 $ — (1) Restructuring expenses for the three months ended September 30, 2022 primarily consisted of $1 million related to our global restructuring programs and $1 million related to our 1 LKQ Europe program. (2) Restructuring expenses for the three months ended September 30, 2021 primarily consisted of $2 million related to our global restructuring programs. See Note 4, "Restructuring and Transaction Related Expenses" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring and acquisition integration plans. (Gain) on Disposal of Businesses and Impairment of Net Assets Held for Sale During the three months ended September 30, 2022, we recorded a $4 million pretax gain from the sale of a business within our Self Service segment. See "Divestitures" in Note 2, "Financial Statement Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our gain on disposal of businesses. Depreciation and Amortization The following table summarizes depreciation and amortization for the periods indicated (in millions): Three Months Ended September 30, 2022 2021 Change Depreciation $ 36 $ 39 $ (3) (1) Amortization 22 25 (3) (2) Total depreciation and amortization $ 58 $ 64 $ (6) (1) The decrease in depreciation expense included (i) $2 million from foreign currency translation primarily related to a decrease in the euro and pound sterling rates during the three months ended September 30, 2022 compared to the prior year period and (ii) $1 million related to the sale of PGW. (2) The decrease in amortization expense included $4 million from foreign currency translation primarily related to a decrease in the euro and pound sterling rates during the three months ended September 30, 2022 compared to the prior year period. 31 Other Expense, Net The following table summarizes the components of the change in other expense, net (in millions): Other Expense, Net Other expense, net for the three months ended September 30, 2021 $ 13 Increase (decrease) due to: Interest expense, net of interest income 1 (1) Other income, net (3) (2) Net decrease (2) Other expense, net for the three months ended September 30, 2022 $ 11 (1) Net interest expense increased primarily due to (i) a $3 million increase resulting from higher interest rates during the three months ended September 30, 2022 compared to the prior year period and (ii) a $1 million increase from higher average borrowings in the current year, partially offset by (iii) a $2 million decrease from foreign exchange translation, primarily related to a decrease in the euro exchange rate. (2) The increase in Other income, net is primarily comprised of (i) an increase related to a net $3 million change in insurance proceeds, (ii) an increase related to a net $2 million gain on previously held equity interests, partially offset by (iii) a decrease related to a net $2 million change in our fair value adjustments for equity investments not accounted for under the equity method. Provision for Income Taxes Our effective income tax rate for the three months ended September 30, 2022 was 25.2%, compared to 24.4% for the three months ended September 30, 2021. In the third quarter of 2022, we increased our estimate of the annual effective rate by 20 basis points, which resulted in a year to date adjustment to increase the provision. In the three months ended September 30, 2021, we reduced the annual effective rate by 50 basis points, which resulted in a year to date adjustment to decrease the provision. The net change resulted in a higher effective tax rate in 2022. See Note 12, "Income Taxes" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Equity in Earnings of Unconsolidated Subsidiaries Equity in earnings of unconsolidated subsidiaries for the three months ended September 30, 2022 decreased by $6 million primarily related to a decline in year over year results reported by Mekonomen, which is our largest equity method investment, and the negative year over year effect resulting from the divestiture of a Self Service investment in the second quarter of 2022. Foreign Currency Impact We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the three months ended September 30, 2021, the euro, pound sterling and Czech koruna rates used to translate the 2022 statements of income decreased by 15%, 15% and 11%, respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar combined with the negative impact of realized and unrealized currency gains and losses for the three months ended September 30, 2022 resulted in a negative $0.06 effect on diluted earnings per share relative to the prior year period. 32 Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Revenue The following table summarizes the changes in revenue by category (in millions): Nine Months Ended September 30, Percentage Change in Revenue 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 9,105 $ 9,171 5.1 % (0.6) % (5.3) % (0.7) % Other revenue 688 732 (5.8) % 0.2 % (0.3) % (6.0) % Total revenue $ 9,793 $ 9,903 4.3 % (0.5) % (4.9) % (1.1) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. The decline in parts and services revenue of 0.7% represented decreases in segment revenue of 4.8% in Europe and 2.1% in Specialty, partially offset by increases of 11.6% in Self Service and 5.4% in Wholesale - North America. Parts and services revenue increased by 5.1% organically, so the overall decrease was attributable to negative effects from fluctuations in foreign exchange rates of 5.3% and the net reduction from divestitures of 0.6%. The decrease in other revenue of 6.0% was primarily driven by a decrease in organic revenue of $43 million, attributable to a $50 million decrease in our Self Service segment, partially offset by an $8 million increase in our Wholesale - North America segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment during the nine months ended September 30, 2022 compared to the prior year period. Cost of Goods Sold Cost of goods sold as a percentage of revenue remained at 59.1% for both the nine months ended September 30, 2022 and 2021. Cost of goods sold reflects an increase of 0.5% in our Self Service segment partially offset by a decrease of 0.2% attributable to mix as a greater portion of sales are coming from Wholesale - North America which has higher margins. The remaining decrease is related to improvements in each of our other three segments. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Selling, General and Administrative Expenses Our SG&A expenses as a percentage of revenue increased to 27.4% in the nine months ended September 30, 2022 from 26.7% in the nine months ended September 30, 2021. The SG&A expense increase primarily reflects impacts of 0.2% in each of our Europe, Specialty, and Self Service segments. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. Restructuring and Transaction Related Expenses The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions): Nine Months Ended September 30, 2022 2021 Change Restructuring expenses $ 5 (1) $ 15 (2) $ (10) Transaction related expenses 5 (3) 1 4 Restructuring and transaction related expenses $ 10 $ 16 $ (6) (1) Restructuring expenses for the nine months ended September 30, 2022 consisted of (i) $2 million related to our acquisition integration plans, (ii) $2 million related to our global restructuring programs and (iii) $1 million related to our 1 LKQ Europe program. (2) Restructuring expenses for the nine months ended September 30, 2021 primarily consisted of (i) $9 million related to our global restructuring programs and (ii) $6 million related to our 1 LKQ Europe program. 33 (3) Transaction related expenses for the nine months ended September 30, 2022 primarily related to external costs such as legal, accounting and advisory fees for completed and potential transactions. See Note 4, "Restructuring and Transaction Related Expenses" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring and acquisition integration plans. (Gain) on Disposal of Businesses and Impairment of Net Assets Held for Sale During the nine months ended September 30, 2022, we recorded a $159 million pretax gain from divestitures including $155 million ($127 million after tax) from the sale of PGW and $4 million from the sale of a business within our Self Service segment. See "Divestitures" in Note 2, "Financial Statement Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our gain on disposal of businesses. Depreciation and Amortization The following table summarizes depreciation and amortization for the periods indicated (in millions): Nine Months Ended September 30, 2022 2021 Change Depreciation $ 106 $ 117 $ (11) (1) Amortization 72 78 (6) (2) Total depreciation and amortization $ 178 $ 195 $ (17) (1) The decrease in depreciation expense included $5 million from foreign currency translation primarily related to a decrease in the euro and pound sterling rates during the nine months ended September 30, 2022 compared to the prior year period and $3 million related to divestiture of businesses (primarily PGW) with the remaining decrease due to individually immaterial factors. (2) The decrease in amortization expense primarily reflected (i) a $6 million decrease from foreign exchange translation, primarily related to a decrease in the euro exchange rate and (ii) a decrease of $4 million related to the customer relationship intangible assets recorded upon our acquisition of Stahlgruber as the accelerated amortization of the customer relationship intangible assets resulted in lower amortization expense during the nine months ended September 30, 2022 compared to the prior year period, partially offset by (iii) a $2 million increase related to software amortization with the remaining increase due to individually immaterial factors. Other Expense, Net The following table summarizes the components of the change in other expense, net (in millions): Other Expense, Net Other expense, net for the nine months ended September 30, 2021 $ 65 Increase (decrease) due to: Interest expense, net of interest income (10) (1) Loss on debt extinguishment (24) (2) Other income, net 11 (3) Net decrease (23) Other expense, net for the nine months ended September 30, 2022 $ 42 (1) Net interest expense declined primarily due to (i) a $5 million decrease from foreign exchange translation, primarily related to a decrease in the euro exchange rate and (ii) a $4 million decrease resulting from lower interest rates during the nine months ended September 30, 2022 compared to the prior year period. (2) The $24 million decrease in loss on debt extinguishment is due to the charge recorded in April 2021 related to the redemption of the Euro Notes (2026). (3) The decrease in Other income, net is primarily comprised of (i) a decrease related to a $11 million change in our fair value adjustments for equity investments not accounted for under the equity method and (ii) a decrease related to a $5 million change in foreign currency gains and losses, partially offset by (iii) other individually insignificant increases which in the aggregate had a $5 million favorable impact. 34 Provision for Income Taxes Our effective income tax rate for the nine months ended September 30, 2022 was 24.4%, compared to 25.7% for the nine months ended September 30, 2021. The decrease in the effective tax rate for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 was attributable to net favorable discrete items of 1.1%, primarily related to the sale of PGW, and the geographic distribution of income. See Note 12, "Income Taxes" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Equity in Earnings of Unconsolidated Subsidiaries Equity in earnings of unconsolidated subsidiaries for the nine months ended September 30, 2022 decreased by $9 million primarily related to a decline in year over year results reported by Mekonomen, which is our largest equity method investment, and the negative year over year effect resulting from the divestiture of a Self Service investment in the second quarter of 2022. Foreign Currency Impact We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the nine months ended September 30, 2021, the euro, pound sterling, and Czech koruna rates used to translate the 2022 statements of income decreased by 11%, 9%, and 7%, respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar combined with the negative impact of realized and unrealized currency gains and losses for the nine months ended September 30, 2022 resulted in an $0.11 negative effect on diluted earnings per share relative to the prior year period. Results of Operations—Segment Reporting We have four reportable segments: Wholesale - North America, Europe, Specialty and Self Service. We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our growth and profitability, consistent with how we evaluate our performance, as this statistic removes the translation impact of exchange rate fluctuations, which are outside of our control and do not reflect our operational performance. Constant currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's currency conversion rate. This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under US GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies. 35 The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 % of Total Segment Revenue 2021 % of Total Segment Revenue 2022 % of Total Segment Revenue 2021 % of Total Segment Revenue Third Party Revenue Wholesale - North America $ 1,108 $ 1,112 $ 3,453 $ 3,281 Europe 1,380 1,525 4,345 4,565 Specialty 452 465 1,424 1,454 Self Service 164 195 571 603 Total third party revenue $ 3,104 $ 3,297 $ 9,793 $ 9,903 Total Revenue Wholesale - North America $ 1,109 $ 1,112 $ 3,454 $ 3,282 Europe 1,380 1,525 4,345 4,565 Specialty 452 466 1,426 1,457 Self Service 164 195 571 603 Eliminations (1) (1) (3) (4) Total revenue $ 3,104 $ 3,297 $ 9,793 $ 9,903 Segment EBITDA Wholesale - North America $ 216 19.4 % $ 190 17.1 % $ 648 18.7 % $ 603 18.4 % Europe 155 11.3 % 175 11.5 % 446 10.3 % 484 10.6 % Specialty 49 10.8 % 52 11.1 % 176 12.4 % 193 13.2 % Self Service 4 2.6 % 36 18.4 % 76 13.3 % 148 24.6 % Note: In the table above, the percentages of total segment revenue may not recalculate due to rounding. The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for and subsequent adjustments to reserves for asset recoverability and expenditures to support our employees and their families). EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding discontinued operations, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense. See Note 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of total Segment EBITDA to net income. 36 Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021 Wholesale - North America Third Party Revenue The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Wholesale - North America 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 1,026 $ 1,025 10.9 % (1) (10.6) % (3) (0.2) % 0.1 % Other revenue 82 87 (4.4) % (2) 0.1 % (0.2) % (4.5) % Total third party revenue $ 1,108 $ 1,112 9.7 % (9.8) % (0.2) % (0.2) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue increased 10.9% for the three months ended September 30, 2022 compared to the prior year period, primarily driven by passing through input cost inflation. Aftermarket collision parts volumes increased slightly year over year due to reduced pressures on our supply chain and were largely offset by decreases in collision and mechanical parts volumes from our salvage business. (2) Other organic revenue decreased 4.4%, primarily related to (i) a $3 million decrease in revenue from scrap steel related to lower prices and (ii) a $2 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices, partially offset by higher volumes. (3) Acquisition and divestiture revenue was a net decrease of $109 million due to the divestiture of PGW in the second quarter of 2022. See "Divestitures" in Note 2, "Financial Statement Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the divestiture of PGW. Segment EBITDA Segment EBITDA increased $26 million , or 13.5%, in the three months ended September 30, 2022 compared to the prior year period, despite the $13 million negative year over year effect resulting from the divestiture of PGW in the second quarter of 2022. The primary drivers of the increase were higher prices on parts and productivity initiatives helping to offset inflationary pressures related to ocean freight, labor, supplies and fuel. In addition, certain charitable and incentive benefit contributions totaling $15 million in the three months ended September 30, 2021 were not repeated in the three months ended September 30, 2022. The overall increase was partially offset by decreases attributable to precious metals and scrap steel. We estimate that precious metals and scrap steel pricing had an unfavorable effect of $10 million, or 0.8%, on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment: Wholesale - North America Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2021 17.1 % Increase (decrease) due to: Change in gross margin 1.9 % (1) Change in segment operating expenses 0.2 % (2) Change in other income and expenses, net 0.2 % (3) Segment EBITDA for the three months ended September 30, 2022 19.4 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin of 1.9% was primarily driven by (i) productivity and price initiatives to offset inflation on product cost and inbound freight and (ii) a 0.8% mix benefit resulting from the PGW divestiture in the second quarter, partially offset by (iii) an unfavorable impact from a decrease in scrap steel and precious metals pricing. (2) Segment operating expenses as a percentage of revenue decreased 0.2% due to (i) a 0.6% favorable impact from personnel expense due to non-recurring incentive compensation in 2021, (ii) a 0.4% favorable impact from lower charitable contributions, offset by (iii) a 0.4% unfavorable impact from higher professional fees, and (iv) a 0.4% unfavorable impact 37 of other operating expenses in the aggregate. (3) Other income and expenses, net as a percentage of revenue was favorable by 0.2% mainly due to insurance proceeds. Europe Third Party Revenue The following table summarizes the changes in third party revenue by category in our Europe segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Europe 2022 2021 Organic Acquisition and Divestiture Foreign Exchange (2) Total Change Parts & services revenue $ 1,376 $ 1,520 4.8 % (1) 0.5 % (14.7) % (9.4) % Other revenue 4 5 (11.6) % — % (15.3) % (27.0) % Total third party revenue $ 1,380 $ 1,525 4.7 % 0.5 % (14.7) % (9.5) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended September 30, 2022 increased by 4.8% (5.8% on a per day basis), primarily due to pricing initiatives across all geographies that have been implemented throughout 2022 to offset increased costs resulting from inflationary pressures. The organic revenue growth across most of our European operations was partially offset by 0.4% of an unfavorable effect on certain operations and product lines due to the Ukraine/Russia conflict. (2) Compared to the prior year, exchange rates decreased our revenue growth by $224 million, or 14.7%, primarily due to the stronger U.S. dollar against the euro, pound sterling, and Czech koruna during the third quarter of 2022 relative to the prior year period. Segment EBITDA Segment EBITDA decreased $20 million, or 11.2%, in the three months ended September 30, 2022 compared to the prior year period. Our Europe Segment EBITDA included a negative year over year impact of $26 million rel ated to the translation of local currency results into U.S. dollars at lower exchange rates than those experienced during the three months ended September 30, 2021 . On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $6 million, or 3.6% , co mpared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the three months ended September 30, 2022. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment: Europe Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2021 11.5 % Increase (decrease) due to: Change in gross margin 0.1 % (1) Change in segment operating expenses (0.3) % (2) Segment EBITDA for the three months ended September 30, 2022 11.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin was primarily attributable to favorable impacts of net price increases and margin improvement initiatives undertaken to support profitable revenue growth despite inflationary pressures. (2) The increase in segment operating expenses as a percentage of revenue reflects unfavorable impacts of (i) 0.4% from freight, vehicle, and fuel expenses due to inflationary pressures, (ii) 0.3% from increased personnel costs primarily due to inflationary pressures, partially offset by favorable impacts of (iii) 0.2% from lower professional expenses and (iv) several individually immaterial factors totaling 0.2% in the aggregate. 38 Specialty Third Party Revenue The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Specialty 2022 2021 Organic (1) Acquisition and Divestiture (2) Foreign Exchange Total Change Parts & services revenue $ 452 $ 465 (9.1) % 6.6 % (0.3) % (2.8) % Other revenue — — — % — % — % — % Total third party revenue $ 452 $ 465 (9.1) % 6.6 % (0.3) % (2.8) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended September 30, 2022 decreased by 9.1% due to the strong growth we experienced in the third quarter of 2021, when parts and services organic revenue growth was 13.7%; demand softness from lower new vehicle sales caused by supply chain challenges; and a decrease in drop shipment volumes. (2) Acquisition related growth for the three months ended September 30, 2022 reflected revenue from our acquisitions of two Specialty businesses from the beginning of 2021 through the one-year anniversary of the acquisition dates. Segment EBITDA Segment EBITDA decreased $3 million, or 5.0%, in the three months ended September 30, 2022 compared to the prior year period primarily due to the organic revenue decline and the negative effect of inflation on overhead expenses. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment: Specialty Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2021 11.1 % Increase (decrease) due to: Change in gross margin 0.5 % (1) Change in segment operating expenses (0.8) % (2) Segment EBITDA for the three months ended September 30, 2022 10.8 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin primarily reflects (i) a 1.0% benefit from lower customer rebate accruals and (ii) other individually immaterial factors totaling 0.5%, partially offset by (iii) a 1.0% unfavorable impact from acquisitions. (2) The increase in segment operating expenses as a percentage of revenue primarily reflects unfavorable impacts of (i) 0.8% in personnel costs as a result of wage inflation and lower operating leverage due to the organic parts and services revenue decline, (ii) 0.6% in vehicle and fuel expenses primarily due to higher fuel costs, (iii) 0.4% in fixed facility expenses as a result of lower operating leverage due to the organic parts and services revenue decline and (iv) several individually immaterial factors that had an unfavorable impact of 0.5% in the aggregate, partially offset by favorable impacts of (v) 0.8% from operating expense synergies and leverage generated from the 2021 acquisitions, primarily Seawide, and (vi) 0.7% related to lower incentive compensation. 39 Self Service Third Party Revenue The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Self Service 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 55 $ 51 7.2 % (1) — % — % 7.2 % Other revenue 109 144 (24.8) % (2) — % — % (24.8) % Total third party revenue $ 164 $ 195 (16.3) % — % — % (16.3) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue increased 7.2% for the three months ended September 30, 2022 compared to the prior year period, primarily driven by pricing initiatives to mitigate significant increases in input costs resulting from greater competition for vehicles. (2) The 24.8%, or $35 million, year over year decrease in other revenue is related to (i) a $23 million decrease in revenue from scrap steel related to lower volumes and lower prices, (ii) a $13 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices and lower volumes, partially offset by (iii) a $1 million increase in revenue from other scrap (including aluminum) and cores. Segment EBITDA Segment EBITDA decreased $32 million, or 88.0%, in the three months ended September 30, 2022 compared to the prior year period. The decrease includes a $5 million decline due to lower precious metals prices relative to the comparable prior year period. In addition, net sequential changes in scrap steel prices in our self service operations had a $16 million unfavorable impact on Segment EBITDA during the three months ended September 30, 2022, compared to a $4 million favorable impact during the three months ended September 30, 2021. This unfavorable impact for the three months ended September 30, 2022 resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle. We estimate that precious metals and scrap steel pricing had an unfavorable effect of 12.4% on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment: Self Service Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2021 18.4 % Increase (decrease) due to: Change in gross margin (9.5) % (1) Change in segment operating expenses (6.3) % (2) Segment EBITDA for the three months ended September 30, 2022 2.6 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in gross margin reflects (i) an unfavorable impact of 9.9% resulting from movements in metals prices partially offset by (ii) a favorable impact due to increased prices for parts and services. (2) The increase in segment operating expense as a percentage of revenue reflects (i) a negative leverage effect of 5.4% from decreases in metals revenue and (ii) other individually immaterial factors representing a 0.9% unfavorable impact in the aggregate. 40 Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021 Wholesale - North America Third Party Revenue The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Wholesale - North America 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 3,182 $ 3,018 11.7 % (1) (6.1) % (3) (0.1) % 5.4 % Other revenue 271 263 3.2 % (2) 0.6 % (0.1) % 3.6 % Total third party revenue $ 3,453 $ 3,281 11.0 % (5.6) % (0.1) % 5.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue increased 11.7% (11.2% on a per day basis) for the nine months ended September 30, 2022 compared to the prior year period, primarily driven by passing through input cost inflation. Aftermarket collision parts volumes decreased in the first nine months of the year due to ocean freight delays and supply chain challenges but showed year over year improvement in the third quarter. Increased volumes of collision parts from our salvage business partially offset the year to date aftermarket volume decline. (2) Organic other revenue increased 3.2%, or $8 million, related to (i) a $19 million increase in revenue from other scrap (e.g., aluminum) and cores due to higher prices as well as higher volumes, and (ii) a $2 million increase in revenue from scrap steel due to higher volumes, partially offset by (iii) a $13 million decrease in revenue from precious metals (platinum, palladium, and rhodium) primarily due to lower prices partially offset by higher volumes. (3) Acquisition and divestiture revenue was a net decrease of $185 million primarily due to the divestiture of PGW in the second quarter of 2022. See "Divestitures" in Note 2, "Financial Statement Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the divestiture of PGW. Segment EBITDA Segment EBITDA increased $45 million, or 7.4%, for the nine months ended September 30, 2022 compared to the prior year, despite the $12 million negative year over year effect related to the PGW business, which we divested in the second quarter of 2022. The increase is attributable to higher prices on parts and productivity initiatives helping to offset inflationary pressures related to ocean freight, labor, supplies and fuel. The increase was partially offset by decreases attributable to precious metals and scrap steel. We estimate that precious metals and scrap steel pricing had an unfavorable effect of $32 million, or 0.9%, on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North America segment: Wholesale - North America Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2021 18.4 % Increase (decrease) due to: Change in gross margin 0.3 % (1) Change in segment operating expenses — % (2) Segment EBITDA for the nine months ended September 30, 2022 18.7 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin of 0.3% was driven by (i) productivity and price initiatives to offset inflation on product cost and inbound freight and (ii) a 0.5% mix benefit resulting from the PGW divestiture in the second quarter, partially offset by (iii) an unfavorable impact from a decrease in scrap steel and precious metals pricing. (2) The segment operating expenses as a percentage of revenue were flat which reflects favorable impacts of (i) 0.2% related to personnel costs due to lower incentive compensation and (ii) 0.2% from lower charitable contributions, partially offset by (iii) a 0.3% unfavorable impact related to professional fees and (iv) other individually immaterial factors representing a 0.1% unfavorable impact in the aggregate. 41 Europe Third Party Revenue The following table summarizes the changes in third party revenue by category in our Europe segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Europe 2022 2021 Organic Acquisition and Divestiture Foreign Exchange (2) Total Change Parts & services revenue $ 4,327 $ 4,545 5.3 % (1) 0.4 % (10.5) % (4.8) % Other revenue 18 20 (1.1) % — % (10.5) % (11.7) % Total third party revenue $ 4,345 $ 4,565 5.2 % 0.4 % (10.5) % (4.8) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the nine months ended September 30, 2022 increased by 5.3% (5.5% on a per day basis), primarily due to pricing initiatives across all geographies that have been implemented throughout 2022 to offset increased costs resulting from inflationary pressures. The organic revenue growth across most of our European operations was partially offset by 0.4% of a negative effect on certain operations and product lines due to the Ukraine/Russia conflict. (2) Compared to the prior year, exchange rates decreased our revenue growth by $478 million, or 10.5%, primarily due to the stronger U.S. dollar against the euro, pound sterling and Czech koruna for the nine months ended September 30, 2022 relative to the prior year period. Segment EBITDA Segment EBITDA decreased $38 million, or 7.8%, for the nine months ended September 30, 2022 compared to the prior year period. Our Europe Segment EBITDA included a negative year over year impact of $52 million related to the translation of local currency results into U.S. dollars at lower exchange rates than those experienced during the nine months ended September 30, 2021. On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $14 million, or 3.0%, com pared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the nine months ended September 30, 2022. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment: Europe Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2021 10.6 % Increase (decrease) due to: Change in gross margin 0.1 % (1) Change in segment operating expenses (0.3) % (2) Change in other expense, net (0.1) % Segment EBITDA for the nine months ended September 30, 2022 10.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin was primarily attributable to favorable impacts of net price increases and margin improvement initiatives undertaken to support profitable revenue growth despite inflationary pressures. (2) The increase in segment operating expenses as a percentage of revenue primarily reflects unfavorable impacts of (i) 0.3% from increased personnel costs primarily due to inflationary pressures, (ii) 0.3% from increased freight, vehicle, and fuel expenses due to inflationary pressures and supply chain constraints, and (iii) other individually immaterial factors representing a 0.3% favorable impact in the aggregate. 42 Specialty Third Party Revenue The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Specialty 2022 2021 Organic (1) Acquisition and Divestiture (2) Foreign Exchange Total Change Parts & services revenue $ 1,424 $ 1,454 (9.7) % 7.9 % (0.3) % (2.1) % Other revenue — — — % — % — % — % Total third party revenue $ 1,424 $ 1,454 (9.7) % 7.9 % (0.3) % (2.1) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the nine months ended September 30, 2022, decreased by 9.7% (10.2% on a per day basis) due to strong comparative growth for the nine months ended September 30, 2021, when parts and services organic revenue growth was 24.6%; demand softness from lower new vehicle sales caused by supply chain challenges; and a decrease in drop shipment volumes. (2) Acquisition related growth for the nine months ended September 30, 2022 reflected revenue from our acquisitions of three Specialty businesses from the beginning of 2021 through the one-year anniversary of the acquisition dates. Segment EBITDA Segment EBITDA decreased $17 million, or 8.5%, for the nine months ended September 30, 2022 compared to the prior year period primarily due to the organic revenue decline and the negative effect of inflation on overhead expenses. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment: Specialty Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2021 13.2 % Increase (decrease) due to: Change in gross margin 0.5 % (1) Change in segment operating expenses (1.3) % (2) Segment EBITDA for the nine months ended September 30, 2022 12.4 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin primarily reflects lower discounting to recover higher input costs and lower customer rebate accruals, partially offset by a 1.0% unfavorable impact from acquisitions. (2) The increase in segment operating expenses as a percentage of revenue primarily reflects unfavorable impacts of (i) 0.8% in personnel costs primarily as a result of wage inflation and lower operating leverage due to the organic parts and services revenue decline, (ii) 0.5% in vehicle and fuel expenses primarily due to higher fuel costs, (iii) 0.3% in fixed facility expenses as a result of lower operating leverage due to the organic parts and services revenue decline, and (iv) several individually immaterial factors that had an unfavorable impact of 0.4% in the aggregate, partially offset by (v) a favorable impact of 0.7% from operating expense synergies and leverage generated from the 2021 acquisitions. 43 Self Service Third Party Revenue The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Self Service 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 172 $ 154 11.6 % (1) — % — % 11.6 % Other revenue 399 449 (11.3) % (2) — % — % (11.3) % Total third party revenue $ 571 $ 603 (5.4) % — % — % (5.4) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue increased 11.6% for the nine months ended September 30, 2022 compared to the prior year period, primarily driven by pricing initiatives to mitigate significant increases in input costs resulting from greater competition for vehicles. (2) The 11.3%, or $50 million, year over year decrease in other revenue is related to (i) a $51 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to both lower prices and volumes, and (ii) a $13 million decrease in revenue from scrap steel related to lower volumes partially offset by higher prices, partially offset by (iii) a $14 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher prices. Segment EBITDA Segment EBITDA decreased $72 million, or 48.8%, in the nine months ended September 30, 2022 compared to the prior year period. The decrease is primarily attributable to unfavorable movements in commodity prices compared to the prior year. Decreases in precious metals prices contributed an estimated $32 million decline in Segment EBITDA relative to the nine months ended September 30, 2021. In addition, net sequential changes in scrap steel prices in our self service operations had an $11 million unfavorable impact on Segment EBITDA during the nine months ended September 30, 2022, compared to a $25 million favorable impact during the nine months ended September 30, 2021. The unfavorable impacts for the nine months ended September 30, 2022 resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle. We estimate that precious metals and scrap steel pricing had an unfavorable effect of 10.4% on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment: Self Service Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2021 24.6 % Increase (decrease) due to: Change in gross margin (8.2) % (1) Change in segment operating expenses (3.1) % (2) Segment EBITDA for the nine months ended September 30, 2022 13.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in gross margin reflects (i) an unfavorable impact of 9.2% resulting from movements in metals prices partially offset by (ii) a favorable impact due to increased prices for parts and services. (2) The increase in segment operating expense as a percentage of revenue reflects (i) a negative leverage effect of 2.7% from decreases in metals revenue and (ii) other individually immaterial factors representing a 0.4% unfavorable impact in the aggregate. 44 Liquidity and Capital Resources The following table summarizes liquidity data as of the dates indicated (in millions): September 30, 2022 December 31, 2021 Cash and cash equivalents $ 269 $ 274 Total debt (1) 2,447 2,824 Current maturities (2) 50 35 Capacity under credit facilities (3) 3,150 3,150 Availability under credit facilities (3) 1,460 1,194 Total liquidity (cash and cash equivalents plus availability under credit facilities) 1,729 1,468 (1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $7 million and $12 million as of September 30, 2022 and December 31, 2021, respectively). (2) Debt amounts reflect the gross values to be repaid in the next 12 months (excluding debt issuance costs of immaterial amounts as of September 30, 2022 and December 31, 2021). (3) Capacity under credit facilities includes our revolving credit facilities and availability under credit facilities is reduced by our outstanding letters of credit. We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions. Our primary sources of liquidity are cash flows from operations and our credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt, paying dividends or repurchasing our common stock. As we have pursued acquisitions as part of our historical growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our acq uisitions, we have accessed various forms of debt financing, including revolving credit facilities and senior notes. As of September 30, 2022, we had debt outstanding and additional available sources of financing as follows: • Senior secured credit facilities maturing in January 2024, composed of $3,150 million in revolving credit ($1,621 million outstanding at September 30, 2022), bearing interest at variable rates, with availability reduced by $69 million of amounts outstanding under letters of credit • Euro Notes (2024) totaling $490 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate • Euro Notes (2028) totaling $245 million (€250 million) maturing in April 2028 and bearing interest at a 4.125% fixed rate As of September 30, 2022, we had approximately $1,460 million available under our credit facilities. Combined with $269 million of cash and cash equivalents at September 30, 2022, we had approximately $1,729 million i n available liquidity, an increase of $261 million from our available liquidity as of December 31, 2021. We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current operating and capital requirements. Our 2022 plan includes spending to rebuild inventory levels, support growth driven capital projects, complete tuck-in acquisitions, and return stockholder value through the payment of dividends and repurchasing shares of our common stock. A summary of the dividend activity for our common stock for the nine months ended September 30, 2022 is as follows: Dividend Amount Declaration Date Record Date Payment Date $0.25 February 15, 2022 March 3, 2022 March 24, 2022 $0.25 April 26, 2022 May 19, 2022 June 2, 2022 $0.25 July 26, 2022 August 11, 2022 September 1, 2022 On October 25, 2022, our Board of Directors declared a quarterly cash dividend of $0.275 per share of common stock, payable on December 1, 2022, to stockholders of record at the close of business on November 17, 2022. We believe that our future cash flow generation will permit us to continue paying dividends in future periods; however, the timing, amount and frequency of such future dividends will be subject to approval by our Board of Directors, and based on considerations of capital availability, and various other factors, many of which are outside of our control. 45 With $1,729 million of total liquidity as of September 30, 2022 and $50 million of current maturities, we have access to funds to meet our near term commitments. We have a surplus of current assets over current liabilities, which further reduces the risk of short-term cash shortfalls. Our total liquidity inclu des availability under our senior secured credit facility, which includes the two financial maintenance covenants presented below (our required debt covenants and our actual ratios with respect to those covenants as calculated per the credit agreement as of September 30, 2022): Covenant Level Ratio Achieved as of September 30, 2022 Maximum net leverage ratio 4.00 : 1.00 1.3 Minimum interest coverage ratio 3.00 : 1.00 31.1 The terms net leverage ratio and minimum interest coverage ratio used in the credit agreement are specifically calculated per the credit agreement and differ in specified ways from comparable US GAAP or common usage terms. Our credit agreement contains customary covenants that impose limitations and conditions on our ability to enter into certain transactions. The credit agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio. During the second quarter of 2022, two ratings agencies, S&P Global Ratings and Moody's Investors Service, upgraded our issuer credit rating to an investment grade rating of 'BBB-' and 'Baa3', respectively, and rated our outlook as stable. With the assignment of an investment grade rating, we are no longer required to comply with certain restrictive covenants under the credit agreement. We were in compliance with all applicable covenants under our credit agreement as of September 30, 2022. The indentures relating to our Euro Notes d o not include financial maintenance covenants, and the indentures will not restrict our ability to draw funds under the credit facility. The indentures do not prohibit amendments to the financial covenants under the credit facility as needed. While we believe that we have adequate capacity under our existing credit facilities, from time to time we may need to raise additional funds through public or private financing, strategic relationships or modification of our existing credit facilities. There can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs. Our failure to raise capital if and when needed could have a material adverse impact on our business, operating results, and financial condition. Our current credit facility matures in January 2024, and we expect to refinance the facility prior to that date. We utilize a supply chain financing arrangement, which allows us to improve our operating cash flows by extending payment terms. Financial institutions participate in the supply chain financing initiative on an uncommitted basis and can cease purchasing receivables from our suppliers at any time. The initiative is at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. In the future, if the financial institutions do not continue to purchase receivables from our suppliers under the initiative, the participating vendors may need to renegotiate their payment terms with us, which in turn could cause our borrowings under our revolving credit facility to increase. All outstanding payments owed under the initiative to the participating financial institutions are recorded within Accounts payable in our Unaudited Condensed Consolidated Balance Sheets. We have held interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings and currency swaps that contain an interest rate swap component and a foreign currency forward contract component. As of September 30, 2022, we did not have any of these contracts outstanding. The weighted average interest rate on borrowings outstanding under our credit agreement was 3.0% at September 30, 2022. Including our senior notes, our overall weighted average interest rate on borrowings was 3.3% at September 30, 2022. Our borrowings in U.S. dollars continue to accrue interest at LIBOR until a replacement rate is specified, which is expected to occur prior to June 2023. We do not expect the change in benchmark rates will have a material impact on our results of operations, financial position or liquidity. See Note 8, "Long-Term Obligations" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our borrowings and related interest. We had outstanding credit agreement borrowin gs of $1,621 million and $1,887 million at September 30, 2022 and December 31, 2021, respectively. Of these amounts, t here wer e no current maturities at September 30, 2022 or December 31, 2021. 46 The scheduled maturities of long-term obligations outstanding at September 30, 2022 are as follows (in millions): Three months ending December 31, 2022 (1) $ 37 Years ending December 31: 2023 20 2024 2,119 2025 9 2026 3 Thereafter 259 Total debt (2) $ 2,447 (1) Long-term obligations maturing by December 31, 2022 include $34 million of short-term debt that may be extended beyond the current year ending December 31, 2022. (2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $7 million as of September 30, 2022). As of September 30, 2022, the Company had cash and cash equivalents of $269 million, of which $210 million was held by foreign subsidiaries. In general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries. We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S. without repatriating our foreign earnings. We may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity objectives. Distributions of dividends from our foreign subsidiaries, if any, would be generally exempt from further U.S. taxation, either as a result of the 100% participation exemption under the Tax Cuts and Jobs Act, or due to the previous taxation of foreign earnings under the transition tax and the Global Intangible Low-Taxed Income regime. The procurement of inventory is the largest operating use of our funds. We normally pay for aftermarket product purchases on standard payment terms or at the time of shipment, depending on the manufacturer and the negotiated payment terms. We normally pay for salvage vehicles acquired at salvage auctions and under direct procurement arrangements at the time that we take possession of the vehicles. The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the three and nine months ended September 30, 2022 and 2021 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change 2022 2021 Change Wholesale - North America $ 288 $ 276 $ 12 $ 907 $ 798 $ 109 (1) Europe 829 962 (133) 2,708 2,861 (153) (2) Specialty 322 352 (30) 1,031 1,105 (74) (3) Total $ 1,439 $ 1,590 $ (151) $ 4,646 $ 4,764 $ (118) (1) Inventory purchases across the Wholesale - North America segment increased in the nine months ended September 30, 2022 compared to the prior year period primarily due to required restocking to keep up with the demand for our products. (2) The decrease in inventory purchases in our Europe segment included a decrease of $307 million attributable to the decrease in the value of the euro, and to a lesser extent, the pound sterling in the nine months ended September 30, 2022 compared to the prior year period. On a constant currency basis, inventory purchases increased compared to the prior year period, due to required restocking to keep up with the demand for our products as well as purchases to improve availability for customers in certain regions. (3) The decrease in inventory purchases in the Specialty segment compared to the prior year period was primarily due to matching inventory levels with demand. This was partially offset by inventory purchases made by companies acquired in the second half of 2021. 47 The following table sets forth a summary of our global wholesale salvage and self service procurement for the three and nine months ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 % Change 2022 2021 % Change Wholesale - North America salvage vehicles 63 61 3.3 % 188 174 8.0 % Europe wholesale salvage vehicles 7 6 16.7 % 23 19 21.1 % Self Service salvage vehicles 122 137 (10.9) % 396 414 (4.3) % Wholesale - North America salvage purchases in 2022 increased relative to the prior year due to limitations in the prior year on vehicles at auctions. Self Service salvage vehicle purchases in 2022 decreased due to increased market competition and decreased availability of vehicles. The following table summarizes the components of the year over year changes in cash provided by operating activities (in millions): Operating Cash Net cash provided by operating activities for the nine months ended September 30, 2021 $ 1,362 Increase (decrease) due to: Working capital accounts: (1) Receivables, net 16 Inventories (296) Accounts payable — Other operating activities (72) (2) Net cash provided by operating activities for the nine months ended September 30, 2022 $ 1,010 (1) Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period. • Receivables, net was a $16 million benefit to cash provided by operating activities year over year. This was driven by a $43 million inflow for our Europe segment and a $7 million inflow for our Specialty segment, both due to lesser overall cash outflows in 2022 as a result of collections and timing of sales. This was partially offset by a $34 million outflow for our Wholesale - North America segment primarily due to an increase in organic revenue in 2022 compared to 2021, which translated to higher receivables balances in 2022. • Inventories represented $296 million in incremental cash outflows in the first nine months of 2022 compared to the same period of 2021. The change is primarily attributable to increased inventory purchases in the current year as a result of high input costs and volume increases due to strong demand and strategic inventory purchases to curb the impacts of supply chain constraints. • Accounts payable produced a similar cash inflow in the first nine months of 2022 compared to the same period of 2021 on a consolidated basis. This was primarily attributable to Wholesale - North America which contributed a $234 million cash inflow driven by higher accounts payable balances and timing of payments partially offset by a lower cash inflow in our Europe segment of $189 million and a cash outflow of $45 million from our Specialty segment. (2) Primarily reflects the aggregate effect of lower cash operating income and higher incentive compensation payments partially offset by lower cash paid for taxes. Net cash provided by investing activities totaled $244 million and net cash used in investing activities totaled $201 million during the nine months ended September 30, 2022 and 2021, respectively. Proceeds from the disposal of businesses (primarily PGW) were $399 million during the nine months ended September 30, 2022. Property, plant and equipment purchases were $148 million in the nine months ended September 30, 2022 compared to $133 million in the prior year period. We invested $67 million of cash, net of cash acquired, in business acquisitions during the nine months ended September 30, 2021. 48 The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in millions): Nine Months Ended September 30, 2022 2021 Net cash provided by operating activities $ 1,010 $ 1,362 Less: purchases of property, plant and equipment 148 133 Free cash flow $ 862 $ 1,229 Net cash used in financing activities increased by $151 million for the nine months ended September 30, 2022 compared to the same period in 2021 due primarily to increases in repurchases of common stock of $297 million and payment of dividends in 2022 of $210 million (no dividends were paid in the nine months ended September 30, 2021) partially offset by a decrease in settlement of our cross currency swap and other foreign exchange forward contracts in 2021 of $89 million and lower net repayments on our borrowings of $251 million. Please refer to Note 2, "Financial Statement Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information on repurchases of common stock. We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts.