LKQ CORP 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements Statements and information in this Quarterly Report on Form 10-Q that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the “safe harbor” provisions of such Act. Forward-looking statements include, but are not limited to, statements regarding our outlook, guidance, expectations, beliefs, hopes, intentions and strategies. Words such as “may,” “will,” “plan,” “should,” “expect,” “anticipate,” “believe,” “if,” “estimate,” “intend,” “project” and similar words or expressions are used to identify these forward-looking statements. These statements are subject to a number of risks, uncertainties, assumptions and other factors that may cause our actual results, performance or achievements to be materially different. All forward-looking statements are based on information available to us at the time the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. You should not place undue reliance on our forward-looking statements. Actual events or results may differ materially from those expressed or implied in the forward-looking statements. The risks, uncertainties, assumptions and other factors that could cause actual results to differ from the results predicted or implied by our forward-looking statements include factors discussed in our filings with the SEC, including those disclosed under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K and our Quarterly Reports on Form 10-Q (including this Quarterly Report). Overview We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty 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: new products produced by OEMs; new products produced by companies other than the OEMs, which are referred to as aftermarket products; recycled products obtained from salvage and total loss vehicles; recycled products that have been refurbished; and recycled products that have been remanufactured. We distribute a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical products; recycled collision and mechanical products; refurbished collision products such as wheels, bumper covers and lights; and remanufactured engines and transmissions. Collectively, we refer to the four sources that are not new OEM products as alternative parts. We are organized into four operating segments: Wholesale - North America; Europe; Specialty; and Self Service, each of which is presented as a reportable segment. Our Wholesale - North America segment is 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. Our Europe segment is 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. Our Specialty segment is a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada. Our Self Service segment operates self service retail facilities across the U.S. that sell recycled automotive products from end-of-life-vehicles. Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Please refer to the factors referred to in Forward-Looking Statements above. Due to these factors and others, which may be unknown to us at this time, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance. 24 Acquisitions and Investments Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. Through 2018, our acquisition strategy was focused on consolidation to build scale in fragmented markets across North America and Europe. We targeted companies that were market leaders, expanded our geographic presence and enhanced our ability to provide a wide array of vehicle products through our distribution network. In the last few years, we have shifted our focus to acquisitions that target high synergies and/or add critical capabilities, including the pending Uni-Select Acquisition that will complement our existing North American paint distribution operations and will provide a scaled position in the Canadian mechanical parts space, with opportunity for future consolidation and growth. Additionally, we have made investments in various businesses to advance our strategic objectives. See Note 3, "Uni-Select Acquisition," and Note 8, "Equity Method Investments," to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our acquisitions and investments. Sources of Revenue We report our revenue in two categories: (i) parts and services and (ii) other. Our parts revenue is generated from the sale of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories used to improve the performance, functionality and appearance of vehicles. Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, and diagnostic and repair services. Revenue from other sources includes scrap and other metals (including precious metals - platinum, palladium and rhodium - contained in recycled parts such as catalytic converters) sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold. See Note 10, "Revenue Recognition" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information related to our sources of revenue. Critical Accounting Estimates The discussion and analysis of our financial condition and results of operations are based upon our Unaudited Condensed Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our 2022 Form 10-K includes a summary of the critical accounting estimates we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting estimates that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the three months ended March 31, 2023. Financial Information by Geographic Area See Note 10, "Revenue Recognition" and Note 21, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our revenue and long-lived assets by geographic region. 1 LKQ Europe Program We have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under this multi-year program, we expect to recognize the following: • Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will derive no ongoing benefit. See Note 11, "Restructuring and Transaction Related Expenses” to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details. • Transformation expenses — Period costs incurred to execute the 1 LKQ Europe program that are expected to contribute to ongoing benefits to the business (e.g. non-capitalizable implementation costs related to a common ERP system). These expenses are recorded in SG&A 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. 25 Costs related to the 1 LKQ Europe program incurred to date are reflected in SG&A expenses, Restructuring and transaction related expenses and Purchases of property, plant and equipment in our Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2025. During the three months ended March 31, 2023, we incurred $6 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 $50 million to $80 million for 2023 through the projected program completion date in 2025 . In the future, we may also identify additional initiatives and projects under the 1 LKQ Europe program that may result in additional expenditures, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. We expect the transformation and restructuring expenses will be entirely funded by trade working capital initiatives across our Europe segment. Ukraine/Russia Conflict The Russian invasion of Ukraine and resulting global governmental response 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. 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 represented less than 1% of both our total annual revenue and total annual operating profit for fiscal year 2022 and comprised approximately $65 million of total assets as of March 31, 2023. In addition, LKQ revenue 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 estimates underlying our financial statements may change significantly in future periods. Key Performance Indicators We believe that organic revenue growth, Segment EBITDA and free cash flow are key performance indicators for our business. Segment EBITDA is our key measure of segment profit or loss reviewed by our chief operating decision maker. Free cash flow is a financial measure that is not prepared in accordance with U.S. generally accepted accounting principles (“non-GAAP”). • Organic revenue growth - We define organic revenue growth as total revenue growth from continuing operations excluding the effects of acquisitions and divestitures (i.e., revenue generated from the date of acquisition to the first anniversary of that acquisition, net of reduced revenue due to the disposal of businesses) and foreign currency movements (i.e., impact of translating revenue at different exchange rates). Organic revenue growth includes incremental sales from both existing and new (i.e., opened within the last twelve months) locations and is derived from expanding business with existing customers, securing new customers and offering additional products and services. We believe that organic revenue growth is a key performance indicator as this statistic measures our ability to serve and grow our customer base successfully. • Segment EBITDA - See Note 21, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of the calculation of Segment EBITDA. We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results. • Free Cash Flow - We calculate free cash flow as net cash provided by operating activities, less purchases of property, plant and equipment. Free cash flow provides insight into our liquidity and provides useful information to management and investors concerning cash flow available to meet future debt service obligations and working capital requirements, 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. By using these performance measures, we attempt to motivate a balanced approach to the business that rewards growth, profitability and cash flow generation in a manner that enhances our long-term prospects. 26 Results of Operations—Consolidated The following table sets forth statements of income data as a percentage of total revenue for the periods indicated: Three Months Ended March 31, 2023 2022 Revenue 100.0 % 100.0 % Cost of goods sold 59.0 % 59.5 % Gross margin 41.0 % 40.5 % Selling, general and administrative expenses 27.8 % 27.6 % Restructuring and transaction related expenses 0.5 % 0.1 % Depreciation and amortization 1.7 % 1.8 % Operating income 10.9 % 11.1 % Total other expense, net 0.1 % 0.4 % Income from continuing operations before provision for income taxes 10.8 % 10.6 % Provision for income taxes 2.8 % 2.7 % Equity in earnings of unconsolidated subsidiaries 0.1 % 0.1 % Income from continuing operations 8.1 % 8.0 % Net income from discontinued operations — % 0.1 % Net income 8.1 % 8.2 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Revenue The following table summarizes the changes in revenue by category (in millions): Three Months Ended March 31, Percentage Change in Revenue 2023 2022 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 3,152 $ 3,104 7.9 % (3.3) % (3.0) % 1.5 % Other revenue 197 244 (14.0) % (4.8) % (0.4) % (19.2) % Total revenue $ 3,349 $ 3,348 6.3 % (3.4) % (2.8) % — % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. The increase in parts and services revenue of 1.5% represented increases in segment revenue of 4.9% in Self Service, 4.6% in Europe, and 3.8% in Wholesale - North America, partially offset by a decrease of 14.0% in Specialty. This overall increase was driven by organic parts and services revenue growth of 7.9% (7.1% on a per day basis), partially offset by a 3.0% decrease due to fluctuations in foreign exchange rates and a 3.3% net reduction from acquisitions and divestitures. The decrease in other revenue of 19.2% was primarily driven by a decrease in organic revenue of $34 million, attributable to a $20 million decrease in our Self Service segment and a $14 million decrease 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 three months ended March 31, 2023 compared to the three months ended March 31, 2022. Cost of Goods Sold Cost of goods sold decreased to 59.0% of revenue in the three months ended March 31, 2023 from 59.5% of revenue in the three months ended March 31, 2022. Cost of goods sold reflects decreases of 0.7% 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 Specialty segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. 27 Selling, General and Administrative Expenses Our SG&A expenses as a percentage of revenue increased to 27.8% in the three months ended March 31, 2023 from 27.6% in the three months ended March 31, 2022. The SG&A expense increase primarily reflects impacts of 0.3% in our Self Service segment, 0.3% related to mix, and 0.2% in our Specialty segment, partially offset by a 0.5% decrease in our Europe segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. Restructuring and Transaction Related Expenses The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions): Three Months Ended March 31, 2023 2022 Change Restructuring expenses $ 8 (1) $ — $ 8 Transaction related expenses 10 (2) 3 (2) 7 Restructuring and transaction related expenses $ 18 $ 3 $ 15 (1) Restructuring expenses for the three months ended March 31, 2023 primarily consisted of (i) $5 million related to our global restructuring plans, (ii) $2 million related to our acquisition integration plans, and (ii) $1 million related to our 1 LKQ Europe plan. (2) Transaction related expenses for the three months ended March 31, 2023 and March 31, 2022 primarily related to external costs such as legal, accounting and advisory fees related to completed and potential acquisitions (including Uni-Select costs in 2023). See Note 11, "Restructuring and Transaction Related Expenses" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on our restructuring and acquisition integration plans. Depreciation and Amortization The following table summarizes depreciation and amortization for the periods indicated (in millions): Three Months Ended March 31, 2023 2022 Change Depreciation $ 36 $ 36 $ — Amortization 22 23 (1) Depreciation and amortization $ 58 $ 59 $ (1) Total Other Expense, Net The following table summarizes Total other expense, net for the periods indicated (in millions): Three Months Ended March 31, 2023 2022 Change Interest expense $ 36 $ 16 $ 20 (1) Gains on foreign exchange contracts - acquisition related (2) (23) — (23) Interest income and other income, net (9) (1) (8) (3) Total other expense, net $ 4 $ 15 $ (11) (1) Interest expense increased primarily due to (i) a $17 million increase from higher interest rates in the first quarter of 2023 and (ii) a $3 million increase related to amortization of pre-acquisition bridge loan financing costs related to the Uni-Select Acquisition. 28 (2) Related to the Uni-Select acquisition. See Note 3, "Uni-Select Acquisition" and Note 17, "Derivative Instruments and Hedging Activities" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. (3) The increase in Interest income and other income, net is primarily comprised of (i) a $5 million increase from funds received to settle an eminent domain matter in 2023, (ii) a $2 million increase from the change in foreign currency gains and losses, and (iii) a $2 million increase in interest income, partially offset by (iv) individually insignificant decreases which in the aggregate had a $1 million impact. Provision for Income Taxes Our effective income tax rate for the three months ended March 31, 2023 was 26.1%, compared to 25.0% for the three months ended March 31, 2022. The increase in the effective rate for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 is primarily attributable to the geographic distribution of income and 0.2% resulting from higher non-deductible transaction costs in 2023, mostly related to the Uni-Select Acquisition. For the three months ended March 31, 2023, the effective tax rate was decreased by 0.4% compared to the three months ended March 31, 2022, related primarily to net favorable discrete items including excess tax benefits from stock-based payments. See Note 20, "Income Taxes" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Equity in Earnings of Unconsolidated Subsidiaries Equity in earnings of unconsolidated subsidiaries for the three months ended March 31, 2023 increased by $1 million primarily related to the positive year over year effect resulting from the divestiture of a Self Service investment (which incurred a loss in the first quarter of 2022) in the second quarter of 2022, partially offset by a decline in year over year results reported by Mekonomen, which is our largest equity method investment. Foreign Currency Impact We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the three months ended March 31, 2022, the pound sterling and euro rates used to translate the 2023 statements of income decreased by 9.4% and 4.3%, respectively. Realized and unrealized currency gains and losses combined with the translation effect of the change in foreign currencies against the U.S. dollar had a net positive effect of $0.05 on diluted earnings per share for the three months ended March 31, 2023, mostly related to the $23 million pretax gain on the foreign exchange forward contract related to the Uni-Select acquisition. Results of Operations—Segment Reporting We have four reportable segments: Wholesale - North America, Europe, Specialty and Self Service. We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our growth and profitability, consistent with how we evaluate our performance, as this statistic removes the translation impact of exchange rate fluctuations, which are outside of our control and do not reflect our operational performance. Constant currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's currency conversion rate. This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under US GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies. 29 The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in millions): Three Months Ended March 31, 2023 % of Total Segment Revenue 2022 % of Total Segment Revenue Third Party Revenue Wholesale - North America $ 1,229 $ 1,201 Europe 1,555 1,488 Specialty 396 460 Self Service 169 199 Total third party revenue $ 3,349 $ 3,348 Total Revenue Wholesale - North America $ 1,229 $ 1,201 Europe 1,555 1,488 Specialty 397 461 Self Service 169 199 Eliminations (1) (1) Total revenue $ 3,349 $ 3,348 Segment EBITDA Wholesale - North America $ 252 20.5 % $ 218 18.1 % Europe 151 9.7 % 131 8.8 % Specialty 31 7.9 % 58 12.6 % Self Service 22 13.2 % 40 20.0 % Note: In the table above, the percentages of total segment revenue may not recalculate due to rounding. The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as Net Income excluding discontinued operations; depreciation, amortization; interest (which includes gains and losses on debt extinguishment); income tax expense; restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for and subsequent adjustments to reserves for asset recoverability and expenditures to support our employees and their families). See Note 21, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of total Segment EBITDA to net income. 30 Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Wholesale - North America Third Party Revenue The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions): Three Months Ended March 31, Percentage Change in Revenue Wholesale - North America 2023 2022 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 1,148 $ 1,106 14.4 % (1) (10.3) % (3) (0.4) % 3.8 % Other revenue 81 95 (14.3) % (2) — % (0.4) % (14.7) % Total third party revenue $ 1,229 $ 1,201 12.1 % (9.5) % (0.4) % 2.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue increased 14.4% for the three months ended March 31, 2023 compared to the prior year period, primarily driven by pricing initiatives which focused on offsetting inflation on input costs and a net volume increase. Aftermarket collision parts volumes increased year over year due to reduced pressures on our supply chain, with the improved aftermarket inventory availability contributing to a year over year decrease in recycled parts volumes. Aftermarket collision parts volumes also grew as a result of the continued rollout of State Farm's aftermarket parts program, which began on a trial basis in June 2022 and has subsequently been expanded. (2) Other organic revenue decreased 14.3% primarily related to (i) a $12 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices, (ii) a $1 million decrease in revenue from other scrap (e.g., aluminum) and cores due to lower prices partially offset by higher volumes and (iii) a $1 million decrease in revenue from scrap steel related to lower prices, partially offset by higher volumes. (3) Acquisition and divestiture revenue was a decrease of $113 million due to the divestiture of our PGW aftermarket glass business in the second quarter of 2022. Segment EBITDA Segment EBITDA increased $34 million , or 15.6%, in the three months ended March 31, 2023 compared to the prior year period, despite the $16 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, improved aftermarket volumes, productivity initiatives helping to offset inflationary pressures related to product cost, and lower freight costs. The increase was partially offset by a net decrease attributable to precious metals and scrap steel. We estimate that precious metals and scrap steel pricing had a net unfavorable effect of $8 million, or 0.5%, on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment: Wholesale - North America Percentage of Total Segment Revenue Segment EBITDA for the three months ended March 31, 2022 18.1 % Increase (decrease) due to: Change in gross margin 1.9 % (1) Change in segment operating expenses — % (2) Change in other income and expenses, net 0.5 % (3) Segment EBITDA for the three months ended March 31, 2023 20.5 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin of 1.9% was primarily driven by (i) a 0.9% benefit from lower inbound freight costs (ii) a 0.6% mix benefit resulting from the PGW divestiture in the second quarter of 2022, and (iii) a 0.4% benefit from other factors, including pricing and productivity initiatives to offset inflationary pressures related to product cost. (2) Segment operating expenses as a percentage of revenue were flat primarily reflecting favorable impacts of (i) 0.8% from decreased freight, vehicle, and fuel costs, offset by (ii) 0.7% from higher charitable contributions, and (iii) other individually immaterial factors representing a 0.1% unfavorable impact in the aggregate. 31 (3) The favorable impact in other income and expenses, net was primarily related to funds received to settle an eminent domain matter in 2023. Europe Third Party Revenue The following table summarizes the changes in third party revenue by category in our Europe segment (in millions): Three Months Ended March 31, Percentage Change in Revenue Europe 2023 2022 Organic Acquisition and Divestiture Foreign Exchange (2) Total Change Parts & services revenue $ 1,548 $ 1,481 9.7 % (1) 0.7 % (5.9) % 4.6 % Other revenue 7 7 (1.0) % 0.2 % (8.0) % (8.8) % Total third party revenue $ 1,555 $ 1,488 9.7 % 0.7 % (5.9) % 4.5 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended March 31, 2023 increased by 9.7% (8.2% on a per day basis), primarily driven by pricing initiatives across all geographies to offset increased costs resulting from inflationary pressures and to a lesser extent, higher volumes. (2) Exchange rates decreased our revenue growth by $88 million, or 5.9%, primarily due to the stronger U.S. dollar against the euro and pound sterling for the three months ended March 31, 2023 relative to the prior year period. Segment EBITDA Segment EBITDA increased $20 million, or 14.8%, for the three months ended March 31, 2023 compared to the prior year period. Our Europe Segment EBITDA included a negative year over year impact of $9 million rel ated to the translation of local currency results into U.S. dollars at lower exchange rates than those experienced during the three months ended March 31, 2022 . On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $29 million, or 21.3% , co mpared to the prior year period. The increase in dollar terms is attributable to organic revenue growth of $144 million and margin expansion from favorable leverage effects and productivity initiatives. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the three months ended March 31, 2023. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment: Europe Percentage of Total Segment Revenue Segment EBITDA for the three months ended March 31, 2022 8.8 % Increase (decrease) due to: Change in gross margin — % (1) Change in segment operating expenses 0.9 % (2) Change in other expense, net 0.1 % Segment EBITDA for the three months ended March 31, 2023 9.7 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Gross margin was flat year over year due to offsetting individually immaterial factors. (2) The decrease in segment operating expenses as a percentage of revenue reflects favorable impacts of (i) 0.9% from personnel costs due to increased sales leverage and productivity initiatives, and (ii) other individually immaterial factors representing a 0.2% favorable impact in the aggregate, partially offset by (iii) an unfavorable impact of 0.2% due to higher utilities costs as compared to the prior year period due to rising energy prices. 32 Specialty Third Party Revenue The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions): Three Months Ended March 31, Percentage Change in Revenue Specialty 2023 2022 Organic (1) Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 396 $ 460 (13.5) % — % (0.5) % (14.0) % Other revenue — — — % — % — % — % Total third party revenue $ 396 $ 460 (13.5) % — % (0.5) % (14.0) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended March 31, 2023 decreased by 13.5% primarily due to demand softness in the recreational vehicle ("RV") product line, as RV unit retail sales and wholesale shipments have declined year over year. Segment EBITDA Segment EBITDA decreased $27 million, or 46.3%, in the three months ended March 31, 2023 compared to the prior year period primarily due to the organic revenue decline and the negative leverage effect on overhead expenses. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment: Specialty Percentage of Total Segment Revenue Segment EBITDA for the three months ended March 31, 2022 12.6 % Increase (decrease) due to: Change in gross margin (3.2) % (1) Change in segment operating expenses (1.5) % (2) Segment EBITDA for the three months ended March 31, 2023 7.9 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in gross margin primarily was driven by (i) increased competitive pricing due to broader availability of inventory among competitors in the market, (ii) discounting on inventory primarily in the RV and towing product lines, and (iii) product channel mix toward lower margin auto and marine products. (2) The increase in segment operating expenses as a percentage of revenue was due to a negative leverage effect as operating expenses decreased at a lower rate than the decline in organic revenue. The major contributing expense categories were personnel costs (0.4%), facility expenses (0.3%) and vehicle and fuel expenses (0.3%) with all other immaterial operating expense categories in aggregate contributing to the remaining 0.5%. Self Service Third Party Revenue The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions): Three Months Ended March 31, Percentage Change in Revenue Self Service 2023 2022 Organic Acquisition and Divestiture (3) Foreign Exchange Total Change Parts & services revenue $ 60 $ 57 4.9 % (1) — % — % 4.9 % Other revenue 109 142 (14.5) % (2) (8.3) % — % (22.8) % Total third party revenue $ 169 $ 199 (8.9) % (5.9) % — % (14.8) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. 33 (1) Parts and services organic revenue increased 4.9% for the three months ended March 31, 2023 compared to the prior year period, primarily driven by pricing initiatives which focused on offsetting inflation on input costs resulting from greater competition for vehicles. (2) Other organic revenue decreased 14.5%, or $20 million, year over year due to (i) a $17 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices, (ii) a $5 million decrease in revenue from scrap steel related to lower prices and slightly lower volumes, partially offset by (iii) a $2 million increase in revenue from other scrap (including aluminum) and cores primarily due to higher volumes partially offset by lower prices. (3) Acquisition and divestiture revenue was a decrease of $12 million, or 5.9% due to the divestiture of a business in the third quarter of 2022. Segment EBITDA Segment EBITDA decreased $18 million, or 43.5%, in the three months ended March 31, 2023 compared to the prior year period. The decrease is driven by the decline in revenue due to unfavorable movements in commodity prices compared to the prior year period and gross margin compression from higher vehicle procurement costs. In addition, decreases in precious metals prices contributed an estimated $15 million decline in Segment EBITDA relative to the three months ended March 31, 2022. Net sequential changes in scrap steel prices partially offset the impact of the decline in precious metals prices. During the three months ended March 31, 2023, scrap steel prices had an $11 million favorable impact on Segment EBITDA, compared to a $2 million favorable impact during the three months ended March 31, 2022. The favorable impacts for the three months ended March 31, 2023 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. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment: Self Service Percentage of Total Segment Revenue Segment EBITDA for the three months ended March 31, 2022 20.0 % Increase (decrease) due to: Change in gross margin (1.8) % (1) Change in segment operating expenses (5.0) % (2) Segment EBITDA for the three months ended March 31, 2023 13.2 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in gross margin primarily reflects an unfavorable impact resulting from higher vehicle procurement costs due to greater competition for vehicles. (2) The increase in segment operating expenses as a percentage of revenue reflects (i) a negative leverage effect of 4.5% from decreases in metals revenue and (ii) other individually immaterial factors representing a 0.5% unfavorable impact in the aggregate. Liquidity and Capital Resources The following table summarizes liquidity data as of the dates indicated (in millions): Adjusted (4) March 31, 2023 December 31, 2022 December 31, 2022 Cash and cash equivalents $ 342 $ 278 $ 278 Total debt 2,740 (1) 2,662 (5) 2,662 (1) Current maturities (2) 44 34 34 Capacity under credit facilities (3) 2,000 2,000 3,150 Availability under credit facilities (3) 591 645 1,295 Total liquidity (cash and cash equivalents plus availability under credit facilities) 933 923 1,573 (1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $12 million and $6 million as of March 31, 2023 and December 31, 2022, respectively). (2) Debt amounts reflect the gross values to be repaid in the next 12 months (excluding debt issuance costs of immaterial amounts as of March 31, 2023 and December 31, 2022). 34 (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 Senior Unsecured Credit Agreement as if both were in effect as of December 31, 2022. See Note 16, "Long-Term Obligations" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. (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. Our primary sources of liquidity are cash flows from operations and our credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt, paying dividends or repurchasing our common stock. As we have pursued acquisitions as part of our historical growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our acq uisitions, we have accessed various forms of debt financing, including revolving credit facilities and senior notes. We currently believe we have sufficient access to capital markets to support our future growth objectives. As of March 31, 2023, we had debt outstanding and additional available sources of financing as follows: • Senior unsecured credit facilities, composed of term loans totaling $500 million (all of which was outstanding at March 31, 2023) and $2,000 million in available revolving credit ($1,335 million outstanding at March 31, 2023), bearing interest at variable rates, with availability reduced by $74 million of amounts outstanding under letters of credit • Euro Notes (2024) totaling $542 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate • Euro Notes (2028) totaling $271 million (€250 million) maturing in April 2028 and bearing interest at a 4.125% fixed rate We had approximately $591 million available under our credit facilities in place as of March 31, 2023 . Combined with $342 million of cash and cash equivalents at March 31, 2023, we had approximately $933 million i n available liquidity, a decrease of $640 million from our available liquidity as of December 31, 2022 as a result of reducing our overall credit facility capacity by $650 million. The Uni-Select Acquisition is expected to close in the second half of 2023. As of March 31, 2023, we have the following arrangements in place to finance the transaction: • Bridge loan facility of $1,600 million. We intend to replace the bridge loan facility with permanent financing, such as senior notes, in advance of closing the transaction; and • CAD delayed draw term loan of up to CAD 700 million scheduled to mature three years from the date of funding (i.e. the business day prior to the acquisition closing date), bearing interest at variable rates. We believe that our current liquidity, cash expected to be generated by operating activities in future periods and access to capital markets will be sufficient to meet our current operating and capital requirements. However, as noted, we will access additional financing sources to fund the Uni-Select transaction. 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 three months ended March 31, 2023 is as follows: Dividend Amount Declaration Date Record Date Payment Date $0.275 February 21, 2023 March 16, 2023 March 30, 2023 On April 25, 2023, our Board of Directors declared a quarterly cash dividend of $0.275 per share of common stock, payable on June 1, 2023, to stockholders of record at the close of business on May 18, 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, and various other factors, many of which are outside of our control. 35 With $933 million of total liquidity as of March 31, 2023 and $44 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 Unsecured Credit Agreement, which includes two financial maintenance covenants: a maximum total leverage ratio and minimum interest coverage ratio. The terms maximum total leverage ratio and minimum interest coverage ratio are specifically calculated per the Senior Unsecured Credit Agreement and differ in specified ways from comparable US GAAP or common usage terms. We were in compliance with all applicable covenants under our Senior Unsecured Credit Agreement as of March 31, 2023. The required debt covenants per the Senior Unsecured Credit Agreement and our actual ratios with respect to those covenants are as follows as of March 31, 2023: Covenant Level Ratio Achieved as of March 31, 2023 Maximum total leverage ratio 4.00 : 1.00 1.6 Minimum interest coverage ratio 3.00 : 1.00 19.9 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 Senior Unsecured Credit Agreement. The indentures do not prohibit amendments to the financial covenants under the credit facility as needed. While we believe that we have adequate capacity under our existing credit facilities to finance our current operations, 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 such as will be required to finance the Uni-Select Acquisition. 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. As part of our effort to improve our operating cash flows, we may negotiate payment term extensions with suppliers. These efforts are supported by our supply chain finance programs. See Note 15, "Supply Chain Financing" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our supply chain financing arrangements. We hold interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings. After giving effect to these contracts, the weighted average interest rate on borrowings outstanding under our Senior Unsecured Credit Agreement was 5.0% at March 31, 2023. Including our senior notes, our overall weighted average interest rate on borrowings was 4.7% at March 31, 2023. Under the Senior Unsecured Credit Agreement, our borrowings 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. See Note 16, "Long-Term Obligations" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our borrowings and related interest. The interest rate swaps are described in Note 17, "Derivative Instruments and Hedging Activities" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q. We had outstanding credit agreement borrowin gs (including both term loans and revolving credit facilities) of $1,835 million and $1,786 million at March 31, 2023 and December 31, 2022, respectively. Of these amounts, t here wer e no current maturities at March 31, 2023 or December 31, 2022. 36 The scheduled maturities of long-term obligations outstanding at March 31, 2023 are as follows (in millions): Amount Nine months ending December 31, 2023 (1) $ 39 Years ending December 31: 2024 557 2025 13 2026 506 2027 5 Thereafter 1,620 Total debt (2) $ 2,740 (1) Long-term obligations maturing by December 31, 2023 include $20 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 $12 million as of March 31, 2023). As of March 31, 2023, the Company had cash and cash equivalents of $342 million, of which $249 million was held by foreign subsidiaries. In general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries. We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S. without repatriating our foreign earnings. We may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity objectives. Distributions of dividends from our foreign subsidiaries, if any, would be generally exempt from further U.S. taxation, either as a result of the 100% participation exemption under the Tax Cuts and Jobs Act enacted in 2017, or due to the previous taxation of foreign earnings under the transition tax and the Global Intangible Low-Taxed Income regime. The procurement of inventory is the largest operating use of our funds. We normally pay for aftermarket product purchases on standard payment terms or at the time of shipment, depending on the manufacturer and the negotiated payment terms. We normally pay for salvage vehicles acquired at salvage auctions and under direct procurement arrangements at the time that we take possession of the vehicles. The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the three months ended March 31, 2023 and 2022 (in millions): Three Months Ended March 31, 2023 2022 Change Wholesale - North America $ 273 $ 317 $ (44) (1) Europe 920 955 (35) (2) Specialty 251 403 (152) (3) Total $ 1,444 $ 1,675 $ (231) (1) Inventory purchases across the Wholesale - North America segment decreased in the three months ended March 31, 2023 compared to the prior year period primarily due to higher required restocking needed in the prior year to rebuild inventory levels. (2) The decrease in inventory purchases in our Europe segment included a decrease of $53 million attributable to the decrease in the value of the euro, and to a lesser extent, the pound sterling in the three months ended March 31, 2023 compared to the prior year period. On a constant currency basis, inventory purchases increased by 2% compared to the prior year period. (3) The decrease in inventory purchases in the Specialty segment compared to the prior year period was primarily due to matching inventory levels with demand. 37 The following table sets forth a summary of our global wholesale salvage and self service procurement for the three months ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 % Change Wholesale - North America salvage vehicles 64 60 6.7 % Europe wholesale salvage vehicles 8 8 — % Self Service salvage vehicles 137 135 1.5 % Wholesale - North America salvage purchases in 2023 increased relative to the prior year due to improved availability of vehicles at auctions. The following table summarizes the components of the year over year changes in cash provided by operating activities (in millions): Operating Cash Net cash provided by operating activities for the three months ended March 31, 2022 $ 409 Increase (decrease) due to: Working capital accounts: (1) Receivables, net of allowance for credit losses (6) Inventories 155 Accounts payable (287) Other operating activities (48) (2) Net cash provided by operating activities for the three months ended March 31, 2023 $ 223 (1) Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period. • Inventories represented $155 million in incremental cash inflows in the first three months of 2023 compared to the same period of 2022. The change is primarily attributable to our Specialty segment inventory decreases of $112 million due to decreasing inventory purchasing levels to align with softening demand and decreases at our Europe segment of $24 million and our Wholesale - North America segment of $19 million due to higher required restocking needed in the prior year to rebuild inventory levels. • Accounts payable produced $287 million in lower cash inflows in the first three months of 2023 compared to the same period of 2022 on a consolidated basis. This was primarily attributable to lower cash inflows in our Wholesale - North America segment of $249 million (partly related to accelerated vendor payments in late 2021 to ensure priority access to inventory) and in our Europe segment of $57 million, partially offset by our Specialty segment which contributed a $19 million lower cash outflow. (2) Primarily reflects the aggregate effect of higher interest payments in the first quarter of 2023 primarily due to higher interest rates during the three months ended March 31, 2023 compared to the same period of 2022. Net cash used in investing activities totaled $97 million and $63 million during the three months ended March 31, 2023 and 2022, respectively. Property, plant and equipment purchases were $70 million in the three months ended March 31, 2023 compared to $59 million in the prior year period, primarily driven by capital projects in our Europe and Specialty segments. We invested $25 million of cash in business acquisitions in the three months ended March 31, 2023. We did not complete any business acquisitions in the same period of 2022. The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in millions): Three Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 223 $ 409 Less: purchases of property, plant and equipment 70 59 Free cash flow $ 153 $ 350 38 Net cash used in financing activities decreased by $212 million for the three months ended March 31, 2023 compared to the same period in 2022 due primarily to decreases in repurchases of common stock of $136 million and net borrowings on our debt of $41 million compared to net repayments on our debt of $53 million in 2022. Please refer to "Unregistered Sales of Equity Securities and Use of Proceeds" in Part II, Item 2 of this Quarterly Report on Form 10-Q for additional information on repurchases of common stock. We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts.