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Item 1. Financial Statements

2023-10-27 compared with 2023-07-27 · 248 added, 150 removed, 692 unchanged (37% of the section changed)

3 unchanged sentences

(In millions, except per share data)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

34 unchanged sentences

Net income attributable to LKQ stockholders $ 0.78 $ 0.95 $ 2.83 $ 3.40

(1) Related to the sale of PGW Auto Glass ("PGW").

(1) Primarily related to the sale of PGW Auto Glass ("PGW").

Refer to Note 3, "Discontinued Operations and Divestitures" for further information.

1 unchanged sentence

("Uni-Select") acquisition.

Refer to Note 3, "Uni-Select Acquisition" and Note 17, "Derivative Instruments and Hedging Activities" for further information.

Refer to Note 2, "Business Combinations" and Note 17, "Derivative Instruments and Hedging Activities" for further information.

(3) The sum of the individual earnings per share amounts may not equal the total due to rounding.

3 unchanged sentences

(In millions)

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

5 unchanged sentences

Net change in unrealized gains/losses on cash flow hedges, net of tax 2 — ( 5 ) —

Net change in unrealized gains/losses on pension plans, net of tax — 1 — 1

Other comprehensive income from unconsolidated subsidiaries 8 2 12 4

Other comprehensive income (loss) 45 ( 149 ) 88 ( 202 )

Other comprehensive loss ( 137 ) ( 184 ) ( 49 ) ( 386 )

Comprehensive income 71 78 711 569

5 unchanged sentences

(In millions, except per share data)

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Current assets:

3 unchanged sentences

Prepaid expenses and other current assets 275 230

Assets of discontinued operations 311 —

Total current assets 5,286 4,258

16 unchanged sentences

Other current liabilities 148 89

Liabilities of discontinued operations 173 —

Total current liabilities 3,559 2,271

6 unchanged sentences

Stockholders' equity:

Common stock, $ 0.01 par value, 1,000.0 shares authorized, 322.9 shares issued and 267.7 shares outstanding at June 30, 2023;

Common stock, $ 0.01 par value, 1,000.0 shares authorized, 323.1 shares issued and 267.9 shares outstanding at September 30, 2023;

322.4 shares issued and 267.3 shares outstanding at December 31, 2022

3 unchanged sentences

Treasury stock, at cost;

55.2 shares at June 30, 2023 and 55.1 shares at December 31, 2022

55.2 shares at September 30, 2023 and 55.1 shares at December 31, 2022

( 2,394 ) ( 2,389 )

7 unchanged sentences

(In millions)

Six Months Ended June 30,

Nine Months Ended September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

18 unchanged sentences

Proceeds from disposals of businesses — 399

Proceeds from settlement of foreign exchange contracts - acquisition related 49 —

Other investing activities, net ( 14 ) ( 8 )

15 unchanged sentences

Net increase (decrease) in cash and cash equivalents 146 ( 5 )

Cash and cash equivalents, beginning of period 278 274

Cash and cash equivalents of continuing operations, beginning of period 278 274

Cash and cash equivalents of discontinued operations, beginning of period — —

Cash and cash equivalents of continuing and discontinued operations, beginning of period 278 274

Cash and cash equivalents of continuing and discontinued operations, end of period

Cash and cash equivalents of discontinued operations, end of period

Cash and cash equivalents, end of period $ 401 $ 269

10 unchanged sentences

Shares Amount Shares Amount

Balance as of April 1, 2023 322.8 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,510 $ 6,852 $ ( 280 ) $ 14 $ 5,705

Balance as of July 1, 2023 322.9 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,520 $ 7,059 $ ( 235 ) $ 15 $ 5,968

Net income — — — — — 208 — — 208

Other comprehensive income — — — — — — 45 — 45

Other comprehensive loss — — — — — — ( 137 ) — ( 137 )

Vesting of restricted stock units, net of shares withheld for employee tax 0.2 — — — ( 2 ) — — — ( 2 )

1 unchanged sentence

Dividends declared to LKQ stockholders ($0.275 per share) — — — — — ( 73 ) — — ( 73 )

Balance as of June 30, 2023 322.9 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,520 $ 7,059 $ ( 235 ) $ 15 $ 5,968

Balance as of September 30, 2023 323.1 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,527 $ 7,194 $ ( 372 ) $ 15 $ 5,973

LKQ Stockholders

2 unchanged sentences

Shares Amount Shares Amount

Balance as of April 1, 2022 322.0 $ 3 ( 37.3 ) $ ( 1,490 ) $ 1,482 $ 5,995 $ ( 206 ) $ 15 $ 5,799

Balance as of July 1, 2022 322.0 $ 3 ( 45.4 ) $ ( 1,894 ) $ 1,492 $ 6,344 $ ( 355 ) $ 15 $ 5,605

Net income — — — — — 262 — — 262

1 unchanged sentence

Purchase of treasury stock — — ( 6.8 ) ( 343 ) — — — — ( 343 )

Vesting of restricted stock units, net of shares withheld for employee tax 0.3 — — — ( 1 ) — — — ( 1 )

Stock-based compensation expense — — — — 8 — — — 8

Dividends declared to LKQ stockholders ($0.25 per share) — — — — — ( 70 ) — — ( 70 )

Balance as of June 30, 2022 322.0 $ 3 ( 45.4 ) $ ( 1,894 ) $ 1,492 $ 6,344 $ ( 355 ) $ 15 $ 5,605

Balance as of September 30, 2022 322.3 $ 3 ( 52.2 ) $ ( 2,237 ) $ 1,499 $ 6,536 $ ( 539 ) $ 15 $ 5,277

The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

8 unchanged sentences

Net income — — — — — 759 — 1 760

Other comprehensive income — — — — — — 88 — 88

Other comprehensive loss — — — — — — ( 49 ) — ( 49 )

Purchase of treasury stock — — ( 0.1 ) ( 5 ) — — — — ( 5 )

2 unchanged sentences

Dividends declared to LKQ stockholders ($0.825 per share) — — — — — ( 221 ) — — ( 221 )

Balance as of June 30, 2023 322.9 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,520 $ 7,059 $ ( 235 ) $ 15 $ 5,968

Balance as of September 30, 2023 323.1 $ 3 ( 55.2 ) $ ( 2,394 ) $ 1,527 $ 7,194 $ ( 372 ) $ 15 $ 5,973

LKQ Stockholders

9 unchanged sentences

Dividends declared to LKQ stockholders ($0.75 per share) — — — — — ( 213 ) — — ( 213 )

Balance as of June 30, 2022 322.0 $ 3 ( 45.4 ) $ ( 1,894 ) $ 1,492 $ 6,344 $ ( 355 ) $ 15 $ 5,605

Balance as of September 30, 2022 322.3 $ 3 ( 52.2 ) $ ( 2,237 ) $ 1,499 $ 6,536 $ ( 539 ) $ 15 $ 5,277

The accompanying notes are an integral part of the Unaudited Condensed Consolidated Financial Statements.

17 unchanged sentences

The adoption of ASU 2022-04 did not have a material impact on our unaudited condensed consolidated financial statements.

Discontinued Operations and Divestitures

Glass Manufacturing Business

For the six months ended June 30, 2022, we recorded to discontinued operations a $ 4 million benefit primarily related to the reassessment of a previously recorded valuation allowance on a deferred tax asset related to our glass manufacturing business sold in 2017.

Other Divestitures (Not Classified in Discontinued Operations)

In April 2022, we completed the sale of PGW, our aftermarket glass business within our Wholesale - North America segment, to a third party for $ 361 million resulting in recognition of a $ 155 million pretax gain ($ 127 million after tax).

Uni-Select Acquisition

On February 26, 2023, we entered into an arrangement agreement in order to implement a plan of arrangement (the "Arrangement") under the provisions of the Québec Business Corporations Act pursuant to which we will acquire all of Uni-Select's issued and outstanding shares for Canadian dollar (“CAD”) 48.00 per share in cash, representing a total enterprise value of approximately CAD 2.8 billion ($ 2.1 billion at the June 30, 2023 exchange rate) (the "Uni-Select Acquisition").

Business Combinations

On August 1, 2023, we acquired all of Uni-Select's issued and outstanding shares for Canadian dollar (“CAD”) 48.00 per share in cash, representing a total enterprise value of approximately CAD 2.8 billion ($ 2.1 billion) (the "Uni-Select Acquisition"), by way of a plan of arrangement (the "Arrangement") entered into on February 26, 2023, under the provisions of the Business Corporations Act (Québec).

Uni-Select is a leading distributor of automotive refinish and industrial coatings and related products in North America through its FinishMaster segment, in the automotive aftermarket parts business in Canada through its Canadian Automotive Group segment and in the United Kingdom (“U.K.”) through its GSF Car Parts segment.

The Uni-Select Acquisition will complement our existing North American paint distribution operations and provides a scaled position in the Canadian mechanical parts space, with opportunity for future consolidation and growth.

During the second quarter of 2023, we received the required approvals

from Uni-Select's shareholders, the Superior Court of Québec and regulators in the United States and Canada with respect to the Arrangement.

On July 21, 2023, the U.K.'s Competition and Markets Authority issued its Phase 1 decision on the Arrangement, and in response we submitted proposed undertakings relating to the divestiture of Uni-Select’s GSF Car Parts business in the U.K.

As a result of the satisfaction or waiver of all the closing conditions relating to required regulatory approvals on July 26, 2023, Uni-Select and LKQ Corporation will proceed with the remaining procedures necessary to give effect to the Arrangement.

Subject to the satisfaction or waiver of the remaining closing conditions pursuant to its terms, the Arrangement is currently anticipated to be completed on or around August 1, 2023, and we plan to divest the GSF Car Parts business soon thereafter.

The remaining businesses will be reported within our Wholesale - North America segment.

See Note 11, "Restructuring and Transaction Related Expenses" for information related to transaction expenses related to the Uni-Select Acquisition.

In order to reduce the risk related to changes in CAD foreign exchange rates for the CAD purchase price between signing and closing, we entered into foreign exchange contracts.

These foreign exchange contracts do not qualify for hedge accounting, and therefore the changes in fair value are reported in Gains on foreign exchange contracts - acquisition related in the Unaudited Condensed Consolidated Statements of Income.

As of June 30, 2023, we reported an asset of $ 46 million with corresponding gains of $ 23 million and $ 46 million for the three and six months ended June 30, 2023, respectively.

We intend to settle these foreign exchange contracts upon the closing of the Uni-Select Acquisition.

During the second quarter of 2023, we received the required approvals from Uni-Select's shareholders, the Superior Court of Québec and regulators in the United States and Canada with respect to the Arrangement.

On July 26, 2023, the U.K.'s Competition and Markets Authority cleared the acquisition, except with respect to the wholesale automotive parts business, GSF Car Parts in the U.K., which was divested in October 2023.

See Note 3, "Discontinued Operations and Divestitures" for information related to the divestment of GSF Car Parts.

In order to reduce the risk related to changes in CAD foreign exchange rates for the CAD purchase price between signing the Arrangement and closing of the Uni-Select Acquisition, we entered into foreign exchange contracts.

These foreign exchange contracts did not qualify for hedge accounting, and therefore the changes in fair value are reported in Gains on foreign exchange contracts - acquisition related in the Unaudited Condensed Consolidated Statements of Income.

We reported Gains on foreign exchange contracts - acquisition related of $ 3 million and $ 49 million for the three and nine months ended September 30, 2023.

These foreign exchange contracts were settled in July 2023 ahead of closing of the Uni-Select Acquisition, resulting in total payments received of $ 49 million.

See Note 17, "Derivative Instruments and Hedging Activities" for information related to these foreign exchange contracts.

In connection with the Uni-Select Acquisition, we entered into a senior unsecured bridge loan facility to obtain committed financing for the purchase price.

In connection with the Uni-Select Acquisition, we entered into a senior unsecured bridge loan facility to obtain committed financing for a portion of the purchase price.

The bridge loan facility was terminated in the second quarter of 2023 after arranging the permanent financing as discussed below.

We incurred $ 9 million in upfront fees related to the bridge loan facility and amortized $ 6 million and $ 9 million of these upfront fees (reported in Interest expense) during the three and six months ended June 30, 2023, respectively.

For the permanent financing, on March 27, 2023, we entered into a new term loan credit agreement ("CAD Note") which establishes an unsecured term loan facility of up to CAD 700 million scheduled to mature three years from the date of funding.

Proceeds from the CAD Note may only be used (i) to finance a portion of the aggregate cash consideration for the Uni-Select Acquisition, (ii) to refinance certain outstanding debt of Uni-Select and (iii) to pay fees, costs and expenses related to the Uni-Select Acquisition.

The CAD Note is expected to fund one business day prior to the consummation of the Uni-Select Acquisition transaction and includes a non-usage fee that will be incurred through the date the proceeds are drawn on the facility.

There were no borrowings against the CAD Note as of June 30, 2023.

We issued a borrowing request on July 26, 2023 for the full amount in anticipation of closing early August 2023.

We incurred $ 9 million in upfront fees related to the bridge loan facility and fully amortized these upfront fees (reported in Interest expense in the Unaudited Condensed Consolidated Statements of Income) during the nine months ended September 30, 2023.

For the permanent financing, on March 27, 2023, we entered into a new term loan credit agreement ("CAD Note") which established an unsecured term loan facility of up to CAD 700 million maturing in July 2026.

Proceeds from the CAD Note could only be used (i) to finance a portion of the aggregate cash consideration for the Uni-Select Acquisition, (ii) to refinance certain outstanding debt of Uni-Select and (iii) to pay fees, costs and expenses related to the Uni-Select Acquisition.

The CAD Note included a non-usage fee that was incurred through the date the proceeds were drawn on the facility.

In connection with the closing of the Uni-Select Acquisition, we borrowed approximately $ 531 million (CAD 700 million) under the CAD Note on July 31, 2023.

There were no changes in borrowings against the CAD Note between the draw date and September 30, 2023.

The CAD Note contains customary covenants for an unsecured term loan for a company that has debt ratings that are investment grade, such as requirements to comply with a total leverage ratio and interest coverage ratio, each calculated in accordance with the terms of the CAD Note, and limits on the Company’s and its subsidiaries’ ability to incur liens and indebtedness.

The interest rate applicable to the CAD Note may be (i) a forward-looking term rate based on the Canadian Dollar Offer Rate for an interest period chosen by the Company of one or three months or (ii) the Canadian Prime Rate (as defined in the CAD Note), plus in each case a spread based on the Company’s debt rating and total leverage ratio.

See Note 16, "Long-Term Obligations" for additional information related to the CAD Note.

Additionally, on May 24, 2023, we completed an offering of $ 1,400 million aggregate principal amount of senior unsecured notes, consisting of $ 800 million senior notes due 2028 (the "U.S.

4 unchanged sentences

The net proceeds from the offering of the U.S.

Notes (2028/33) will be used, together with borrowings under our CAD note, (i) to finance a portion of the consideration payable for the Uni-Select Acquisition, including repaying existing Uni-Select indebtedness, (ii) to pay associated fees and expenses, including fees and expenses incurred in connection with the offering, and (iii) for general corporate purposes.

As of June 30, 2023, we recorded the net proceeds received of $ 1,385 million to Cash and cash equivalents on the Unaudited Condensed Consolidated Balance Sheets as there are no restrictions on usage of the funds.

The proceeds were invested in money market funds, and the interest income partially offsets the carrying cost of the U.S.

Notes (2028/33).

Notes (2028/33) were used, together with borrowings under our CAD Note, (i) to finance a portion of the consideration payable for the Uni-Select Acquisition, including repaying existing Uni-Select indebtedness, (ii) to pay associated fees and expenses, including fees and expenses incurred in connection with the offering, and (iii) for general corporate purposes.

Notes (2028) and U.S.

2 unchanged sentences

To hedge the movement of market interest rates for the senior notes prior to the issuance date, we entered into forward-starting interest rate swaps to lock interest rates for the five and ten year senior notes.

These forward-starting interest rate swaps were settled following the issuance of the U.S.

These forward-starting interest rate swaps were settled in the second quarter following the issuance of the U.S.

Notes (2028/33).

See Note 17, "Derivative Instruments and Hedging Activities" for information related to these interest rate instruments.

We anticipate funding the remainder of the purchase price with borrowings under our revolving credit facility and/or cash on hand.

We initiated borrowings on our revolving credit facility for approximately $150 million on July 26, 2023 in anticipation of closing early August 2023.

We funded the remainder of the purchase price with borrowings under our revolving credit facility and cash on hand of approximately $ 150 million and $ 50 million, respectively.

We recorded $ 1,230 million of goodwill related to our acquisition of Uni-Select, of which we expect $ 116 million to be deductible for income tax purposes.

In the period between the acquisition date and September 30, 2023, Uni-Select, which is reported in our Wholesale - North America segment, generated revenue of $ 239 million and an operating loss of $ 13 million, including $ 20 million of restructuring expenses and $ 12 million of amortization of acquired intangibles.

In addition to our acquisition of Uni-Select, we completed acquisitions of one business within our Wholesale - North America segment, four businesses within our Europe segment and one business in our Specialty segment, during the nine months ended September 30, 2023.

Total acquisition date fair value of the consideration for these acquisitions was $ 135 million, composed of $ 118 million of cash paid (net of cash acquired), $ 5 million of notes payable, $ 6 million of other purchase price obligations (non-interest bearing) and $ 6 million of pre-existing equity method investment balances .

During the nine months ended September 30, 2023, we recorded $ 61 million of goodwill related to these acquisitions, of which we expect $ 11 million to be deductible for income tax purposes.

In the period between the acquisition dates and September 30, 2023, these acquisitions generated revenue of $ 90 million, including $ 42 million within our Europe segment and $ 35 million within our Specialty segment, and operating income of $ 9 million, primarily within our Europe segment.

Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition.

The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition.

The purchase price allocations for the acquisitions made during the nine months ended September 30, 2023 are preliminary as we are in the process of determining the following:

1) valuation amounts for certain receivables, inventories and fixed assets acquired;

2) valuation amounts for certain intangible assets acquired;

3) the acquisition date fair value of certain liabilities assumed;

and 4) the tax basis of the entities acquired.

We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations.

During the first nine months of 2023, the measurement period adjustments recorded for acquisitions completed in prior periods were not material.

The purchase price allocations for the acquisitions completed during the nine months ended September 30, 2023 are as follows (in millions):

Nine Months Ended

September 30, 2023

Uni-Select (1)

Other Acquisitions Total

Receivables $ 123 $ 31 $ 154

Inventories 332 59 391

Prepaid expenses and other current assets 30 5 35

Assets of discontinued operations (1)

Property, plant and equipment 104 10 114

Operating lease assets 80 8 88

Goodwill 1,230 61 1,291

Other intangibles (2)

Other noncurrent assets 22 — 22

Current liabilities assumed (3)

( 330 ) ( 44 ) ( 374 )

Liabilities of discontinued operations (1)

( 183 ) — ( 183 )

Long-term operating lease liabilities, excluding current portion ( 54 ) ( 8 ) ( 62 )

Debt assumed ( 1 ) ( 12 ) ( 13 )

Other noncurrent liabilities assumed (4)

( 135 ) — ( 135 )

Other purchase price obligations ( 3 ) ( 17 ) ( 20 )

Cash used in acquisitions, net of cash acquired $ 2,081 $ 118 $ 2,199

(1) In connection with our acquisition of Uni-Select, we acquired one business (GSF Car Parts) which was required to be sold.

Therefore, such business was classified as held for sale and was included within the "Assets of discontinued operations" and "Liabilities of discontinued operations" line items in the above preliminary allocation of purchase price.

See Note 3, "Discontinued Operations and Divestitures" for information related to the GSF Car Parts business.

(2) The amount recorded for our acquisition of Uni-Select primarily includes $ 17 million of trade names (3 to 5 year useful lives) and $ 543 million of customer and supplier relationships (10 to 17 year useful lives).

(3) The amount recorded for our acquisition of Uni-Select includes $ 64 million of Accounts Payable outstanding under the supply chain financing arrangement.

See Note 15, "Supply Chain Financing" for information related to our supply chain financing programs.

(4) The amount recorded for our acquisition of Uni-Select includes $ 126 million of net deferred income tax liability, the significant components of which are as follows:

deferred tax liabilities related to customer relationships of $ 140 million net with deferred tax assets related to Canadian net operating loss carryforwards of $ 23 million.

The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs.

The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors;

these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs.

See Note 18, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.

The acquisition of Uni-Select complements our existing North American paint distribution operations and provides a scaled position in the Canadian mechanical parts space, with opportunity for future consolidation and growth.

The primary objectives of our other acquisitions made during the nine months ended September 30, 2023 were to create economic value for our stockholders by enhancing our position as a leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating strengths.

When we identify potential acquisitions, we attempt to target companies with a leading market presence, experienced management team and workforce, high synergies and/or that add critical capabilities with opportunity for future consolidation and growth.

For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity.

In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the effect of the businesses acquired during the nine months ended September 30, 2023 as though the businesses had been acquired as of January 1, 2022.

The unaudited pro forma financial information is based upon accounting estimates and judgments that we believe are reasonable.

The unaudited pro forma financial information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects.

These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.

The unaudited pro forma financial information is as follows (in millions):

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Revenue $ 3,685 $ 3,521 $ 11,295 $ 11,002

Income from continuing operations 202 248 692 908

The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses (net of tax) of $ 3 million and $ 17 million and gains on foreign exchange contracts - acquisition related of $ 3 million and $ 49 million for the three and nine months ended September 30, 2023, respectively.

In addition, the unaudited pro forma financial information excludes the results of GSF Car Parts which was classified as discontinued operations upon the acquisition of Uni-Select.

Refer to Note 11, "Restructuring and Transaction Related Expenses" for further information regarding our acquisition related expenses, Note 17, "Derivative Instruments and Hedging Activities" for further information on our foreign exchange contracts and Note 3, "Discontinued Operations and Divestitures" for further information related to the divestment of GSF Car Parts.

Discontinued Operations and Divestitures

GSF C ar Parts

We acquired GSF Car Parts as part of the Uni-Select transaction and we were required to divest GSF Car Parts in order to comply with the U.K.'s Competition and Markets Authority regulatory ruling.

Since the GSF Car Parts business was held separate and never integrated into our business, we classified the business as discontinued operations upon acquisition.

As of September 30, 2023, the assets held for sale and liabilities held for sale are recorded within Assets of discontinued operations and Liabilities of discontinued operations, respectively, on the Unaudited Condensed Consolidated Balance Sheets.

On October 25, 2023, we completed the divestment of GSF Car Parts.

In order to manage our exposure to variability in the cash flows related the sale of GSF Car Parts, we entered into a foreign exchange forward contract to fix the amount of USD we would receive upon completion of the sale.

We do not expect to recognize a significant gain or loss upon disposal.

Glass Manufacturing Business

For the nine months ended September 30, 2022, we recorded to discontinued operations a $ 5 million benefit primarily related to the reassessment of a previously recorded valuation allowance on a deferred tax asset related to our glass manufacturing business sold in 2017.

Other Divestitures (Not Classified in Discontinued Operations)

Additionally, in September 2022, we completed the sale of a business within our Self Service segment, to a third party, resulting in proceeds of $ 25 million and the recognition of a $ 4 million pretax gain ($ 3 million after tax).

We classify our inventory into the following categories:

1 unchanged sentence

Inventories consist of the following (in millions):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Aftermarket and refurbished products $ 2,460 $ 2,279

3 unchanged sentences

Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods.

As of June 30, 2023, manufactured products inventory was composed of $ 32 million of raw materials, $ 7 million of work in process, and $ 16 million of finished goods.

As of September 30, 2023, manufactured products inventory was composed of $ 29 million of raw materials, $ 7 million of work in process, and $ 18 million of finished goods.

As of December 31, 2022, manufactured products inventory was composed of $ 26 million of raw materials, $ 5 million of work in process, and $ 15 million of finished goods.

Our 2023 acquisitions contributed approximately $ 380 million to our aftermarket and refurbished products inventory (including $ 332 million from Uni-Select).

Allowance for Credit Losses

Our allowance for credit losses was $ 52 million and $ 54 million as of June 30, 2023 and December 31, 2022, respectively.

The provision for credit losses was $ 1 million for both the three months ended June 30, 2023 and 2022 and $ 6 million and $ 9 million for the six months ended June 30, 2023 and 2022, respectively.

Our allowance for credit losses was $ 57 million and $ 54 million as of September 30, 2023 and December 31, 2022, respectively.

The provision for credit losses was $ 1 million for both the three months ended September 30, 2023 and 2022, and $ 7 million and $ 9 million for the nine months ended September 30, 2023 and 2022, respectively.

Noncontrolling Interest

8 unchanged sentences

Goodwill and indefinite-lived intangible assets impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment.

We did not identify any indicators of impairment in the first six months of 2023 that necessitated an interim test of goodwill impairment or indefinite-lived intangible assets impairment.

We did not identify any indicators of impairment in the first nine months of 2023 that necessitated an interim test of goodwill impairment or indefinite-lived intangible assets impairment.

Equity Method Investments

The carrying value of our Equity method investments were as follows (in millions):

Segment Ownership as of June 30, 2023

June 30, 2023 December 31, 2022

Segment Ownership as of September 30, 2023

September 30, 2023 December 31, 2022

MEKO AB (1)(2)

1 unchanged sentence

Total $ 158 $ 141

(1) As of June 30, 2023, the Level 1 fair value of our investment in MEKO AB ("Mekonomen") was $ 161 million based on the quoted market price for Mekonomen's common stock using the same foreign exchange rate as the carrying value.

(2) As of June 30, 2023, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $ 9 million;

(1) As of September 30, 2023, the Level 1 fair value of our equity investment in MEKO AB ("Mekonomen") was $ 133 million based on the quoted market price for Mekonomen's common stock using the same foreign exchange rate as the carrying value.

We evaluated our investment in Mekonomen for other-than-temporary impairment and concluded the decline in fair value was not other-than-temporary;

however, a prolonged, material impairment may cause us to account for the decline as an other-than-temporary impairment in a future period, resulting in a charge in our Unaudited Condensed Consolidated Statements of Income.

(2) As of September 30, 2023, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $ 9 million;

this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016.

We record our equity in the net earnings of Mekonomen on a one quarter lag.

(3) In July 2023, we acquired the remaining equity interest in an investment in our Europe segment resulting in a decrease to the carrying value of $ 3 million.

Warranty Reserve

7 unchanged sentences

Warranty claims ( 61 )

Balance as of June 30, 2023 $ 34

Balance as of September 30, 2023 $ 36

Revenue Recognition

8 unchanged sentences

and large mechanical items such as engines and transmissions.

For Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors;

For Wholesale - North America and Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors;

electrical products such as spark plugs and batteries;

12 unchanged sentences

The following table sets forth our revenue disaggregated by category and reportable segment (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

11 unchanged sentences

Amounts related to variable consideration on our Unaudited Condensed Consolidated Balance Sheets are as follows (in millions):

Classification June 30, 2023 December 31, 2022

Classification September 30, 2023 December 31, 2022

Return asset Prepaid expenses and other current assets $ 65 $ 58

4 unchanged sentences

The following table sets forth our revenue by geographic area (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

27 unchanged sentences

These costs are typically incurred within a year from the acquisition date and vary in magnitude depending on the size and complexity of the related integration activities.

We expect to incur an insignificant amount of future expenses to complete any open integration plans.

We expect to incur additional expenses of between $ 15 million and $ 25 million to complete the integration plan related to the Uni-Select Acquisition in our Wholesale - North America segment.

The following table sets forth the expenses incurred related to our restructuring plans (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

Plan Expense Type 2023 2022 2023 2022

1 unchanged sentence

Facility exit costs 2 — 5 —

Inventory related costs (1)

Other costs 1 — 3 —

8 unchanged sentences

Total restructuring expenses $ 26 $ 2 $ 36 $ 5

(1) Recorded to Cost of goods sold in the Consolidated Statements of Income

The following table sets forth the cumulative plan costs by segment related to our restructuring plans (in millions):

6 unchanged sentences

2022 Global Plan 2019/20 Global Plan 1 LKQ Europe Plan

June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022 June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022 September 30, 2023 December 31, 2022

Employee related costs (1)

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The following table sets forth the transaction related expenses incurred (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

3 unchanged sentences

$ 3 $ 1 $ 19 $ 5

(1) Included external costs such as legal, accounting and advisory fees related to completed and potential transactions (including Uni-Select transaction costs in 2023).

(1) Includes external costs such as legal, accounting and advisory fees related to completed and potential transactions (including Uni-Select transaction costs in 2023).

Stock-Based Compensation

The following table summarizes activity related to our restricted stock units ("RSUs") under the LKQ Corporation 1998 Equity Incentive Plan (the "Equity Incentive Plan") for the six months ended June 30, 2023 (in millions, except years and per share amounts):

The following table summarizes activity related to our restricted stock units ("RSUs") under the LKQ Corporation 1998 Equity Incentive Plan (the "Equity Incentive Plan") for the nine months ended September 30, 2023 (in millions, except years and per share amounts):

Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1)

1 unchanged sentence

Vested ( 0.6 ) $ 42.42

Unvested as of June 30, 2023 1.4 $ 47.31

Expected to vest after June 30, 2023 1.2 $ 47.75 2.9 $ 71

Forfeited / Canceled ( 0.1 ) $ 44.08

Unvested as of September 30, 2023 1.2 $ 48.53

Expected to vest after September 30, 2023 1.0 $ 49.26 2.8 $ 50

(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of the period multiplied by the number of units) that would have been received by the holders had all the expected to vest RSUs vested.

This amount changes based on the market price of LKQ’s common stock.

(2) The weighted average grant date fair value of RSUs granted during the six months ended June 30, 2022 was $ 49.00 .

The fair value of RSUs that vested during the six months ended June 30, 2023 was $ 21 million;

(2) The weighted average grant date fair value of RSUs granted during the nine months ended September 30, 2022 was $ 49.04 .

The fair value of RSUs that vested during the nine months ended September 30, 2023 was $ 36 million;

the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.

The following table summarizes activity related to our performance-based RSUs ("PSUs") under the Equity Incentive Plan for the six months ended June 30, 2023 (in millions, except years and per share amounts):

The following table summarizes activity related to our performance-based RSUs ("PSUs") under the Equity Incentive Plan for the nine months ended September 30, 2023 (in millions, except years and per share amounts):

Number Outstanding Weighted Average Grant Date Fair Value Weighted Average Remaining Contractual Term (in years) Aggregate Intrinsic Value (1)

1 unchanged sentence

Vested ( 0.2 ) $ 32.28

Unvested as of June 30, 2023 0.4 $ 47.51

Expected to vest after June 30, 2023 0.3 $ 46.85 1.4 $ 18

Unvested as of September 30, 2023 0.4 $ 47.56

Expected to vest after September 30, 2023 0.3 $ 46.89 1.2 $ 15

(1) The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all the expected to vest PSUs vested.

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(2) Represents the number of PSUs at target payout.

The weighted average grant date fair value of PSUs granted during the six months ended June 30, 2022 was $ 48.92 .

The fair value of PSUs that vested during the six months ended June 30, 2023 was $ 12 million;

The weighted average grant date fair value of PSUs granted during the nine months ended September 30, 2022 was $ 48.95 .

The fair value of PSUs that vested during the nine months ended September 30, 2023 was $ 12 million;

the fair value of PSUs vested is based on the market price of LKQ stock on the date vested.

Stock-Based Compensation Expense

Pre-tax stock-based compensation expense for RSUs and PSUs totaled $ 10 million and $ 20 million for the three and six months ended June 30, 2023, respectively, and $ 10 million and $ 23 million for the three and six months ended June 30, 2022, respectively.

As of June 30, 2023, unrecognized compensation expense related to unvested RSUs and PSUs was $ 62 million.

Pre-tax stock-based compensation expense for RSUs and PSUs totaled $ 9 million and $ 29 million for the three and nine months ended September 30, 2023, respectively, and $ 8 million and $ 31 million for the three and nine months ended September 30, 2022, respectively.

As of September 30, 2023, unrecognized compensation expense related to unvested RSUs and PSUs was $ 54 million.

Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs dif fers from current achievement estimates.

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The following chart sets forth the computation of earnings per share (in millions, except per share amounts):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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The components of Accumulated Other Comprehensive Loss are as follows (in millions):

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Foreign Currency Translation Unrealized Gain (Loss) on Cash Flow Hedges Unrealized Gain on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss)

Balance as of April 1, 2023

Balance as of July 1, 2023

$ ( 242 ) $ ( 7 ) $ 11 $ 3 $ ( 235 )

Pretax income 34 14 — — 48

Pretax (loss) income ( 147 ) 4 — — ( 143 )

Income tax effect — ( 1 ) — — ( 1 )

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Other comprehensive income from unconsolidated subsidiaries — — — 8 8

Balance as of June 30, 2023

Balance as of September 30, 2023

$ ( 389 ) $ ( 5 ) $ 11 $ 11 $ ( 372 )

Three Months Ended June 30, 2022

Foreign Currency Translation Unrealized Loss on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss)

Balance as of April 1, 2022 $ ( 175 ) $ ( 24 ) $ ( 7 ) $ ( 206 )

Three Months Ended September 30, 2022

Foreign Currency Translation Unrealized Gain (Loss) on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss)

Balance as of July 1, 2022 $ ( 325 ) $ ( 24 ) $ ( 6 ) $ ( 355 )

Pretax loss ( 187 ) — — ( 187 )

Disposal of business 4 — — 4

Reclassification of unrealized loss — 1 — 1

Other comprehensive income from unconsolidated subsidiaries — — 2 2

Balance as of June 30, 2022 $ ( 325 ) $ ( 24 ) $ ( 6 ) $ ( 355 )

Six Months Ended June 30, 2023

Balance as of September 30, 2022 $ ( 512 ) $ ( 23 ) $ ( 4 ) $ ( 539 )

Nine Months Ended September 30, 2023

Balance as of January 1, 2023 $ ( 333 ) $ — $ 11 $ ( 1 ) $ ( 323 )

Pretax income (loss) 91 ( 8 ) — — 83

Pretax loss ( 56 ) ( 4 ) — — ( 60 )

Income tax effect — 1 — — 1

1 unchanged sentence

Other comprehensive income from unconsolidated subsidiaries — — — 12 12

Balance as of June 30, 2023

Balance as of September 30, 2023

$ ( 389 ) $ ( 5 ) $ 11 $ 11 $ ( 372 )

Six Months Ended June 30, 2022

Foreign Currency Translation Unrealized Loss on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss)

Nine Months Ended September 30, 2022

Foreign Currency Translation Unrealized Gain (Loss) on Pension Plans Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries Accumulated Other Comprehensive Income (Loss)

Balance as of January 1, 2022 $ ( 121 ) $ ( 24 ) $ ( 8 ) $ ( 153 )

Pretax loss ( 395 ) — — ( 395 )

Reclassification of unrealized loss — 1 — 1

Disposal of business 4 — — 4

Other comprehensive income from unconsolidated subsidiaries — — 4 4

Balance as of June 30, 2022 $ ( 325 ) $ ( 24 ) $ ( 6 ) $ ( 355 )

Balance as of September 30, 2022 $ ( 512 ) $ ( 23 ) $ ( 4 ) $ ( 539 )

Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.

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All outstanding payments owed under the supply chain finance programs with the participating financial institutions are recorded within Accounts payable in our Unaudited Condensed Consolidated Balance Sheets.

As of June 30, 2023 and December 31, 2022, we had $ 264 million and $ 248 million of Accounts payable outstanding under the arrangements, respectively.

As of September 30, 2023 and December 31, 2022, we had $ 348 million, including amounts under the Uni-Select program, and $ 248 million of Accounts payable outstanding under the arrangements, respectively.

Long-Term Obligations

Long-term obligations consist of the following (in millions):

June 30, 2023

September 30, 2023

December 31, 2022

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Revolving credit facilities January 2024 — % — 4.24 % (1)

Senior Notes:

Senior Unsecured Term Loan Agreement:

Term loans payable July 2026 6.75 % 516 — % —

Unsecured Senior Notes:

Notes (2028) June 2028 5.75 % 800 — % —

7 unchanged sentences

Other debt 3.64 % (1)

25 2.28 % (1)

Total debt 4,369 2,662

17 unchanged sentences

In connection with entering into the Senior Unsecured Credit Agreement noted above, Wells Fargo Bank, National Association and the various lending parties terminated the Prior Credit Agreement and each amendment thereto resulting in an immaterial loss on extinguishment of debt.

Senior Unsecured Term Loan Credit Agreement

For the permanent financing related to the Uni-Select Acquisition, on March 27, 2023, we entered into the CAD Note which established an unsecured term loan facility of up to CAD 700 million maturing in July 2026.

The CAD Note was funded on July 31, 2023, which was one business day prior to the consummation of the Uni-Select Acquisition.

Unsecured Senior Notes

On May 24, 2023, as part of the financing for the Uni-Select Acquisition, we completed an offering of $ 1,400 million aggregate principal amount of senior unsecured notes, consisting of $ 800 million senior notes due 2028 and $ 600 million senior notes due 2033 in a private placement conducted pursuant to Rule 144A and Regulation S under the United States Securities Act of 1933.

See Note 3, "Uni-Select Acquisition" for additional information on the acquisition and the U.S.

Notes (2028/33).

Notes (2028/33) are governed by the Indenture, dated as of May 24, 2023 (the "Indenture"), among the Company, certain of the Company's subsidiaries (the "Guarantors") and U.S.

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Notes (2028/33) being redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

If the Uni-Select Acquisition is not consummated or the Arrangement is terminated, in each case, on or prior to November 27, 2023 (subject to extension to February 26, 2024 if certain regulatory approvals are not received by November 27, 2023, or such later date to which the “Outside Date” (as defined in the Arrangement as in effect on May 24, 2023) may be extended in accordance with the terms of the Arrangement), then we will be required to redeem the U.S.

Notes (2033), in whole and not in part, at a redemption price of 101 % of their principal amount, plus accrued and unpaid interest to, but excluding, the date of redemption.

In connection with the sale of the U.S.

2 unchanged sentences

Notes (2028/33) identified therein.

Under the Registration Rights Agreement the Company and the Guarantors have agreed to (i) file a registration statement on an appropriate registration form with respect to a registered offer to exchange each series of U.S.

Pursuant to the terms of the Registration Rights Agreement, on September 1, 2023, the Company and the Guarantors filed a Registration Statement on Form S-4 ("Form S-4") with respect to a registered offer to exchange (the "Exchange Offer") each series of U.S.

Notes (2028/33) and related guarantees for new notes of such series (the "Exchange Notes") and new related guarantees, which will have terms substantially identical in all material respects to the applicable series of U.S.

Notes (2028/33) (except that the Exchange Notes will not contain terms with respect to transfer restrictions and Additional Interest (as defined below)) and (ii) cause such exchange offer registration statement to be declared effective under the Securities Act within 330 days after the issue date of the U.S.

Notes (2028/33).

A "Registration Default" will be deemed to occur if (x) we have not exchanged Exchange Notes for all U.S.

Notes (2028/33) (except that the Exchange Notes will not contain terms with respect to transfer restrictions and Additional Interest (as defined below)).

The SEC declared the Form S-4 effective on September 14, 2023.

The Company currently expects the Exchange Offer to close in the fourth quarter of 2023.

Pursuant to the terms of the Registration Rights Agreement, a "Registration Default" will be deemed to occur if, among other things, we have not exchanged Exchange Notes for all U.S.

Notes (2028/33) validly tendered in accordance with the terms of an exchange offer within 365 days after the issue date of the U.S.

Notes (2028/33);

(y) if required, we have not had a shelf registration statement declared effective under the Securities Act within 270 days after the date, if any, on which we became obligated to file the shelf registration statement pursuant to the registration rights agreement;

or (z) if applicable, a shelf registration statement covering resales of the notes has been declared effective and such shelf registration statement ceases

to be effective or the prospectus contained therein ceases to be usable at any time during the effectiveness period and such failure to remain effective or usable exists for more than 90 days (whether or not consecutive) in any 12-month period (subject to certain exceptions);

additional interest ("Additional Interest") will accrue on the principal amount of the applicable U.S.

Notes (2028/33) which have not been registered and/or exchanged at a rate of 0.25 % per annum during the 90-day period beginning on the day immediately following the occurrence of any Registration Default, which rate will, after such 90-day period, increase to a maximum of 0.50 % per annum thereafter commencing on the day immediately following such Registration Default.

Notes (2028/33) which have not been registered and/or exchanged at a rate of 0.25 % per annum during the 90-day period beginning on the day immediately following the occurrence of any

Registration Default, which rate will, after such 90-day period, increase to a maximum of 0.50 % per annum thereafter commencing on the day immediately following such Registration Default.

Assuming the Exchange Offer closes in the fourth quarter of 2023, as the Company currently anticipates, the Company will not be obligated to pay Additional Interest.

Interest on the U.S.

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In March 2023, we entered into forward starting interest rate swaps to hedge the risk of changes in interest rates related to forecasted debt issuance to finance a portion of the Uni-Select Acquisition.

These swaps were settled in May 2023 after issuance of the U.S.

These swaps were settled in May 2023 upon issuance of the U.S.

Notes (2028/33), resulting in total payments of $ 13 million.

2 unchanged sentences

Changes in the fair value of the interest rate swaps were recorded in Accumulated other comprehensive loss and the fair value at the termination date will be reclassified to Interest expense over the term of the debt.

Payments made to settle the forward starting interest swaps were classified in financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows as these payments were related to the forecasted debt issuance.

Payments made to settle the forward starting interest rate swaps were classified in financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows as these payments were related to the forecasted debt issuance.

All of our interest rate swap contracts have been executed with counterparties that we believe are creditworthy, and we closely monitor the credit ratings of these counterparties.

As of June 30, 2023, the notional amounts, balance sheet classification and fair values of our derivative instruments designated as cash flow hedges were as follows (in millions) (there were no such hedges as of December 31, 2022):

As of September 30, 2023, the notional amounts, balance sheet classification and fair values of our derivative instruments designated as cash flow hedges were as follows (in millions) (there were no such hedges as of December 31, 2022):

Notional Amount Balance Sheet Caption Fair Value - Asset / (Liability)

Interest rate swap agreements $ 700 Other noncurrent assets $ 6

The activity related to our cash flow hedges is included in Note 14, "Accumulated Other Comprehensive Loss." As of June 30, 2023, we estimate that $ 3 million of derivative gains (net of tax) included in Accumulated other comprehensive loss will be reclassified into our Unaudited Condensed Consolidated Statements of Income within the next 12 months.

The activity related to our cash flow hedges is included in Note 14, "Accumulated Other Comprehensive Loss." As of September 30, 2023, we estimate that $ 3 million of derivative gains (net of tax) included in Accumulated other comprehensive loss will be reclassified into our Unaudited Condensed Consolidated Statements of Income within the next 12 months.

Derivative Instruments Not Designated as Hedges

To manage the foreign currency exposure related to the Uni-Select Acquisition purchase price (denominated in CAD), we entered into foreign exchange contracts in March 2023 to purchase CAD 1.6 billion for approximately $ 1.2 billion.

These contracts are set to expire on September 29, 2023.

These contracts do not qualify for hedge accounting, and therefore, the contracts are adjusted to fair value through the results of operations as of each balance sheet date.

As of June 30, 2023, the fair value of these foreign exchange contracts was $ 46 million and is recorded within Prepaid expenses and other current assets on the Unaudited Condensed Consolidated Balance Sheets, with corresponding amounts recorded to Gains on foreign exchange contracts - acquisition related on the Unaudited Condensed Consolidated Statements of Income of $ 23 million and $ 46 million for the three and six months ended June 30, 2023, respectively.

These contracts did not qualify for hedge accounting, and therefore, the contracts were adjusted to fair value through the results of operations as of each balance sheet date.

We reported Gains on foreign exchange contracts - acquisition related on the Unaudited Condensed Consolidated Statements of Income of $ 3 million and $ 49 million for the three and nine months ended September 30, 2023, respectively.

These contracts were settled in July 2023 resulting in total payments received of $ 49 million.

To manage our foreign currency exposure on other non-functional currency denominated intercompany loans, we entered into short-term foreign currency forward contracts in 2023.

We elected not to apply hedge accounting for these transactions, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date.

The fair values of these short-term derivative instruments were recorded in either Prepaid expenses and other current assets or Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets and were not material at September 30, 2023.

Additionally, we hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability in the cash flows related to inventory purchases denominated in a non-functional currency.

We have elected not to apply hedge accounting for these transactions.

The notional amount and fair value of these contracts at June 30, 2023 and December 31, 2022, along with the effect on our results of operations during the three and six months ended June 30, 2023 and 2022, were not material.

The notional amount and fair value of these contracts at September 30, 2023 and December 31, 2022, along with the effect on our results of operations during the three and nine months ended September 30, 2023 and 2022, were not material.

The fair values of these contracts were recorded in either Prepaid expenses and other current assets or Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets.

Net Presentation for Derivative Instruments

While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge and other derivative instruments on a gross basis in our Unaudited Condensed Consolidated Balance Sheets.

The impact of netting the fair values of these contracts would result in an immaterial decrease to Prepaid expenses and other current assets and Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets at June 30, 2023.

Fair Value Measurements

Financial Assets and Liabilities Measured at Fair Value

We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three and six months ended June 30, 2023, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value.

We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three and nine months ended September 30, 2023, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value.

The tiers in the fair value hierarchy include:

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The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value (in millions):

June 30, 2023 December 31, 2022

Foreign currency forward contracts (Level 2) $ 46 $ —

September 30, 2023 December 31, 2022

Interest rate swaps (Level 2) $ 6 $ —

2 unchanged sentences

Total Liabilities $ 8 $ 7

For contingent consideration liabilities, the current portion is included in Other current liabilities and the noncurrent portion is included in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.

The balance sheet classification of the interest rate swap agreements and foreign currency forward contracts is presented in Note 17, "Derivative Instruments and Hedging Activities."

The balance sheet classification of the interest rate swap agreements is presented in Note 17, "Derivative Instruments and Hedging Activities." For contingent consideration liabilities, the current portion is included in Other current liabilities and the noncurrent portion is included in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.

We value derivative instruments using a third party valuation model that performs discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.

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Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost.

Based on market conditions as of June 30, 2023, the fair value of the Senior Unsecured Credit Agreement borrowings reasonably approximated the carrying value of $ 1,726 million.

Based on market conditions as of September 30, 2023, the fair value of the Senior Unsecured Credit Agreement borrowings reasonably approximated the carrying value of $ 1,546 million.

As of December 31, 2022, the fair value of the Prior Credit Agreement borrowings reasonably approximated the carrying value of $ 1,786 million.

As of June 30, 2023, the fair values of the U.S.

As of September 30, 2023, the fair value of the CAD Note reasonably approximated the carrying value of $ 516 million.

As of September 30, 2023, the fair values of the U.S.

Notes (2028) and U.S.

Notes (2033) were approximately $ 784 million and $ 581 million, respectively, compared to carrying values of $ 800 million and $ 600 million, respectively.

As of June 30, 2023 and December 31, 2022, the fair values of the Euro Notes (2024) were approximately $ 544 million and $ 535 million, respectively, compared to carrying values of $ 545 million and $ 535 million, respectively.

As of June 30, 2023 and December 31, 2022, the fair values of the Euro Notes (2028) were $ 267 million and $ 254 million, respectively, compared to carrying values of $ 273 million and $ 268 million, respectively.

As of September 30, 2023 and December 31, 2022, the fair values of the Euro Notes (2024) were approximately $ 527 million and $ 535 million, respectively, compared to carrying values of $ 529 million and $ 535 million, respectively.

As of September 30, 2023 and December 31, 2022, the fair values of the Euro Notes (2028) were $ 257 million and $ 254 million, respectively, compared to carrying values of $ 264 million and $ 268 million, respectively.

The fair value measurements of the borrowings under the credit agreements are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities.

We estimated the fair value by calculating the upfront cash payment a market participant would require at June 30, 2023 and December 31, 2022 to assume these obligations.

We estimated the fair value by calculating the upfront cash payment a market participant would require at September 30, 2023 and December 31, 2022 to assume these obligations.

The fair values of the U.S.

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Employee Benefit Plans

We have funded and unfunded defined benefit plans covering certain employee groups in various European countries.

Local statutory requirements govern many of our European plans.

We have funded and unfunded defined benefit plans covering certain employee groups in various European countries and Canada.

Local statutory requirements govern many of our European and Canadian plans.

The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits.

As of June 30, 2023 and December 31, 2022, the aggregate funded status of the defined benefit plans was a liability of $ 73 million and $72 million, respectively, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.

Net periodic benefit cost for our defined benefit plans were insignificant for each of the three and six-month periods ended June 30, 2023 and 2022.

As of September 30, 2023 and December 31, 2022, the aggregate funded status of the defined benefit plans was a net liability of $ 75 million and $ 72 million, respectively, and is reported in Other noncurrent assets, Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.

Net periodic benefit cost for our defined benefit plans were insignificant for each of the three and nine-month periods ended September 30, 2023 and 2022.

The service cost component is recorded in Selling, general and administrative ("SG&A") expenses, while the other components are recorded to Interest income and other income, net on the Unaudited Condensed Consolidated Statements of Income.

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The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

Our effective income tax rate for the six months ended June 30, 2023 was 27.1 %, compared to 24.1 % for the six months ended June 30, 2022.

The increase in the effective tax rate for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is primarily attributable to:

(i) net favorable discrete items representing a 1.2 % rate benefit in the prior year, primarily related to the sale of PGW in the second quarter of 2022, (ii) unfavorable rate effects, including non-deductible transaction costs and negative impacts on foreign tax credit availability, of 0.5 % caused by Uni-Select related transaction activity, and (iii) geographic distribution of income favoring higher rate jurisdictions in 2023.

Our effective income tax rate for the nine months ended September 30, 2023 was 25.9 %, compared to 24.4 % for the nine months ended September 30, 2022.

The increase in the effective tax rate for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is primarily attributable to:

(i) 0.9 % of unfavorable rate effects, including non-deductible transaction costs and negative impacts on foreign tax credit availability caused by Uni-Select related

transaction activity and (ii) geographic distribution of income favoring higher rate jurisdictions in 2023.

Discrete items had similar favorable effects in both years, with a 1 % rate benefit in the prior year, primarily related to the sale of PGW in the second quarter of 2022, and in the current year, primarily related to the Uni-Select Acquisition foreign exchange forward contract gain.

On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law in the United States.

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Wholesale - North America Europe Specialty Self Service Eliminations Consolidated

Three Months Ended June 30, 2023

Three Months Ended September 30, 2023

Third Party $ 1,387 $ 1,584 $ 456 $ 141 $ — $ 3,568

4 unchanged sentences

34 37 8 5 — 84

Three Months Ended June 30, 2022

Three Months Ended September 30, 2022

Third Party $ 1,108 $ 1,380 $ 452 $ 164 $ — $ 3,104

5 unchanged sentences

Wholesale - North America Europe Specialty Self Service Eliminations Consolidated

Six Months Ended June 30, 2023

Nine Months Ended September 30, 2023

Third Party $ 3,815 $ 4,777 $ 1,294 $ 479 $ — $ 10,365

4 unchanged sentences

73 110 24 12 — 219

Six Months Ended June 30, 2022

Nine Months Ended September 30, 2022

Third Party $ 3,453 $ 4,345 $ 1,424 $ 571 $ — $ 9,793

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The table below provides a reconciliation of Net Income to Segment EBITDA (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

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Restructuring and transaction related expenses (3)

Restructuring expenses - cost of goods sold (3)

Gain on disposal of businesses (4)

— ( 4 ) — ( 159 )

Losses on previously held equity interests — — — 1

Gains on previously held equity interests ( 4 ) ( 2 ) ( 4 ) ( 1 )

Direct impacts of Ukraine/Russia conflict (5)

1 unchanged sentence

(1) Refer to Note 8, "Equity Method Investments" for further information.

(2) Refer to Note 3, "Uni-Select Acquisition" and Note 17, "Derivative Instruments and Hedging Activities" for further information.

(2) Refer to Note 2, "Business Combinations" and Note 17, "Derivative Instruments and Hedging Activities" for further information.

(3) Refer to Note 11, "Restructuring and Transaction Related Expenses" for further information.

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The following table presents capital expenditures by reportable segment (in millions):

Three Months Ended June 30, Six Months Ended June 30,

Three Months Ended September 30, Nine Months Ended September 30,

2023 2022 2023 2022

7 unchanged sentences

The following table presents assets by reportable segment (in millions):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Receivables, net of allowance for credit losses

23 unchanged sentences

Total assets $ 15,168 $ 12,038

(1) The increase in assets for the Wholesale - North America segment is primarily attributable to the Uni-Select Acquisition.

We report net receivables;

5 unchanged sentences

Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries.

Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India.

As a result of the Uni-Select Acquisition, we further expanded our wholesale operations in Canada.

Our operations in other countries include remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India.

The following table sets forth our tangible long-lived assets by geographic area (in millions):

June 30, 2023 December 31, 2022

September 30, 2023 December 31, 2022

Long-lived assets

4 unchanged sentences

Total long-lived assets $ 2,735 $ 2,463

Subsequent Event

On October 24, 2023, our Board of Directors declared a quarterly cash dividend of $ 0.30 per share of common stock, payable on November 30, 2023, to stockholders of record at the close of business on November 16, 2023.

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-Q

Item 1. Financial Statements