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Item 7. Management’s Discussion and Analysis

2023-02-23 compared with 2022-02-25 · 424 added, 257 removed, 327 unchanged (68% of the section changed)

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The following discussion of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Discussion of 2019 items and the year-over-year comparison of changes in our financial condition and the results of operations as of and for the years ended December 31, 2020 and December 31, 2019 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 26, 2021.

Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "LKQ" and similar terms refer to LKQ Corporation and its subsidiaries.

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.

We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty vehicle aftermarket 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:

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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.

We are also a leading provider of alternative vehicle replacement and maintenance products in Germany, the U.K., 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.

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Wholesale - North America;

Specialty and Self Service.

We aggregate our Wholesale – North America and Self Service operating segments into one reportable segment, North America, resulting in three reportable segments:

North America, Europe and 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.

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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.

In the last few years, we have shifted our focus from larger transactions to acquisitions that target high synergies and/or add critical capabilities.

Additionally, we have made investments in various businesses to advance our strategic objectives.

During the years ended December 31, 2021, 2020 and 2019, we acquired various immaterial businesses across our North America, Europe, and Specialty segments.

During the years ended December 31, 2022, 2021, and 2020, we acquired various immaterial businesses across our Wholesale - North America, Europe, and Specialty segments.

Sources of Revenue

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(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 to improve the performance, functionality and appearance of vehicles.

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.

During the year ended December 31, 2021, parts and services revenue represented approximately 93% of our consolidated revenue.

Revenue from other sources includes scrap and other metals (including precious metals - platinum, palladium and rhodium) sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations.

During the year ended December 31, 2022, parts and services revenue represented approximately

93% of our consolidated revenue.

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.

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Sensitivity of Estimate to Change

The balance of our goodwill was $4,319 million and $4,540 million as of December 31, 2022 and December 31, 2021, respectively.

We have not made material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years.

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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:

Under this multi-year program, we have recognized and expect to continue 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 5, "Restructuring and Acquisition Related Expenses,” to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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).

See Note 14, "Restructuring and Transaction Related Expenses” to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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.

Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses, Restructuring and acquisition related expenses and Purchases of property, plant and equipment in our Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

Beginning in the second half of March 2020, management delayed certain projects under the 1 LKQ Europe program to reduce expenses and preserve capital in response to the COVID-19 pandemic.

Based on our expectations in the second quarter of 2020 that the impacts on our business from COVID-19 had stabilized, we restarted the program in July 2020 with substantially the same initiatives and projects as prior to the pandemic.

While certain projects were delayed as a result of the COVID-19 pandemic, such as our procurement initiatives and the new headquarters in Switzerland, we also accelerated certain projects, such as the integration of previously acquired networks and sharing resources across LKQ Europe.

We have continued the project on schedule after the restart.

We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by 2024.

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 Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K .

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 year ended December 31, 2022, we incurred $34 million in costs across all three categories noted above.

We expect that costs of the program, reflecting all three categories noted above, will range between $100 million and $130 million between 2022 and the projected program completion date in 2024.

We expect that costs of the program, reflecting all three categories noted above, will range between $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 the improved trade working capital initiatives across our Europe segment.

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 our business in 2022, and are expected to continue to impact our business in 2023.

Governmental sanctions imposed on Russia have restricted our ability to sell to and collect from customers based in Russia and Belarus, 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.

We currently do not expect the conflict to have a material impact on our ongoing results of operations or cash flows.

Our operations in Ukraine represent approximately les s than 1% of b oth our total annual revenue and total annual operating profit for fiscal year 2022 and comprised approxi mately $60 million of total assets as of December 31, 2022.

In addition, LKQ r evenue from customers in Russia and Belarus represented less than 0.3% of our total revenue in 2021 .

As future developments in the conflict are difficult to predict and outside of our control, it is possible that the estimates underlying our financials may change significantly in future periods.

COVID-19 Impact on our Operations

In late February 2020, the Italian government began placing restrictions on activity as a result of the COVID-19 outbreak.

Sales volumes fell as fewer cars were on the road and less maintenance activity was performed.

While our Italian operation is an important part of our European business, it represented approximately 10% of the segment’s revenue in 2019, and thus the disruption did not have a material impact on the Company.

By mid-March, the COVID-19 impact began spreading across the rest of the geographies where we operate at a very rapid pace.

Governments adopted aggressive restrictions on the operation of non-essential businesses and personal movement, which reduced miles driven and collisions.

While our businesses were deemed essential in most jurisdictions in which we operate, the change in behavior driven by the COVID-19 restrictions negatively impacted our sales volume.

Our organic parts and services revenue declined by 16.8%, 4.5% and 5.2% in the second, third, and fourth quarters of 2020, respectively, relative to the comparable prior year periods.

We showed improvement in the third quarter of 2020 as governments gradually lifted restrictions for non-essential businesses and personal movement;

however, in the fourth quarter of 2020 revenue declined as certain jurisdictions put restrictions back into place.

As anticipated, April 2020 experienced the most negative revenue impact, with organic parts and services revenue (on a per day basis) down 30.3% compared to the prior year period.

As movement restrictions lessened in May and June of 2020, we experienced organic parts and services revenue declines (on a per day basis) of 13.2% and 7.3%, respectively, compared to the prior year periods.

However, the pace of improvement flattened into the third quarter of 2020 as the increasing level of COVID-19 cases, especially in the United States, slowed the recovery.

During the third quarter of 2020, organic parts and services revenue declined by 4.5% compared to the prior year period, a small improvement from the June 2020 decline of 7.3% (on a per day

During the fourth quarter of 2020, organic parts and services revenue declined by 6.1% (on a per day basis) and gradually worsened during the quarter with a decline of 7.2% (on a per day basis) in December.

During the first quarter of 2021, organic parts and services revenue increased by 2.2% (on a per day basis) despite the continued COVID-19 impact on economic activity in the U.S.

During the second quarter of 2021, organic parts and services revenue increased by 21.1% (on a per day basis) reflecting the low prior year comparable figure owing to COVID-19 and the gradual recovery in mobility.

During the third quarter of 2021, the recovery continued with organic parts and services revenue increasing by 4.0%.

During the fourth quarter of 2021, organic parts and services revenue increased by 7.3% (on a per day basis).

Since the start of the pandemic, our revenue has been impacted to varying degrees depending on the segment, with North America experiencing the most negative impact due to the decrease in miles driven and collision activity.

Europe was also negatively affected by mobility restrictions and reduced miles driven but has experienced a quicker recovery than North America and reached its 2019 revenue level in the fourth quarter of 2021.

After seeing year over year decreases early in the pandemic, Specialty revenue has grown due to favorable trends in recreational vehicle activity and online sales.

We expect consolidated parts and services revenue to grow organically in future periods, but the level of the year over year increase in revenue will depend on, among other factors, the extent of COVID-19 related restrictions across the geographies in which we operate as strategies to address the virus evolve, the pace of recovery in miles driven and access to inventory, which has been constrained with supply chain issues.

Our top priority is the health and safety of our employees, customers and the communities in which we operate.

We are using all reasonable efforts to follow governmental instructions and safety guidelines with respect to the operations of our facilities.

We implemented protocols across our business units designed to help ensure the health and safety of our employees, customers and communities including, but not limited to:

restricting access to, and enhancing cleaning and disinfecting protocols at, our facilities;

encouraging vaccination of our employees;

use of personal protective equipment;

adhering to social distancing guidelines;

instituting remote work arrangements for many of our employees;

and restricting travel.

We are monitoring developments related to variant status, vaccination levels and governmental standards and have adjusted our practices where appropriate to comply with the latest guidance.

Recognizing the demand changes in the first quarter of 2020, we took action in all of our business units to reduce our cost structure.

These actions included, but were not limited to, employee furloughs and reductions in force, decreases in hours and overtime, lowering compensation for salaried employees, a hiring freeze, elimination of temporary labor, route consolidation, deferral of projects, and temporary branch closures.

In the second quarter of 2020, these cost actions contributed to a reduction of approximately 18% in quarterly selling, general and administrative expenses compared to our first quarter 2020 run rate.

Since then, we have been able to sustain a portion of these cost benefits.

As revenue has increased, some of the costs that were reduced as a result of COVID-19 remained at a lower level;

the management team has implemented productivity initiatives to create lower cost structures going forward which has contributed to profitability reported in 2020 and 2021.

Inflationary pressures around wages and freight experienced in 2021 drove expenses higher, which partially offset some of the prior cost savings initiatives.

We pursued certain financial assistance and relief programs that were available to us from governments in Europe and Canada, primarily in the form of grants to offset personnel expenses.

During the year ended December 31, 2021, we qualified for $16 million of assistance.

We received $52 million of government assistance in 2020, with the largest portion coming in the second quarter.

We currently do not anticipate qualifying for significant additional assistance in 2022.

We also emphasized the preservation of capital in 2020 with a deferral of growth driven capital projects, reductions in inventory orders, more active monitoring of customer receivables and terms, income and value added tax payment deferrals (the majority of which were paid during the third quarter of 2020), and suspension of our share buyback program (which was reinstated during the fourth quarter of 2020).

This focus was successful as we improved our liquidity position at December 31, 2020 by approximately $1,000 million relative to March 31, 2020 while managing through the disruption caused by the pandemic.

Beginning in late 2020 and continuing in 2021, we returned to our stated capital allocation strategy with an emphasis on internal investments in capital expenditures and inventory, tuck-in acquisitions and share repurchases while also issuing the Company's first dividend in the fourth quarter of 2021.

In each quarter of 2020, we prepared forecasts of future revenues, profits and cash flows to use in multiple analyses, including the interim goodwill impairment test, other impairment tests of long-lived assets, assessments of the recoverability of inventory, determination of customer and supplier rebate balances, calculation of the annual effective tax rate and evaluations of the realizability of deferred tax assets.

Actual results showed an improving trend, with profitability in the second, third and fourth quarters all exceeding our prior forecast prepared in the first quarter of 2020.

We continued to assess COVID-19 developments and the potential impacts on our business in 2021, and will continue to do so in 2022 and update the applicable analyses as necessary.

As the economic impact of the pandemic is dependent on variables that are difficult to project and in many cases are outside of our control, it is possible that the estimates underlying our analyses may change materially in future periods.

This is particularly the case because it appears that the prevalence of the virus outbreak fluctuates depending on various factors, including the development of variants and the level of economic and social activity and vaccination status in a region.

See the Results of Operations and Liquidity sections for further detail on our year over year trends.

COVID-19 impacted our operations beginning in February 2020.

For additional information on the effects, refer to the discussion in our segment results of operations in Item 7 of this Annual Report on Form 10-K.

Key Performance Indicators

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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 prior period 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 - Refer to Note 15, "Segment and Geographic Information,” to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of the calculation of Segment EBITDA.

• Segment EBITDA - See Note 24, "Segment and Geographic Information" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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.

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, make strategic acquisitions, repurchase stock, and pay dividends.

These three key performance indicators are used as targets in determining incentive compensation at various levels of the organization, including senior management.

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Year Ended December 31,

2022 2021 2020

Revenue 100.0 % 100.0 % 100.0 %

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Selling, general and administrative expenses 27.7 % 27.3 % 28.1 %

Restructuring and acquisition related expenses 0.2 % 0.6 %

Loss on disposal of businesses and impairment of net assets held for sale 0.0 % 0.0 %

Restructuring and transaction related expenses 0.2 % 0.2 % 0.6 %

(Gain) on disposal of businesses and impairment of net assets held for sale

(1.2) % — % — %

Depreciation and amortization 1.8 % 2.0 % 2.3 %

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Income from continuing operations 8.9 % 8.3 % 5.5 %

Net income (loss) from discontinued operations 0.0 % (0.0) %

Net income from discontinued operations — % — % — %

Net income 9.0 % 8.3 % 5.5 %

net income attributable to continuing noncontrolling interest — % — % — %

net income attributable to discontinued noncontrolling interest 0.0 % 0.0 %

Net income attributable to LKQ stockholders 9.0 % 8.3 % 5.5 %

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Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table summarizes the changes in revenue by category (in thousands):

The following table summarizes the changes in revenue by category (in millions):

Year Ended December 31, Percentage Change in Revenue

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In the table above, the sum of the individual percentages may not equal the total due to rounding.

The growth in parts and service s revenue of 10.7% represented increases in segment revenue of 23.8% in Specialty, 10.3% in Europe, and 6.4% in North America.

Organic parts and se rvices revenue growth was 7.9%, w hich in cluded a 0.4% negative effect from one fewer selling day for the year ended December 31, 2021 , resulting in per day organic gro wth of 8.3% as the current year effect of the pandemic was less severe than the prior year.

The increase in other revenue of 42.5% was primarily driven by a $281 million o rganic increase, largely attributable to our North America segment.

The decline in parts and services revenue of 1.7% represented decreases in segment revenue of 5.3% in Europe and 4.1% in Specialty, partially offset by increases of 9.8% in Self Service and 4.2% in Wholesale - North America.

This overall decrease was driven by a 5.5% decrease due to fluctuations in foreign exchange rates and a 1.2% net reduction from divestitures.

This was partially offset by organic parts and services revenue growth of 5.0%, which included a 0.2% negative effect from one fewer selling day for the year ended December 31, 2022, and overall per day organic growth of 5.2%.

The decrease in other revenue of 9.2% was primarily driven by a decrease in organic revenue of $71 million, attributable to a $78 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 for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Cost of Goods Sold

Cost of goods sold decreased to 59.2% of revenue for the year ended December 31, 2022 from 59.3% of revenue for the year ended December 31, 2021.

Cost of goods sold reflects a decrease of 0.2% related to improved gross margin in our Wholesale - North America segment and 0.2% attributable to mix as a greater portion of sales are coming from Wholesale - North America, partially offset by an increase of 0.4% from 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 year ended December 31, 2022 compared to the year ended December 31, 2021.

Selling, General and Administrative Expenses

Our selling, general and administrative ("SG&A") expenses as a percentage of revenue increased to 27.7% for the year ended December 31, 2022 from 27.3% for the year ended December 31, 2021.

The SG&A expense increase primarily reflects impacts of 0.2% related to each of our Self Service and Specialty 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 year ended December 31, 2022 compared to the year ended December 31, 2021.

Restructuring and Transaction Related Expenses

The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions):

Year Ended December 31,

2022 2021 Change

Restructuring expenses $ 15 (1)

Transaction related expenses 5 (3)

Restructuring and transaction related expenses $ 20 $ 20 $ —

(1) Restructuring expenses for the year ended December 31, 2022 primarily consisted of (i) $11 million related to our global restructuring plans and (ii) $3 million related to our acquisition integration plans.

(2) Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $11 million related to our global restructuring plans and (ii) $6 million related to our 1 LKQ Europe plan.

(3) Transaction related expenses for the years ended December 31, 2022 and 2021 primarily related to external costs such as legal, accounting and advisory fees for completed and potential transactions.

See Note 14, "Restructuring and Transaction Related Expenses" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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 year ended December 31, 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 "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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):

Year Ended December 31,

2022 2021 Change

Depreciation $ 142 $ 156 $ (14) (1)

Amortization 95 104 (9) (2)

Depreciation and amortization $ 237 $ 260 $ (23)

(1) The decrease in depreciation expense included $7 million from foreign currency translation primarily related to a decrease in the euro and pound sterling rates for the year ended December 31, 2022 compared to the prior year period and $5 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 $8 million decrease from foreign exchange translation, primarily related to a decrease in the euro exchange rate, (ii) a decrease of $4 million primarily 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 for the year ended December 31, 2022 compared to the prior year period, and (iii) other individually insignificant decreases which in the aggregate had a $2 million impact, partially offset by (iv) a $5 million increase related to software amortization.

Total Other Expense, Net

The following table summarizes Total other expense, net for the periods indicated (in millions):

Year Ended December 31,

2022 2021 Change

Interest expense $ 78 $ 72 $ 6 (1)

Loss on debt extinguishment — 24 (24) (2)

Interest income and other income, net (15) (21) 6 (3)

Total other expense, net $ 63 $ 75 $ (12)

(1) Interest expense increased primarily due to (i) a $10 million increase from higher interest rates in the second half of the year (especially the fourth quarter) and higher outstanding debt for the year ended December 31, 2022 compared to the prior year, partially offset by (ii) a $6 million decrease from foreign exchange translation, primarily related to a decrease in the euro exchange rate.

(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 Interest income and other income, net is primarily comprised of (i) a decrease related to a $16 million change in our fair value adjustments for equity investments not accounted for under the equity method and (ii) a decrease related to a $4 million change in foreign currency gains and losses, partially offset by (iii) a $5 million increase in interest income and (iv) other individually insignificant increases which in the aggregate had a $9 million favorable impact.

Provision for Income Taxes

Our effective income tax rate for the year ended December 31, 2022 was 25.3% , compared to 23.6% for the year ended December 31, 2021.

The base rate for the year ended December 31, 2022 increased when compared to the year ended December 31, 2021 due to shifts in the geographic distribution of pretax income in the current year and an unfavorable impact of 0.6% related to non-deductible expenses.

Additionally, the change in valuation allowances was a 0.4% unfavorable effect on the rate compared to a 0.8% benefit in 2021 primarily from the reversal of valuation allowances on certain interest deduction carryforwards in Europe.

The discrete effect of the PGW divestiture favorably adjusted the base rate in 2022 by 0.9%.

See Note 23, "Income Taxes" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Equity in Earnings of Unconsolidated Subsidiaries

Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2022 decreased by $12 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 for the year ended December 31, 2021, the euro, pound sterling, Czech koruna, and Canadian dollar rates used to translate the 2022 statements of income decreased by 10.9%, 10.1%, 6.9%, and 3.6%, 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 year ended December 31, 2022 resulted in a $0.14 negative effect on diluted earnings per share relative to the prior year period.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

The following table summarizes the changes in revenue by category (in millions):

Year Ended December 31, Percentage Change in Revenue

2021 2020 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 12,141 $ 10,964 7.9 % 0.3 % 2.5 % 10.7 %

Other revenue 948 665 42.3 % — % 0.2 % 42.5 %

Total revenue $ 13,089 $ 11,629 9.8 % 0.3 % 2.4 % 12.6 %

In the table above, the sum of the individual percentages may not equal the total due to rounding.

The growth in parts and service s revenue of 10.7% represented increases in segment revenue of 23.8% in Specialty, 10.3% in Europe, 6.6% in Wholesale - North America and 1.7% in Self Service.

The increase in other revenue of 42.5% was primarily driven by a $281 million o rganic increase, largely attributable to our Self Service and Wholesale - North America segments.

Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Cost of Goods Sold

Cost of goods sold decreased t o 59.3% of revenue for the year ended December 31, 2021 from 60.5% of revenue for the year ended December 31, 2020.

The cost of goods sold decrease reflects impac ts of 0.7%, 0.4% and 0.1% in our Europe, North America and Specialty segments, respectively.

Refer t o 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 year ended December 31, 2021 compared to the year ended December 31, 2020 .

The cost of goods sold decrease reflects impacts of 0.7% and 0.6% in our Europe and Wholesale - North America segments, respectively, partially offset by a 0.2% increase in our Self Service segment.

Selling, General and Administrative Expenses

Our selling, general and administrative ("SG&A") expenses as a percentage of revenue decreased t o 27.3% for the year ended December 31, 2021 fro m 28.1% for the year ended December 31, 2020.

The SG&A expense decrease reflects impacts of 0.4% and 0.3% in our Europe and North America segments, respectively and 0.2% attributable to mix .

Our SG&A expenses as a percentage of revenue decreased t o 27.3% for the year ended December 31, 2021 fro m 28.1% for the year ended December 31, 2020.

The SG&A expense decrease reflects impacts of 0.4% in each of our Europe and Self Service segments and 0.2% attributable to mix.

The mix impact was a result of the increased revenues in our Specialty segment, as the lower SG&A expense percentage for the Specialty segment made up a larger percentage of the consolidated results, which had a favorable effect on SG&A expense as a percentage of revenue.

Restructuring and Acquisition Related Expenses .

The following table summarizes restructuring and acquisition related expenses for the periods indicated (in thousands):

Restructuring and Transaction Related Expenses

The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions):

Year Ended December 31,

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Restructuring expenses $ 17 (1)

Acquisition related expenses 3,010 (3)

Total restructuring and acquisition related expenses $ 20,311 $ 66,163 $ (45,852)

(1) Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $9 million related to our 2020 global restructuring program and (ii) $6 million related to our 1 LKQ Europe program.

(2) Restructuring expenses for the year ended December 31, 2020 primarily consisted of (i) $42 million related to our 2020 global restructuring program, (ii) $9 million related to integration costs from acquisitions, and (iii) $7 million related to our 2019 global restructuring program.

(3) Acquisition related expenses for the year ended December 31, 2021 primarily relate to professional fees related to completed and potential transactions.

(4) Acquisition related expenses for the year ended December 31, 2020 primarily consisted of an $8 million adjustment for the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate.

See Note 5, "Restructuring and Acquisition Related Expenses" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring and integration plans.

Loss on disposal of businesses and impairment of net assets held for sale.

Transaction related expenses 3 (3)

Restructuring and transaction related expenses $ 20 $ 66 $ (46)

(1) Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $11 million related to our global restructuring plans and (ii) $6 million related to our 1 LKQ Europe plan.

(2) Restructuring expenses for the year ended December 31, 2020 primarily consisted of (i) $49 million related to our global restructuring plans and (ii) $9 million related to our acquisition integration plans.

(3) Transaction related expenses for the year ended December 31, 2021 primarily relate to professional fees related to completed and potential transactions.

(4) Transaction related expenses for the year ended December 31, 2020 primarily consisted of an $8 million adjustment for the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate.

(Gain) on Disposal of Businesses and Impairment of Net Assets Held for Sale

For the year ended December 31, 2021 , we recorded immaterial impairment charges on net assets held for sale, compared to $3 million of net impairment charges on net assets held for sale for the year ended December 31, 2020 primarily attributable to our Europe segment.

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Depreciation and Amortization

The following table summarizes depreciation and amortization for the periods indicated (in thousands):

The following table summarizes depreciation and amortization for the periods indicated (in millions):

Year Ended December 31,

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Amortization 104 119 (15) (2)

Total depreciation and amortization $ 259,992 $ 272,292 $ (12,300)

Depreciation and amortization $ 260 $ 272 $ (12)

(1) The increase in depreciation expense primarily reflected (i) $3 million from foreign currency translation primarily related to an increase in the euro and pound sterling exchange rates.

(2) The decrease in amortization expense primarily reflected (i) a decrease of $16 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 for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $3 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate for the year ended December 31, 2021 compared to the prior year period.

Other Expense, Net.

The following table summarizes the components of the change in other expense, net (in thousands):

Other Expense, Net

Balance for the year ended December 31, 2020 $ 100,582

(Decrease) increase due to:

Total Other Expense, Net

The following table summarizes the components of the change in Total other expense, net (in millions):

Year Ended December 31,

2021 2020 Change

Interest expense $ 72 $ 104 $ (32) (1)

Loss (gain) on debt extinguishment 10,813 (2)

Loss on debt extinguishment 24 13 11 (2)

Interest income and other income, net (21) (16) (5) (3)

Net decrease (25,340)

Balance for the year ended December 31, 2021 $ 75,242

Total other expense, net $ 75 $ 101 $ (26)

(1) The lower interest expense is primarily related to (i) a $32 million decrease resulting from lower outstanding debt and lower interest rates for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $2 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate.

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Notes (2023) in January 2020.

(3) The favorable variance in Interest income and other income, net primarily related to (i) $11 million of fair value adjustments in 2021 for appreciation in our equity investments not accounted for under the equity method, (ii) $6 million in pension settlement losses in the prior year related to our primary defined benefit plan in the U.S.

Refer to " Euro Notes (2026/2028)" and " U.S.

Notes (2023)" in Note 18, "Long-Term Obligations " to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the redemption of the Euro Notes (2026) and U.S.

Notes (2023).

(3) The increase in Interest income and other income, net primarily related to (i) $11 million of fair value adjustments in 2021 for appreciation in our equity investments not accounted for under the equity method, (ii) $6 million in pension settlement losses in the prior year related to our primary defined benefit plan in the U.S.

Plan"), (iii) several individually immaterial factors that had a favorable impact of $1 million in the aggregate, partially offset by (iv) an $8 million reduction in proceeds related to insurance settlements compared to the prior year and (v) a $5 million reduction due to a decrease in non-operating income from a North American contract.

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See Note 23, "Income Taxes" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.

Equity in Earnings (Losses) of Unconsolidated Subsidiaries.

Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2021 increas ed by $18 million related to improved year over year results reported by Mekonomen, which is our largest equity method investment, and our North America investments, which generated income in 2021 after posting losses in 2020.

See "Investments in Unconsolidated Subsidiaries" in Note 3, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further discussion.

Equity in Earnings of Unconsolidated Subsidiaries

Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2021 increas ed by $18 million related to improved year over year results reported by Mekonomen, which is our largest equity method investment, and a Self Service investment, which generated income in 2021 after posting losses in 2020.

Foreign Currency Impact

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dollar co mbined with the positive impact of realized and unrealized currency gains and losses for the year ended December 31, 2021 resulted in a $0.03 positive effect on diluted earnings per share relative to the prior year period.

Net Income Attributable to Continuing and Discontinued Noncontrolling Interest.

Net Income Attributable to Continuing Noncontrolling Interest.

Net income attributable to continuing noncontrolling interest for the year ended December 31, 2021 dec reased $1 million compared to the year ended December 31, 2020.

Net income attributable to discontinued noncontrolling interest was immaterial for the year ended December 31, 2020 and related to the Stahlgruber Czech Republic wholesale business.

See Note 2, "Discontinued Operations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on this business.

Results of Operations—Segment Reporting

We have four operating segments:

We have four reportable segments:

Wholesale - North America, Europe, Specialty and Self Service.

Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution.

Therefore, we present three reportable segments:

North America, Europe and Specialty.

We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis.

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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.

The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in thousands):

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):

Year Ended December 31,

2021 % of Total Segment Revenue 2020 % of Total Segment Revenue

2022 % of Total Segment Revenue 2021 % of Total Segment Revenue 2020 % of Total Segment Revenue

Third Party Revenue

North America $ 5,162,639 $ 4,631,306

Wholesale - North America

$ 4,556 $ 4,376 $ 4,039

Europe 5,735 6,062 5,492

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Total Revenue

North America $ 5,164,820 $ 4,632,339

Wholesale - North America

$ 4,556 $ 4,379 $ 4,040

Europe 5,735 6,062 5,492

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Segment EBITDA

North America $ 944,465 18.3 % $ 778,504 16.8 %

Wholesale - North America

$ 852 18.7 % $ 769 17.6 % $ 665 16.5 %

Europe 585 10.2 % 618 10.2 % 428 7.8 %

Specialty 199 11.1 % 223 12.0 % 163 10.8 %

83 11.7 % 175 22.3 % 113 19.1 %

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.

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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 acquisition related expenses (which includes restructuring expenses recorded in Cost of goods sold);

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;

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equity investment fair value adjustments;

and impairment charges.

EBITDA, which is the basis for Segment EBITDA, is calculated as net income attributable to LKQ stockholders excluding discontinued operations and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.

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 24, "Segment and Geographic Information" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of total Segment EBITDA to net income.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

North America

Wholesale - North America

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our North America segment (in thousands):

The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions):

Year Ended December 31, Percentage Change in Revenue

North America 2021 2020 Organic Acquisition and Divestiture Foreign Exchange Total Change

Wholesale - North America 2022 2021 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 4,207 $ 4,037 11.4 % (1)

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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 11.4% for the year ended December 31, 2022 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs.

Aftermarket collision parts volumes decreased for the year ended December 31, 2022, due to ocean freight delays and supply chain challenges in the first half of the year.

As these issues eased in the second half, aftermarket collision parts volumes showed year over year improvement.

Recycled parts volume from our salvage business was roughly flat year over year.

(2) Organic other revenue increased 2.5%, or $8 million, related to (i) a $22 million increase in revenue from other scrap (e.g., aluminum) and cores due to higher prices as well as higher volumes, partially offset by (ii) a $9 million decrease in revenue from precious metals (platinum, palladium, and rhodium) primarily due to lower prices partially offset by higher volumes and (iii) a $5 million decrease in revenue from scrap steel due to lower prices partially offset by higher volumes.

(3) Acquisition and divestiture revenue was a net decrease of $281 million primarily due to the divestiture of PGW in the second quarter of 2022.

Segment EBITDA

Segment EBITDA increased $83 million, or 10.7%, for the year ended December 31, 2022 compared to the prior year, despite the $18 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 $41 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 year ended December 31, 2021

Increase (decrease) due to:

Change in gross margin 0.6 % (1)

Change in segment operating expenses 0.4 % (2)

Change in other income and expenses, net 0.1 %

Segment EBITDA for the year ended December 31, 2022

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 0.6% was driven by (i) a 0.6% mix benefit resulting from the PGW divestiture in the second quarter and (ii) productivity and pricing initiatives which focused on offsetting inflation on product cost and inbound freight, partially offset by (iii) an unfavorable impact of 0.6% from a decrease in commodity prices.

(2) The decrease in segment operating expenses as a percentage of revenue primarily reflects favorable impacts of (i) 0.3% related to personnel costs due to lower incentive compensation, (ii) 0.2% from lower charitable contributions, and (iii) other individually immaterial factors representing a 0.2% favorable impact in the aggregate, partially offset by (iv) a 0.3% unfavorable impact related to professional fees.

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Europe segment (in millions):

Year Ended December 31, Percentage Change in Revenue

Europe 2022 2021 Organic Acquisition and Divestiture Foreign Exchange (2)

Parts & services revenue $ 5,711 $ 6,033 5.1 % (1)

0.4 % (10.8) % (5.3) %

Other revenue 24 29 (6.1) % — % (11.9) % (18.0) %

Total third party revenue $ 5,735 $ 6,062 5.0 % 0.4 % (10.8) % (5.4) %

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 year ended December 31, 2022 increased by 5.1% (5.6% on a per day basis), primarily driven by pricing initiatives which focused on offsetting inflation on input costs across all geographies.

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) Exchange rates decreased our revenue growth by $654 million, or 10.8%, primarily due to the stronger U.S.

dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2022 relative to the prior year.

Segment EBITDA

Segment EBITDA decreased $33 million, or 5.4%, for the year ended December 31, 2022 compared to the prior year.

Our Europe Segment EBITDA included a negative year over year impact of $71 million related to the translation of local currency results into U.S.

dollars at lower exchange rates than those experienced during the year ended December 31, 2021.

On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased $38 million , or 6.1% , 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 year ended December 31, 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 year ended December 31, 2021

Increase (decrease) due to:

Change in gross margin 0.1 % (1)

Change in segment operating expenses (0.1) % (2)

Segment EBITDA for the year ended December 31, 2022

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 pricing initiatives 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) 0.4% from increased freight, vehicle, and fuel expenses due to inflationary pressures and supply chain constraints and (ii) 0.2% from increased personnel costs primarily due to inflationary pressures, partially offset by (iii) other individually immaterial factors representing a 0.5% favorable impact in the aggregate.

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions):

Year Ended December 31, Percentage Change in Revenue

Specialty 2022 2021 Organic (1)

Acquisition and Divestiture (2)

Foreign Exchange Total Change

Parts & services revenue $ 1,788 $ 1,864 (9.9) % 6.1 % (0.3) % (4.1) %

Other revenue — — — % — % — % — %

Total third party revenue $ 1,788 $ 1,864 (9.9) % 6.1 % (0.3) % (4.1) %

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 year ended December 31, 2022, decreased by 9.9% due to strong comparative growth for the year ended December 31, 2021, when parts and services organic revenue growth was 20.2%;

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 year ended December 31, 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 $24 million, or 10.9%, for the year ended December 31, 2022 compared to the prior year 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 year ended December 31, 2021

Increase (decrease) due to:

Change in gross margin 0.5 % (1)

Change in segment operating expenses (1.4) % (2)

Segment EBITDA for the year ended December 31, 2022

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 was driven by pricing initiatives which focused on offsetting inflation on input costs and lower customer rebate levels due to lower customer attainment of rebate targets, partially offset by a 0.8% 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 0.6% from operating expense synergies and leverage generated from the 2021 acquisitions.

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions):

Year Ended December 31, Percentage Change in Revenue

Self Service 2022 2021 Organic Acquisition and Divestiture (3)

Foreign Exchange Total Change

Parts & services revenue $ 227 $ 207 9.9 % (1)

(0.1) % — % 9.8 %

Other revenue 488 580 (13.4) % (2)

Total third party revenue $ 715 $ 787 (7.3) % (1.8) % — % (9.1) %

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 9.9% for the year ended December 31, 2022 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs resulting from greater competition for vehicles.

(2) Other organic revenue decreased 13.4%, or $78 million, year over year due to (i) a $58 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices and, to a lesser extent, lower volumes, and (ii) a $33 million decrease in revenue from scrap steel due to lower volumes and, to a lesser extent, lower prices, partially offset by (iii) a $13 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher prices.

(3) Acquisition and divestiture revenue was a net decrease of $14 million, or 1.8% primarily due to the divestiture of a business in the third quarter of 2022.

Segment EBITDA

Segment EBITDA decreased $92 million, or 52.3%, for the year ended December 31, 2022 compared to the prior year.

The decrease is primarily attributable to unfavorable movements in commodity prices compared to the prior year.

Decreases in precious metals prices contributed an estimated $34 million decline in Segment EBITDA relative to the year ended December 31, 2021.

In addition, net sequential changes in scrap steel prices in our self service operations had a $15 million unfavorable impact on Segment EBITDA during the year ended December 31, 2022, compared to a $26 million favorable impact during the year ended December 31, 2021.

The unfavorable impacts for the year ended December 31, 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 8.6% 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 year ended December 31, 2021

Increase (decrease) due to:

Change in gross margin (6.6) % (1)

Change in segment operating expenses (4.1) % (2)

Change in other income and expenses, net 0.1 %

Segment EBITDA for the year ended December 31, 2022

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 7.1% resulting from movements in metals prices partially offset by (ii) a net favorable impact due to pricing initiatives for parts and services implemented to mitigate the effects of higher car costs.

(2) The increase in segment operating expenses as a percentage of revenue reflects (i) a negative leverage effect of 2.9% from decreases in metals revenue (ii) an unfavorable impact of 0.4% due to higher advertising expense, and (iii) other individually immaterial factors representing a 0.8% unfavorable impact in the aggregate.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

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):

Year Ended December 31, Percentage Change in Revenue

Wholesale - North America 2021 2020 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 4,037 $ 3,786 5.8 % (1)

0.4 % 0.4 % 6.6 %

Other revenue 339 253 33.3 % (2)

0.1 % 0.4 % 33.8 %

Total third party revenue $ 4,376 $ 4,039 7.5 % 0.4 % 0.4 % 8.3 %

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 5.8% (6.7% on a per day basis) for the year ended December 31, 2021 compared to the prior year period, primarily driven by pricing and growth from recycled and remanufactured major mechanical parts and aftermarket automotive glass products.

While mobility statistics have improved relative to 2020, aftermarket collision parts revenue was roughly flat year-over-year due to the constraints on availability of parts caused by supply chain issues in 2021.

Until these issues are resolved, we expect to see a negative effect on aftermarket fill rates across the sector that will impact revenue growth rates.

(2) The $276 million year over year organic increase in other revenue is primarily related to (i) a $134 million increase in revenue from scrap steel due to higher prices, (ii) an $81 million increase in revenue from precious metals (platinum, palladium, and rhodium) primarily due to higher prices, and (iii) a $61 million increase in revenue from other scrap and cores primarily related to higher prices.

While mobility statistics improved relative to 2020, aftermarket collision parts revenue was roughly flat year-over-year due to the constraints on availability of parts caused by supply chain issues in 2021 .

(2) The $84 million year over year organic increase in other revenue is primarily related to (i) a $36 million increase in revenue from other scrap and cores primarily related to higher prices and higher volumes, (ii) a $24 million increase in revenue from scrap steel due to higher prices and to a lesser extent, higher volumes, (iii) a $24 million increase in revenue from precious metals (platinum, palladium, and rhodium) primarily due to higher prices.

Segment EBITDA

Segment EBITDA increased $104 million, or 15.7%, for the year ended December 31, 2021 despite the impact of two fewer selling days compared to the prior year period.

This increase is attributable to higher precious metals and scrap steel prices, margin initiatives, rightsizing actions and the favorable effect from the revenue recovery compared to the prior year when the COVID-19 impact was more severe.

This increase is attributable to margin initiatives, rightsizing actions, metals prices and the favorable effect from the revenue recovery compared to the prior year when the COVID-19 im pact was more severe.

These were partially offset by negative impacts due to aftermarket fill rates and inflationary increases in costs.

Increases in precious metals prices contributed an estimated $60 million in Segment EBITDA improvement relative to the year ended December 31, 2020.

Additionally, net sequential increases in scrap steel prices in our salvage and self service operations had a $42 million favorable impact on Segment EBITDA for the year ended December 31, 2021, compared to a $16 million favorable impact for the year ended December 31, 2020.

This favorable impact for the year ended December 31, 2021 resulted from the increase 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 a favorable effect of 1.0% 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:

North America Percentage of Total Segment Revenue

Increases in precious metals prices contributed an estimated $18 million increase in Segment EBITDA relative to the year ended December 31, 2020 .

Additionally, net sequential increases in scrap steel prices in our salvage operations had a $16 million favorable impact on Segment EBITDA for the year ended December 31, 2021, compared to a $3 million favorable impact for the year ended December 31, 2020 .

We estimate that precious metals and scrap steel pricing had a favorable effect of $31 million, or 0.6%, 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 year ended December 31, 2020

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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 reflected favorable impacts from our wholesale operations.

Wholesale operations gross margin was favorable primarily due to the positive impact of higher precious metals and scrap steel prices, pricing initiatives and cost reductions from operational efficiencies and rightsizing efforts.

Compared to the prior year, input costs for our wholesale operations have risen, with (i) inflationary pressures impacting product and freight costs in aftermarket and (ii) limited supply combined with heightened competition at auctions contributing to higher salvage costs.

We are adjusting prices dynamically to address input cost increases and market conditions such as inventory availability and

demand, and, in some cases, we experienced a margin benefit in 2021 as higher prices were enacted ahead of turning the higher cost inventory.

(2) The decrease in segment operating expense as a percentage of revenue on a per day basis primarily reflects (i) a favorable impact of 0.4% from personnel expenses related to headcount reductions, operational efficiencies, and a positive leverage effect, mostly related to the increase in other revenue, partially offset by inflationary cost increases and increased incentive compensation expense and (ii) a positive leverage effect of 0.4% from facility expenses, which are largely fixed.

(1) The increase in gross margin was favorable primarily due to the positive impact of higher precious metals and scrap steel prices, pricing initiatives and cost reductions from operational efficiencies and rightsizing efforts.

Compared to the prior year, input costs have risen, with (i) inflationary pressures impacting product and freight costs in aftermarket and (ii) limited supply combined with heightened competition at auctions contributing to higher salvage costs.

We are adjusting prices dynamically to address input cost increases and market conditions such as inventory availability and demand, and, in some cases, we experienced a margin benefit in 2021 as higher prices were enacted ahead of turning the higher cost inventory.

(2) The increase in segment operating expense as a percentage of revenue primarily reflects (i) an unfavorable impact of 0.6% related to personnel costs due to higher incentive compensation, (ii) an unfavorable impact of 0.2% for increased charitable contributions, partially offset by (iii) a positive leverage effect of 0.2% from facility expenses, which are largely fixed, and (iv) several other immaterial favorable factors totaling 0.1%.

(3) The unfavorable impact in other expense, net and net income attributable to continuing noncontrolling interest of 0.2% was primarily related to higher insurance proceeds received for the year ended December 31, 2020.

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):

The following table summarizes the changes in third party revenue by category in our Europe segment (in millions):

Year Ended December 31, Percentage Change in Revenue

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Segment EBITDA

Segment EBITDA increased $190 million, or 44.5%, for the year ended December 31, 2021 compared to the prior year period.

Segment EBITDA increased $190 million, or 44.5%, for the year ended December 31, 2021 compared to the prior year.

Our Europe Segment EBITDA included a positive year over year impact of $20 million related to the translation of local currency results into U.S.

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The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:

Europe Percentage of Total Segment Revenue

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Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):

The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions):

Year Ended December 31, Percentage Change in Revenue

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(2) The decrease in segment operating expenses as a percentage of revenue reflects a favorable impact of (i) 0.3% in personnel costs, partially offset by (ii) an unfavorable impact of 0.2% due to increased incentive compensation.

Liquidity and Capital Resources

The following table summarizes liquidity data as of the dates indicated (in thousands):

Third Party Revenue

The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions):

Year Ended December 31, Percentage Change in Revenue

Self Service 2021 2020 Organic Acquisition and Divestiture Foreign Exchange Total Change

Parts & services revenue $ 207 $ 203 1.7 % (1)

— % — % 1.7 %

Other revenue 580 390 49.0 % (2)

— % — % 49.0 %

Total third party revenue $ 787 $ 593 32.8 % — % — % 32.8 %

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 1.7% for the year ended December 31, 2021 compared to the prior year period, primarily driven by pricing initiatives.

(2) The 49.0%, or $190 million, year over year decrease in other revenue is related to (i) a $109 million increase in revenue from scrap steel related to higher prices, (ii) a $56 million increase in revenue from precious metals (platinum, palladium, and rhodium) due to higher prices, and (iii) a $25 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher prices.

Segment EBITDA

Segment EBITDA increased $62 million, or 54.4%, in the year ended December 31, 2021 compared to the prior year period.

The increase is primarily attributable to favorable movements in commodity prices compared to the prior year.

Increases in precious metals prices contributed an estimated $43 million increase in Segment EBITDA relative to the year ended December 31, 2020.

In addition, net sequential changes in scrap steel prices in our self service operations had an $26 million favorable impact on Segment EBITDA during the year ended December 31, 2021, compared to a $13 million favorable impact during the year ended December 31, 2020.

We estimate that precious metals and scrap steel pricing had a favorable effect of $56 million, or 3.1%, 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 year ended December 31, 2020

Increase (decrease) due to:

Change in gross margin (3.0) % (1)

Change in segment operating expenses 6.2 % (2)

Segment EBITDA for the year ended December 31, 2021

In the table above, the sum of the individual percentages may not equal the total due to rounding.

(1) The decrease in gross margin primarily reflects (i) an unfavorable impact of 3.5% resulting from movements in metals prices.

(2) The increase in segment operating expense as a percentage of revenue reflects (i) a positive leverage effect of 7.1% from increases in metals revenue, partially offset by (ii) a 0.7% unfavorable impact on personnel costs primarily related to increased incentive compensation and salaries and wages due to inflationary wage adjustments, and (iii) other individually immaterial factors representing a 0.2% unfavorable impact in the aggregate.

Liquidity and Capital Resources

On January 5, 2023, we entered into a new credit agreement and terminated the senior secured credit agreement ("Prior Credit Agreement") , scheduled to mature on January 29, 2024.

The new credit agreement includes a $500 million unsecured term loan, payable in full on January 5, 2026, and an unsecured revolving credit facility of up to a U.S.

dollar equivalent of $2.0 billion, which matures on January 5, 2028.

See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement.

The following table summarizes liquidity data as of the dates indicated (in millions):

December 31, 2022 2022 2021

Cash and cash equivalents $ 278 $ 278 $ 274

Total debt 2,662 (5)

2,823,831 2,896,676 4,072,026

Current maturities (2)

35,067 58,810 326,648

Capacity under credit facilities (3)

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Total liquidity (cash and cash equivalents plus availability under credit facilities) 923 1,573 1,468

1,468,234 2,858,235 2,445,691

(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $12 million, $26 million, and $30 million as of December 31, 2021, 2020, and 2019, respectively).

(2) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of immaterial amounts as of December 31, 2021, 2020, and 2019, respectively).

(3) Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility (through July 30, 2021, at which time the facility was terminated).

Availability under credit facilities is reduced by our outstanding letters of credit.

(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $6 million and $12 million as of December 31, 2022, and 2021, respectively).

(2) Debt amounts reflect the gross values to be repaid in the next 12 months (excluding immaterial debt issuance costs as of December 31, 2022, and 2021, respectively).

(3) Capacity under credit facilities includes our revolving credit facilities and availability under credit facilities is reduced by our outstanding letters of credit.

(4) Amounts presented represent the termination of the Prior Credit Agreement and inclusion of the new credit agreement as if both were in effect as of December 31, 2022.

See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement.

(5) Debt amount presented above reflects the gross values to be repaid (excluding debt issuance costs of $13 million as of December 31, 2022).

We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions.

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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 acquisitions, we have accessed various forms of debt financing, including revolving credit facilities, senior notes and a receivables securitization facility (terminated on July 30, 2021).

To fund our acq uisitions, we have accessed various forms of debt financing, including revolving credit facilities and senior notes.

We currently believe we have sufficient access to capital markets to support our future growth objectives.

As of December 31, 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 ( $1,887 million outstanding at December 31, 2021), bearing interest at variable rates, with availability reduced by $69 million of amounts outstanding under letters of credit

• Senior secured credit facilities composed of $3,150 million in revolving credit ($1,786 million outstanding at December 31, 2022), bearing interest at variable rates, with availability reduced by $69 million of amounts outstanding letters of credit

• Euro Notes (2024) totaling $535 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate

• Euro Notes (2028) totaling $268 million (€250 million) maturing in April 2028 and bearing interest at a 4.125% fixed rate

As of December 31, 2021, we had approximately $1,194 million available under our credit facilities.

Combined with $274 million of cash and cash equivalents at December 31, 2021, we had approximately $1,468 million in available liquidity, a decrease of $1,390 million from our available liquidity as of December 31, 2020, as a result of the following activity .

On April 1, 2021, we redeemed the €750 million Euro Notes (2026) with proceeds from borrowings on our revolving credit facility and cash on hand, resulting in a decrease in available liquidity compared to December 31, 2020 .

Additionally, in the second quarter of 2021, we used free cash flow generated in our domestic operations and borrowings on our revolving credit facility to repay all of our term loan ($319 million).

Also, we terminated our $110 million receivables securitization facility effective July 30, 2021.

With these transactions, we reduced our overall liquidity by utilizing available capacity under the revolving credit facility and reducing the overall facility size.

We believe our future cash flow needs can be supported by a smaller credit facility, so we redeemed the Euro Notes (2026) and eliminated the term loan using funds from the revolving credit facility, which in turn will lower our interest expense and non-usage fees.

Since December 31, 2019, we have lowered the debt balance by $1,248 million.

We had approximately $1,295 million available under our credit facilities in place as of December 31, 2022 .

Combined with $278 million of cash and cash equivalents at December 31, 2022, we had approximately $1,573 million i n available liquidity, an increase of $105 million from our available liquidity as of December 31, 2021.

With our ability to generate free cash flow, we were comfortable with reducing the size of our credit facilities from $3.15 billion to $2.5 billion when we terminated the Prior Credit Agreement and entered into the new credit agreement in January 2023.

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.

To support our liquidity following the onset of the COVID-19 pandemic, we focused on preserving cash during the expected period of reduced demand.

Our action plan to strengthen our liquidity position included a deferral of growth driven capital projects, reductions in inventory orders, more active monitoring of customer receivables and terms, income and value added tax deferrals, and suspension of our share buyback program, in

addition to the cost saving measures discussed in the "COVID-19 Impact on Our Operations" section above.

Given our success in strengthening our liquidity position as of September 30, 2020, we recommenced our share buyback program during the fourth quarter of 2020, and we returned to our stated capital allocation strategy.

Our 2022 plan includes further spending to rebuild inventory levels, support growth driven capital projects, and complete strategic acquisitions.

Beginning in the fourth quarter of 2021, we expanded our capital allocation strategy to include the payment of dividends as an additional mechanism to return value to our stockholders.

On October 26, 2021, the Board of Directors of LKQ declared a cash dividend to stockholders.

The quarterly cash dividend of $0.25 per share of common stock was paid on December 2, 2021 to stockholders of record at the close of business on November 11, 2021, for an aggregate payout of $73 million, which is reflected as a financing cash outflow.

Our capital allocation strategy includes spending to support growth driven capital projects, complete synergistic 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 year ended December 31, 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

$0.275 October 25, 2022 November 17, 2022 December 1, 2022

On February 21, 2023, our Board of Directors declared a quarterly cash dividend of $0.275 per share of common stock, payable on March 30, 2023, to stockholders of record at the close of business on March 16, 2023 .

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, compliance with covenants in our credit facilities and senior note indentures, and various other factors, many of which are outside of our control.

Additionally, due to the rapidly evolving global situation, it is not possible to predict whether unanticipated consequences of the COVID-19 pandemic are reasonably likely to materially affect our liquidity and capital resources negatively in the future or alter our capital allocation strategy.

With $1,468 million of total liquidity as of December 31, 2021 and $35 million of current maturities, we have access to funds to meet our near term commitments even if the pandemic effect extends longer than our current expectations.

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.

With $1,573 million of total liquidity as of December 31, 2022 ($923 million on an adjusted basis) and $34 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 December 31, 2021):

Our total liquidity inclu des availability under our Prior Credit Agreement, which included the two financial maintenance covenants presented below.

The required debt covenants per the Prior Credit Agreement and our actual ratios with respect to those covenants were calculated in accordance with the Prior Credit Agreement as follows as of December 31, 2022:

Covenant Level Ratio Achieved as of December 31, 2022

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Minimum interest coverage ratio 3.00 :

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.

We were in compliance with all restrictive covenants under our credit agreement as of December 31, 2021.

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 on the credit facility.

The terms net leverage ratio and minimum interest coverage ratio used in the Prior Credit Agreement are specifically calculated per the Prior Credit Agreement and differ in specified ways from comparable US GAAP or common usage terms.

The new credit agreement contains similar financial covenants but replaces the maximum net leverage ratio with a maximum total leverage ratio (calculated as 1.5x as of December 31, 2022) while maintaining the same 4.00 :

1.00 requirement.

Our Prior Credit Agreement contained customary covenants that imposed limitations and conditions on our ability to enter into certain transactions.

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 were no longer required to comply with certain restrictive covenants under the Prior Credit Agreement, and we were no longer required to provide collateral to secure the borrowings under the Prior Credit Agreement.

We were in compliance with all applicable covenants under our Prior Credit Agreement and new credit agreement as of December 31, 2022.

The new credit agreement also does not have restrictions on our ability to enter into certain transactions, such as dividend payments, share repurchases and asset sales.

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.

In the long term, 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 other arrangements, such as (i) our November 2018 amendment to our senior secured credit facility and (ii) the issuance of the €750 million senior notes due 2026 and €250 million senior notes due 2028 the "Euro Notes (2026/28)" in April 2018 related to the Stahlgruber acquisition.

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.

Beginning in 2019, a number of our European suppliers began participating in a supply chain financing initiative in select countries under which they may sell their accounts receivable to the participating financial institutions, allowing us to extend payment terms which in turn improves our operating cash flows.

The initiative allows our suppliers to monetize their receivables prior to their payment date, subject to payment of a discount.

We expect more suppliers will begin participating in our European supply chain financing initiative in 2022.

F inancial institutions participate in the supply chain financing initiative on an uncommitted basis and can cease purchasing receivables from our suppliers at any time.

Our failure to raise capital if and when needed could have a material adverse effect on our business, operating results, and financial condition.

We utilize supply chain financing arrangements, which allow us to improve our operating cash flows by extending payment terms with certain suppliers who participate in the programs.

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 did 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.

financial institutions do not continue to purchase receivables from our suppliers under the initiative, the participating suppliers 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 Consolidated Balance Sheets.

Borrowings under the credit agreement accrue interest at variable rates which are tied to various indices, depending on the currency and the duration of the borrowing, plus an applicable margin rate that is subject to change quarterly based on our reported leverage ratio.

As detailed in Note 9, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, certain of the available interest rates were modified in November in connection with the phase out of LIBOR.

Borrowings in U.S.

dollars will 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.

We have held interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings, with the effect of fixing the interest rates on the respective notional amounts.

In addition, from time to time, we hold currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when combined with related intercompany financing arrangements, effectively convert variable rate U.S.

dollar-denominated borrowings into fixed rate euro-denominated borrowings.

These derivative transactions are described in Note 10, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.

As of December 31, 2021, we did not have any of these types of contracts outstanding, and the weighted average interest rate on borrowings outstanding under our credit agreement was 1.1% at December 31, 2021.

As of December 31, 2022, we had approximately $248 million of Accounts payable outstanding under the arrangements.

In the past, 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 December 31, 2022, we did not have any of these contracts outstanding.

The weighted average interest rate on borrowings outstanding under our Prior Credit Agreement was 4.2% at December 31, 2022.

Including our senior notes, our overall weighted average interest rate on borrowings was 4.2% at December 31, 2022.

Cash interest payments were $76 million for the year ended December 31, 2021, including interest payments on our Euro Notes (2024) and Euro Notes (2028) as well as the interest owed when we settled the Euro Notes (2026).

Interest payments on our Euro Notes (2024) and Euro Notes (2028) are made in April and October.

W e had outstanding credit agreement borrowings of $1,887 million and $967 million at December 31, 2021 and 2020, respectively.

Of these amounts, there were no current maturities as of December 31, 2021 and current maturities of $18 million at December 31, 2020.

Prior to entering into the new credit agreement on January 5, 2023, our borrowings in U.S.

dollars accrued interest at London Inter-Bank Offered Rate (i.e.

Under the new credit agreement, our borrowings will bear interest at Secured Overnight Financing Rate (i.e.

SOFR) plus the applicable spread or other risk-free interest rates that are applicable for the specified currency plus a spread.

We do not expect the change in benchmark rates will have a material impact on our results of operations, financial position or liquidity.

However, we project that the increase in benchmark interest rates in the United States and Europe in 2022 and potential for further increases in 2023 to combat rising inflation will drive higher interest expense of $45 million to $55 million in 2023 relative to 2022.

See Note 18, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our borrowings and related interest.

We had outstanding Prior Credit Agreement borrowin gs of $1,786 million and $1,887 million at December 31, 2022 and 2021, respectively.

Of these amounts , there were no current maturities at December 31, 2022 or 2021.

The new credit agreement has no scheduled principal payments in 2023.

The scheduled maturities of long-term obligations outstanding at December 31, 2022 are as follows (in millions):

December 31, 2022 December 31, 2022

2024 548 2,334

Thereafter 1,564 278

Total debt $ 2,662 (3)

(1) Long-term obligations maturing by December 31, 2023 include $15 million of short-term debt that may be extended beyond the current year ending December 31, 2023.

(2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $6 million as of December 31, 2022).

(3) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $13 million as of December 31, 2022).

(4) Amounts presented represent the termination of the Prior Credit Agreement and inclusion of the new credit agreement as if both were in effect as of December 31, 2022.

See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement.

As of December 31, 2022, the Company had cash and cash equivalents of $278 million , of which $227 million was held by foreign subsidiaries.

In general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following the enactment of the Tax Act and the related imposition of the transition tax on deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.

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.

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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 Act, or due to the previous taxation of foreign earnings under the transition tax and the GILTI regime.

taxation, either as a result of the 100% participation exemption under the Tax Cuts and Jobs Act enacted in 2017, or due to the previous taxation of foreign earnings under the transition tax and the Global Intangible Low-Taxed Income regime ("GILTI").

The procurement of inventory is the largest operating use of our funds.

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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 years ended December 31, 2021, 2020 and 2019 (in thousands):

The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 2022, and 2021 (in millions):

Year Ended December 31,

2022 2021 Change

North America $ 1,107,200 $ 1,033,500 $ 1,372,600 $ 73,700 (1)

Wholesale - North America

$ 1,172 $ 1,107 $ 65 (1)

Europe 3,498 3,829 (331) (2)

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Total $ 5,974 $ 6,388 $ (414)

(1) Inventory purchases across the North America segment have increased for the year ended December 31, 2021 compared to the prior year period due to the low base as we scaled back buying in recognition of demand changes in 2020.

We are rebuilding our inventory levels after decreases in 2020 due to the COVID-19 pandemic, however, they did not reach our desired levels for the year ended December 31, 2021 due to ocean freight driven delays in shipping.

(2) The increase in inventory purchases in our Europe segment included an increase of $142 million attributable to the increase in the value of the euro, and to a lesser extent, the pound sterling for the year ended December 31, 2021 compared to the prior year period.

On a constant currency basis, inventory purchases increased compared to 2020, primarily due to the low base as we scaled back buying in recognition of demand changes in 2020.

However, we did not reach our desired levels for the year ended December 31, 2021 due to ocean freight driven delays in shipping.

(3) The increase in inventory purchases in the Specialty segment was primarily due to required restocking to keep up with the high demand for our products.

As shown in the table above, while inventory procurement increased for the year ended December 31, 2021 compared to December 31, 2020, procurement is still below pre-pandemic levels for the North America and Europe segments.

The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2021, 2020 and 2019 (in thousands):

(1) Inventory purchases across the Wholesale - North America segment increased for the year ended December 31, 2022 compared to the prior year 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 $415 million attributable to the decrease in the value of the euro, and to a lesser extent, the pound sterling for the year ended December 31, 2022 compared to the prior year.

On a constant currency basis, inventory purchases increased compared to the prior year, 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 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.

The following table sets forth a summary of our global wholesale salvage and self service procurement for the years ended December 31, 2022, and 2021 (in thousands):

Year Ended December 31,

2022 2021 % Change

North America wholesale salvage cars and trucks 239 230 309 3.9 %

Europe wholesale salvage cars and trucks 26 24 25 8.3 %

Self service and "crush only" cars 542 574 591 (5.6) %

Salvage purchases in 2021 increased relative to the prior year due to reduced buying in the prior year to reflect lower demand during the COVID-19 pandemic.

Self service vehicle purchases in 2021 declined due to (i) increased competition in the market due to high costs of precious metals and scrap steel and (ii) the elimination of underperforming locations in accordance with the 2020 Global Restructuring Program.

We expect to increase inventory purchases in 2022 to support the service and fill rate requirements of our businesses based on the revenue trend and expectations for full year 2022, including normal seasonality as supply chain challenges in 2021 deferred a portion of the inventory build to 2022 (although if supply chain challenges continue, our ability to increase inventory purchases to the desired level could be affected).

The following table summarizes the components of the year-over-year decrease in cash provided by operating activities (in thousands):

Wholesale - North America salvage vehicles 246 239 2.9 %

Europe wholesale salvage vehicles 29 26 11.5 %

Self Service salvage vehicles 517 542 (4.6) %

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 change in cash provided by operating activities (in millions):

Operating Cash

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Increase (decrease) due to:

Operating income 488,795 (1)

Cash paid for taxes

(174,656) (2)

Cash paid for interest

Working capital accounts:

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Net cash provided by operating activities for the year ended December 31, 2022

(1) Refer to the Results of Operations – Consolidated section for further information on the increase in operating income.

(2) Cash payments related to income taxes increased due to an increase in pretax income and the timing of estimated tax payments.

(3) Decrease in cash payments for interest is due to lower outstanding borrowings and the payoff of the Euro Notes (2026) in April 2021 with proceeds from lower interest rate debt.

(4) 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 $110 million greater outflow in 2021 primarily due to an increase in revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020 , which translated to larger net outflows in the North America segment (of $25 million) and in the Europe segment (of $95 million).

We had a smaller cash outflow in the Specialty segment (of $10 million).

• Inventories represented $668 million in incremental cash outflows for the year ended December 31, 2021 compared to the same period of 2020.

The change is primarily attributable to increased inventory purchases in the current year as a result of recovering demand from prior year pandemic lows and strategic inventory purchases to curb the impacts of supply chain constraints.

• Accounts payable produced $347 million in highe r cash inflows primarily due to higher accounts payable balances in the North America segment (of $196 million) and in the Specialty segment (of $20 million) due to timing of payments, and in the Europe segment (of $131 million) co mpared to the prior year period, as a result of timing of payments and benefits from extended payment terms, including through our supply chain financing initiatives.

(5) Reflects a number of individually insignificant fluctuations in cash paid for other operating activities.

Net cash used in investing activities totaled $419 million and $166 million for the years ended December 31, 2021 and 2020, respectively.

Property, plant and equipment purchases were $293 million in 2021 compared to $173 million in the prior year.

The increase in capital spending in 2021 is partially attributable to the low base as we scaled back asset purchases during the initial stages of the pandemic.

Additionally, we increased real estate purchases in 2021 to support our long-term strategic objectives in the salvage business.

We invested $124 million of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2021 compared to $7 million during the year ended December 31, 2020.

The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in thousands):

(1) Cash flows related to our primary working capital accounts can be volatile as the sales and purchases, payments and collections can be timed differently from period to period.

• Receivables, net had a similar impact on cash provided by operating activities year over year.

This was driven by a $26 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.

This was partially offset by a $14 million inflow for our Europe segment and a $12 million inflow for our Specialty segment, both due to lesser overall cash outflows in 2022 as a result of collections and timing of sales.

• Inventories represented $107 million in incremental cash outflows for the year ended December 31, 2022 compared to the same period of 2021 as a result of inventory increases in the (i) Wholesale - North America segment of $151 million primarily attributable to increased cash paid for inventory in the current year as a result of higher input costs and volume increases due to strong demand and (ii) Europe segment of $101 million, primarily attributable to increased cash paid for inventory in the current year as a result of higher input costs, volume increases due to strong demand and strategic inventory purchases to curb the impacts of supply chain constraints, which was partially offset by inventory decreases in the (iii) Specialty segment of $127 million primarily related to decreasing inventory purchasing levels to align with softening demand and (iv) Self Service segment of $18 million primarily related to lower vehicle purchases in 2022 due to increased market competition and decreased availability of vehicles.

• Accounts payable was a $14 million detriment to cash provided by operating activities year over year.

This change was primarily attributable a lower cash inflow in our Europe segment of $187 million and a cash outflow of $38 million from our Specialty segment partially offset by our Wholesale - North America segment which contributed a $211 million cash inflow driven by higher accounts payable balances and timing of payments.

(2) Primarily related to offsetting effects from (i) non-cash items in net income, including gain on disposal of businesses, refer to "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and Divestitures," for further information, (ii) cash paid for taxes, and (iii) a number of individually insignificant fluctuations in cash paid for other operating activities.

Net cash provided by investing activities totaled $172 million and net cash used in investing activities totaled $419 million for the years ended December 31, 2022 and 2021, respectively.

Proceeds from the disposal of businesses (primarily PGW) were $399 million for the year ended December 31, 2022 compared to $7 million for the year ended December 31, 2021.

Property, plant and equipment purchases were $222 million for the year ended December 31, 2022 compared to $293 million in the prior year.

We invested $124 million of cash, net of cash acquired, in business acquisitions for the year ended December 31, 2021 compared to $4 million in 2022.

The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in millions):

Year Ended December 31,

1 unchanged sentence

purchases of property, plant and equipment 222 293

293,466 172,695

Free cash flow $ 1,028 $ 1,074

Net cash used in financing activities totaled $985 million and $1,513 million for the years ended December 31, 2021 and 2020, respectively.

During the year ended December 31, 2021, net borrowings totaled $85 million compared to net repayments of our borrowings of $1,365 million during the year ended December 31, 2020.

Repayments in 2021 and 2020 include the redemption of the €750 million Euro Notes (2026) and the $600 million U.S.

Notes, respectively.

We repurchased $877 million of our common stock in the year ended December 31, 2021 compared to $117 million in the year ended December 31, 2020.

In 2021, we settled our cross currency swap and other foreign exchange forward contracts with the counterparties for $89 million due primarily to strengthening in the Euro exchange rate relative to the contract rates.

We also paid $73 million in dividends to our stockholders during the year ended December 31, 2021 (no dividends were paid in 2020).

Net cash used in financing activities increased by $409 million for the year ended December 31, 2022 compared to 2021 due primarily to higher payment of dividends in 2022 of $211 million, increases in repurchases of common stock of $163 million and higher net repayments of debt of $133 million, partia lly offset by a decrease in settlement of our cross currency swap and other foreign exchange forward contracts in 2021 of $89 million (no similar transaction in 2022).

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 and costs.

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.

We have various contractual obligations and commitments arising in the normal course of business.

9 unchanged sentences

• Self-insurance reserves of $126 million, of which $62 million is expected to be paid within twelve months.

See Note 3, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information relates to self-insurance reserves at December 31, 2021.

See Note 6, "Self-Insurance Reserves" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information relates to self-insurance reserves at December 31, 2022.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis