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 2023 Form 10-K and our Quarterly Reports on Form 10-Q (including this Quarterly Report). Overview LKQ, a member of the Standard & Poor's 500 Stock Index, is a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty 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, paint and related body repair 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, 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. 27 Acquisitions and Investments Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. Our current acquisition strategy focuses on highly accretive tuck-in acquisitions with significant synergies or critical capabilities and no large platform acquisitions are expected. Additionally, from time to time, we make investments in various businesses to advance our strategic objectives. See Note 2, "Business Combinations," and Note 7, "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 sales of scrap and other metals (including precious metals - platinum, palladium and rhodium - contained in recycled parts such as catalytic converters), 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 8, "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 2023 Form 10-K includes a summary of the critical accounting estimates we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting estimates that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the nine months ended September 30, 2024. Recently Issued Accounting Pronouncements See "Recent Accounting Pronouncements" in Note 1, "Interim Financial Statements" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to new accounting standards. Financial Information by Geographic Area See Note 8, "Revenue Recognition" and Note 19, "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 Plan We have undertaken the 1 LKQ Europe plan 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 plan, we expect to recognize the following: • Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe plan from which the business will derive no ongoing benefit. See Note 9, "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 plan that are expected to contribute to ongoing benefits to the business (e.g., non-capitalizable implementation costs related to a common ERP platform). These expenses are recorded in SG&A expenses. 28 • 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 plan. Costs related to the 1 LKQ Europe plan 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 are executing on the various projects associated with the 1 LKQ Europe plan and expect to be completed by the end of 2027. During the three and nine months ended September 30, 2024, we incurred $12 million and $31 million, respectively, in costs across all three categories noted above. We expect that costs of the plan, reflecting all three categories noted above, will range between $125 million to $155 million for 2024 through the projected plan completion date in 2027. In the future, we may also identify additional initiatives and projects under the 1 LKQ Europe plan 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 plan to continue to enable trade working capital and productivity initiatives that will help fund the plan cost. 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 CODM. 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 19, "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. 29 Results of Operations—Consolidated The following table sets forth statements of income data as a percentage of total revenue for the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of goods sold 61.2 % 61.0 % 61.0 % 59.7 % Gross margin 38.8 % 39.0 % 39.0 % 40.3 % Selling, general and administrative expenses 27.1 % 27.5 % 27.2 % 27.5 % Restructuring and transaction related expenses 0.6 % 0.8 % 0.9 % 0.5 % Depreciation and amortization 2.5 % 2.1 % 2.4 % 1.9 % Operating income 8.6 % 8.6 % 8.4 % 10.4 % Total other expense, net 1.6 % 1.3 % 1.6 % 0.6 % Income from continuing operations before provision for income taxes 7.0 % 7.4 % 6.8 % 9.8 % Provision for income taxes 1.7 % 1.7 % 2.0 % 2.5 % Equity in earnings of unconsolidated subsidiaries 0.1 % 0.1 % — % 0.1 % Income from continuing operations 5.3 % 5.8 % 4.9 % 7.3 % Net income from discontinued operations — % — % — % — % Net income 5.3 % 5.9 % 4.9 % 7.3 % Less: net income attributable to continuing noncontrolling interest — % — % — % — % Net income attributable to LKQ stockholders 5.3 % 5.8 % 4.9 % 7.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Revenue The following table summarizes the changes in revenue by category (in millions): Three Months Ended September 30, Percentage Change in Revenue 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 3,427 $ 3,407 (2.8) % 3.1 % 0.4 % 0.6 % Other revenue 157 161 (2.4) % 0.1 % — % (2.2) % Total revenue $ 3,584 $ 3,568 (2.8) % 2.9 % 0.3 % 0.5 % 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 0.6% represented increases in segment revenue of 2.8% in Wholesale - North America and 1.8% in Europe, partially offset by decreases of 10.5% in Self Service and 8.5% in Specialty. This overall increase was driven by a 3.1% increase due to the net impact of acquisitions and divestitures and a 0.4% increase due to fluctuations in foreign exchange rates, partially offset by an organic parts and services revenue decrease of 2.8% (4.3% decrease on a per day basis). The decrease in other revenue of 2.2% was primarily driven by a decrease in organic revenue of $4 million due to lower commodities prices and volumes compared to the prior year period, which resulted in a $4 million decrease in Self Service and a $2 million decrease in Wholesale - North America. 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 September 30, 2024 compared to the three months ended September 30, 2023. 30 Cost of Goods Sold Cost of goods sold as a percentage of revenue increased to 61.2% of revenue for the three months ended September 30, 2024 from 61.0% of revenue for the three months ended September 30, 2023. Cost of goods sold reflects an increase of 0.7% from Wholesale - North America, partially offset by decreases of 0.3% from Self Service and 0.2% from Europe. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Selling, General and Administrative Expenses SG&A expenses as a percentage of revenue decreased to 27.1% for the three months ended September 30, 2024 from 27.5% for the three months ended September 30, 2023. The year over year decrease in SG&A expense primarily reflects impacts of 0.4% related to Wholesale - North America and 0.3% in Europe, partially offset by an increase of 0.2% from Specialty. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. Restructuring and Transaction Related Expenses The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions): Three Months Ended September 30, 2024 2023 Change Restructuring expenses $ 19 (1) $ 24 (2) $ (5) Transaction related expenses 1 3 (2) Restructuring and transaction related expenses $ 20 $ 27 $ (7) (1) Restructuring expenses for the three months ended September 30, 2024 primarily consisted of (i) $14 million related to our 2024 Global Restructuring plan, (ii) $4 million related to our acquisition integration plans, and (iii) $1 million related to our 2022 Global Restructuring plan. (2) Restructuring expenses for the three months ended September 30, 2023 primarily consisted of $20 million related to our acquisition integration plans and $4 million related to our 2022 Global Restructuring plan. See Note 9, "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 September 30, 2024 2023 Change Depreciation $ 45 $ 40 $ 5 (1) Amortization 47 36 11 (2) Depreciation and amortization $ 92 $ 76 $ 16 (1) Depreciation expense increased primarily related to increased capital expenditures in the last three months of 2023 and acquisitions in our Wholesale - North America and Europe segments. (2) Amortization expense increased primarily due to an increase in Wholesale - North America due to our acquisition of Uni-Select in August 2023. 31 Total Other Expense, Net The following table summarizes Total other expense, net for the periods indicated (in millions): Three Months Ended September 30, 2024 2023 Change Interest expense $ 66 $ 62 $ 4 (1) Gains on foreign exchange contracts - acquisition related — (3) 3 (2) Interest income and other income, net (8) (14) 6 (3) Total other expense, net $ 58 $ 45 $ 13 (1) Interest expense increased primarily due to a $4 million increase from higher outstanding debt in the current year period. (2) Related to the Uni-Select Acquisition. See Note 2, "Business Combinations" and Note 14, "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 decrease in Interest income and other income, net is primarily comprised of a $5 million decrease in interest income, primarily related to interest income on the proceeds from the U.S. Notes (2028/33) that were invested in money market funds in 2023 and 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 September 30, 2024 was 25.0%, compared to 22.6% for the three months ended September 30, 2023. The increase in the effective tax rate for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 is mostly related to favorable discrete items in the prior year of 4.4%, primarily related to the Uni-Select Acquisition foreign exchange forward contract gain, exceeding the favorable discrete items of 2.4% in the current year. Refer to Note 14, "Derivative Instruments and Hedging Activities" for further information on the foreign exchange forward contracts. See Note 17, "Income Taxes" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Equity in Earnings of Unconsolidated Subsidiaries Equity in earnings of unconsolidated subsidiaries for the three months ended September 30, 2024 decreased by $1 million primarily related to a decrease in year over year results in an immaterial investment in our Europe segment. Foreign Currency Impact We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the three months ended September 30, 2023, the Czech koruna and Canadian dollar rates used to translate the 2024 statements of income decreased by 3.3% and 1.7%, respectively, while the pound sterling and euro rates increased by 2.7% and 1.0%, respectively. Realized and unrealized currency gains and losses (including the effects of hedge instruments) combined with the translation effect of the change in foreign currencies against the U.S. dollar had a net negative effect of $0.06 on diluted earnings per share relative to the prior year period primarily related to the gain on the foreign exchange forward contracts in the third quarter of 2023 related to the Uni-Select Acquisition, including the tax effects. 32 Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 Revenue The following table summarizes the changes in revenue by category (in millions): Nine Months Ended September 30, Percentage Change in Revenue 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 10,514 $ 9,818 (1.8) % 8.7 % 0.2 % 7.1 % Other revenue 484 547 (11.8) % 0.3 % — % (11.5) % Total revenue $ 10,998 $ 10,365 (2.3) % 8.2 % 0.2 % 6.1 % 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 7.1% represented increases in segment revenue of 16.4% in Wholesale - North America, 2.4% in Europe, and 0.8% in Specialty, partially offset by a decrease of 10.7% in Self Service. This overall increase was driven by an 8.7% increase due to the net impact of acquisitions and divestitures and a 0.2% increase due to fluctuations in foreign exchange rates, partially offset by an organic parts and services revenue decrease of 1.8%. The decrease in other revenue of 11.5% was primarily driven by a decrease in organic revenue of $65 million due to lower commodities prices and volumes compared to the prior year period, which resulted in a $58 million decrease in Self Service and a $9 million decrease in Wholesale - North America. Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Cost of Goods Sold Cost of goods sold as a percentage of revenue increased to 61.0% for the nine months ended September 30, 2024 from 59.7% for the nine months ended September 30, 2023. Cost of goods sold primarily reflects an increase of 1.1% from Wholesale - North America. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Selling, General and Administrative Expenses SG&A expenses as a percentage of revenue decreased to 27.2% for the nine months ended September 30, 2024 from 27.5% for the nine months ended September 30, 2023. The year over year decrease in SG&A expense primarily reflects an impact of 0.6% related to Wholesale - North America, partially offset by an increase of 0.2% in Europe. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. Restructuring and Transaction Related Expenses The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions): Nine Months Ended September 30, 2024 2023 Change Restructuring expenses $ 96 (1) $ 34 (2) $ 62 Transaction related expenses 3 19 (3) (16) Restructuring and transaction related expenses $ 99 $ 53 $ 46 (1) Restructuring expenses for the nine months ended September 30, 2024 primarily consisted of (i) $70 million related to our 2024 Global Restructuring plan, (ii) $20 million related to our acquisition integration plans, (iii) $3 million related to our 1 LKQ Europe plan, and (iv) $3 million related to our 2022 Global Restructuring plan. (2) Restructuring expenses for the nine months ended September 30, 2023 primarily consisted of (i) $22 million related to our acquisition integration plans, (ii) $11 million related to our 2022 Global Restructuring plan, and (iii) $1 million related to our 1 LKQ Europe plan. 33 (3) Transaction related expenses for the nine months ended September 30, 2023 primarily related to external costs such as legal, accounting and advisory fees related to completed and potential acquisitions (including Uni-Select transaction costs). See Note 9, "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): Nine Months Ended September 30, 2024 2023 Change Depreciation $ 132 $ 114 $ 18 (1) Amortization 136 81 55 (2) Depreciation and amortization $ 268 $ 195 $ 73 (1) Depreciation expense increased primarily related to increased capital expenditures in the last three months of 2023 and acquisitions in our Wholesale - North America and Europe segments. (2) Amortization expense increased primarily due to an increase in Wholesale - North America due to our acquisition of Uni-Select in August 2023. Total Other Expense, Net The following table summarizes Total other expense, net for the periods indicated (in millions): Nine Months Ended September 30, 2024 2023 Change Interest expense $ 196 $ 150 $ 46 (1) Gains on foreign exchange contracts - acquisition related — (49) 49 (2) Interest income and other income, net (17) (34) 17 (3) Total other expense, net $ 179 $ 67 $ 112 (1) Interest expense increased primarily due to (i) a $48 million increase from higher outstanding debt primarily related to the permanent financing for the Uni-Select Acquisition and (ii) a $7 million increase from higher interest rates in the first nine months of 2024 compared to the prior year period, partially offset by (iii) a $9 million decrease related to amortization of pre-acquisition bridge loan financing costs related to the Uni-Select Acquisition in the first nine months of 2023. (2) Related to the Uni-Select Acquisition. See Note 2, "Business Combinations" and Note 14, "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 decrease in Interest income and other income, net is primarily comprised of (i) an $11 million decrease in interest income, primarily related to interest income on the proceeds from the U.S. Notes (2028/33) that were invested in money market funds in 2023, (ii) a $5 million decrease from funds received to settle an eminent domain matter in 2023, and (iii) individually insignificant decreases which in the aggregate had a $1 million impact. Provision for Income Taxes Our effective income tax rate for the nine months ended September 30, 2024 was 28.8%, compared to 25.9% for the nine months ended September 30, 2023. The increase in the effective tax rate for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 is primarily attributable to a 2.9% year over year unfavorable impact of discrete items, mostly related to the unfavorable tax effects of the 2024 Global Restructuring Plan impairments in the current year and the favorable tax effects from the Uni-Select Acquisition foreign exchange forward contract gain in the prior year. Refer to Note 9, "Restructuring and Transaction Related Expenses" for further information on the impairments and Note 14, "Derivative Instruments and Hedging Activities" for further information on the foreign exchange forward contracts. 34 See Note 17, "Income Taxes" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information. Equity in Earnings of Unconsolidated Subsidiaries Equity in earnings of unconsolidated subsidiaries for the nine months ended September 30, 2024 decreased by $6 million compared to the nine months ended September 30, 2023, primarily related to a decrease 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 nine months ended September 30, 2023, the Czech koruna and Canadian dollar rates used to translate the 2024 statements of income decreased by 4.6% and 1.1%, respectively, while the pound sterling and euro rates increased by 2.6% and 0.4%, respectively. Realized and unrealized currency gains and losses (including the effects of hedge instruments) combined with the translation effect of the change in foreign currencies against the U.S. dollar had a net negative effect of $0.19 on diluted earnings per share relative to the prior year period primarily related to the $49 million pretax gain on the foreign exchange forward contracts in the first nine months of 2023 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 GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies. 35 The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2024 % of Total Segment Revenue 2023 % of Total Segment Revenue 2024 % of Total Segment Revenue 2023 % of Total Segment Revenue Third Party Revenue Wholesale - North America $ 1,423 $ 1,387 $ 4,396 $ 3,815 Europe 1,613 1,584 4,896 4,777 Specialty 417 456 1,305 1,294 Self Service 131 141 401 479 Total third party revenue $ 3,584 $ 3,568 $ 10,998 $ 10,365 Total Revenue Wholesale - North America $ 1,423 $ 1,387 $ 4,397 $ 3,815 Europe 1,613 1,584 4,896 4,777 Specialty 419 457 1,308 1,297 Self Service 131 141 401 479 Eliminations (2) (1) (4) (3) Total revenue $ 3,584 $ 3,568 $ 10,998 $ 10,365 Segment EBITDA Wholesale - North America $ 228 16.1 % $ 236 17.0 % $ 728 16.6 % $ 736 19.3 % Europe 165 10.2 % 147 9.3 % 482 9.8 % 486 10.2 % Specialty 31 7.3 % 40 8.6 % 99 7.6 % 113 8.7 % Self Service 10 7.3 % (1) (0.6) % 39 9.7 % 28 6.0 % 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 CODM, 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 net income and loss attributable to noncontrolling interest; income and loss from discontinued operations; depreciation; amortization; interest; gains and losses on debt extinguishment; income tax expense; restructuring and transaction related expenses; 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. See Note 19, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of total Segment EBITDA to net income. 36 Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023 Wholesale - North America Third Party Revenue The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Wholesale - North America 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 1,349 $ 1,312 (6.1) % (1) 9.1 % (3) (0.2) % 2.8 % Other revenue 74 75 (2.4) % (2) 0.3 % (0.1) % (2.2) % Total third party revenue $ 1,423 $ 1,387 (5.9) % 8.6 % (0.1) % 2.5 % 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 decreased 6.1% (7.5% on a per day basis) for the three months ended September 30, 2024 compared to the prior year period. This decline was primarily driven by a reduction in paint revenue, related to increased competition, and a decrease in aftermarket collision volumes. The latter was negatively impacted by fewer repairable claims, which we believe are mostly attributable to difficult economic conditions and, to a lesser extent, inventory availability issues due to delays in inbound deliveries. Additionally, adverse weather conditions caused by hurricane Helene led to temporary operational closures in the southeast region, which had a small but negative impact on revenue towards the end of September 2024. (2) Other organic revenue decreased 2.4%, or $2 million, year over year primarily related to a $2 million decrease in revenue from precious metals due to lower prices and lower volumes. (3) Acquisition and divestiture parts and services revenue was an increase of $119 million, or 9.1%, primarily due to the acquisition of Uni-Select in the third quarter of 2023. See Note 2, "Business Combinations" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the acquisition of Uni-Select. Segment EBITDA Segment EBITDA decreased $8 million, or 2.9%, for the three months ended September 30, 2024 compared to the prior year period, primarily due to the organic revenue decline, continued inflationary pressures, unfavorable commodities prices and a decrease in salvage margins, partially offset by cost savings initiatives, acquisition related synergies, lower incentive compensation for the three months ended September 30, 2024, and positive impacts from the acquisition of Uni-Select in the third quarter of 2023 (Uni-Select increases Segment EBITDA dollars but dilutes the Segment EBITDA percentage). We estimate that precious metals and scrap steel prices had a net unfavorable effect of $4 million, or 0.3%, on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment: Wholesale - North America Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2023 17.0 % Increase (decrease) due to: Change in gross margin (1.8) % (1) Change in segment operating expenses 0.9 % (2) Segment EBITDA for the three months ended September 30, 2024 16.1 % 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 of 1.8% was driven by decreases in salvage margins tied to softening salvage revenue, a decline in commodities prices and the related mix effect resulting from lower aftermarket revenue, which has a higher margin than our other wholesale lines. Additionally, gross margin was negatively affected by the dilutive nature of the acquisition of Uni-Select, which changed the segment's product mix to reflect a greater percentage of paint, body and equipment and maintenance product lines. These product lines have a lower gross margin structure than our other 37 wholesale product lines. The year over year effect was noted through the third quarter, and the impact has now been annualized. (2) The decrease in segment operating expenses as a percentage of revenue primarily reflects favorable impacts of (i) 0.8% related to lower incentive compensation and (ii) 0.3% in other personnel costs primarily related to higher operating leverage, partially offset by (iii) other individually immaterial factors representing a 0.2% unfavorable impact in the aggregate. Europe Third Party Revenue The following table summarizes the changes in third party revenue by category in our Europe segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Europe 2024 2023 Organic Acquisition and Divestiture (2) Foreign Exchange (3) Total Change Parts & services revenue $ 1,609 $ 1,581 1.8 % (1) (1.0) % 0.9 % 1.8 % Other revenue 4 3 33.2 % (0.5) % 2.9 % 35.6 % Total third party revenue $ 1,613 $ 1,584 1.9 % (1.0) % 0.9 % 1.9 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended September 30, 2024 increased by 1.8% (0.1% on a per day basis), primarily driven by an increased number of selling days in the current quarter compared to the prior year period. On a per day basis, organic revenue was roughly flat as the effects of pricing initiatives to offset increased costs resulting from inflationary pressures were mostly offset by decreased overall volumes, despite increases in several markets, as a result of difficult economic conditions and heightened competition in certain markets. (2) Acquisition and divestiture revenue was a net decrease of $16 million, or 1.0%, primarily related to our divestment of three wholesale businesses in 2024. (3) Exchange rates increased our revenue growth by $15 million, or 0.9%, primarily due to the weaker U.S. dollar against the pound sterling and euro, partially offset by the stronger U.S. dollar against the Czech koruna for the three months ended September 30, 2024 relative to the prior year period. Segment EBITDA Segment EBITDA increased $18 million, or 12.1%, for the three months ended September 30, 2024 compared to the prior year period. On a constant currency basis (i.e., excluding translation impact), Segment EBITDA increased by $17 million, or 11.2%, compared to the prior year period. The increase in dollar terms is mainly attributable to organic revenue growth of $30 million and a decrease in segment operating expenses largely driven by an $11 million charge in the prior year to settle a value-added tax issue in Italy. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the three months ended September 30, 2024. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment: Europe Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2023 9.3 % Increase (decrease) due to: Change in gross margin 0.1 % Change in segment operating expenses 0.7 % (1) Change in other income and expenses, net 0.1 % Segment EBITDA for the three months ended September 30, 2024 10.2 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in segment operating expenses as a percentage of revenue primarily reflects a favorable impact of 0.7% due to the settlement of a value-added tax issue in Italy in the prior year. 38 Specialty Third Party Revenue The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Specialty 2024 2023 Organic (1) Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 417 $ 456 (8.5) % 0.2 % (0.1) % (8.5) % Other revenue — — — % — % — % — % Total third party revenue $ 417 $ 456 (8.5) % 0.2 % (0.1) % (8.5) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the three months ended September 30, 2024 decreased by 8.5% (10.0% on a per day basis) primarily due to demand softness in the automotive and recreational vehicle ("RV") product lines, as automotive and RV unit retail sales have declined year over year. Segment EBITDA Segment EBITDA decreased $9 million, or 22.7%, for the three months ended September 30, 2024 compared to the prior year period primarily due to the organic revenue decline and higher credit loss reserves. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment: Specialty Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2023 8.6 % Increase (decrease) due to: Change in gross margin 0.3 % (1) Change in segment operating expenses (1.6) % (2) Segment EBITDA for the three months ended September 30, 2024 7.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin was primarily driven by lower discounts to offset increased costs from inflationary pressures. (2) The increase in segment operating expenses as a percentage of revenue was primarily due to unfavorable impacts of (i) 0.8% related to higher credit loss reserves compared to the prior year period, (ii) 0.4% in personnel costs as a result of lower operating leverage, (iii) 0.3% due to duplicate facility costs associated with consolidating distribution centers, and (iv) other individually immaterial factors representing a 0.1% unfavorable impact in the aggregate. Self Service Third Party Revenue The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions): Three Months Ended September 30, Percentage Change in Revenue Self Service 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 52 $ 58 (10.5) % (1) — % — % (10.5) % Other revenue 79 83 (3.8) % (2) — % — % (3.8) % Total third party revenue $ 131 $ 141 (6.6) % — % — % (6.6) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. 39 (1) Parts and services organic revenue decreased 10.5% for the three months ended September 30, 2024 compared to the prior year period, primarily driven by lower parts volumes from a reduced number of customer admissions. (2) Other organic revenue decreased 3.8%, or $4 million, year over year due to a $2 million decrease in revenue from scrap steel primarily related to lower volumes and a $2 million decrease in revenue from precious metals due to lower prices and lower volumes. Segment EBITDA Segment EBITDA increased $11 million for the three months ended September 30, 2024 compared to the prior year period. The increase is driven by improved vehicle procurement costs, operational productivity initiatives and more favorable movements in scrap steel prices, partially offset by lower volumes compared to the prior year period. During the three months ended September 30, 2024, scrap steel prices had a $1 million unfavorable impact on Segment EBITDA, compared to a $6 million unfavorable impact during the three months ended September 30, 2023. The unfavorable impacts for the three months ended September 30, 2024 resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment: Self Service Percentage of Total Segment Revenue Segment EBITDA for the three months ended September 30, 2023 (0.6) % Increase (decrease) due to: Change in gross margin 8.3 % (1) Change in segment operating expenses (0.4) % (2) Segment EBITDA for the three months ended September 30, 2024 7.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin is primarily attributable to improvements in vehicle procurement costs and improved commodities prices. (2) The increase in segment operating expenses as a percentage of revenue reflects negative leverage effect of 0.8% from decreases in metals revenue, partially offset by other individually immaterial factors representing a 0.4% favorable impact in the aggregate. 40 Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023 Wholesale - North America Third Party Revenue The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Wholesale - North America 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 4,169 $ 3,581 (5.0) % (1) 21.5 % (3) (0.1) % 16.4 % Other revenue 227 234 (3.8) % (2) 0.6 % (0.1) % (3.2) % Total third party revenue $ 4,396 $ 3,815 (4.9) % 20.2 % (0.1) % 15.2 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue decreased 5.0% (5.4% on a per day basis) for the nine months ended September 30, 2024 compared to the prior year period. This decline was primarily driven by a reduction in aftermarket collision volumes, which were negatively impacted by a reduction in repairable claims. We believe this is mainly attributable to difficult economic conditions. Additionally, organic revenue was negatively impacted by a reduction in paint revenue related to increased competition, comparatively warmer weather in the first quarter of 2024 which reduced backlog at body shops going into the second quarter of 2024 and, to a lesser extent, inventory availability issues due to delays in inbound deliveries. (2) Other organic revenue decreased 3.8%, or $9 million, year over year primarily related to (i) a $16 million decrease in revenue from precious metals due to lower prices and (ii) a $1 million decrease in revenue from scrap steel due to lower prices, partially offset by (iii) an $8 million increase in revenue from other scrap (e.g., aluminum) and cores due to higher prices and higher volumes. (3) Acquisition and divestiture parts and services revenue was an increase of $769 million, or 21.5%, primarily due to the acquisition of Uni-Select in the third quarter of 2023. See Note 2, "Business Combinations" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further information on the acquisition of Uni-Select. Segment EBITDA Segment EBITDA decreased $8 million, or 1.0%, for the nine months ended September 30, 2024 compared to the prior year period, primarily due to lower aftermarket volumes, continued inflationary pressures, lower precious metals pricing and a decrease in salvage margins, partially offset by positive impacts from the acquisition of Uni-Select in the third quarter of 2023 (Uni-Select increases Segment EBITDA dollars but dilutes the Segment EBITDA percentage), cost savings initiatives, acquisition related synergies, and lower incentive compensation for the nine months ended September 30, 2024. We estimate that precious metals and scrap steel prices had a net unfavorable effect of $17 million, or 0.4%, on Segment EBITDA margin relative to the comparable prior year period. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment: Wholesale - North America Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2023 19.3 % Increase (decrease) due to: Change in gross margin (4.1) % (1) Change in segment operating expenses 1.6 % (2) Change in other income and expenses, net (0.2) % (3) Segment EBITDA for the nine months ended September 30, 2024 16.6 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. 41 (1) The decrease in gross margin of 4.1% was driven by the dilutive nature of the acquisition of Uni-Select, which changed the segment's product mix to reflect a greater percentage of paint, body and equipment and maintenance product lines. These product lines have a lower gross margin structure than our other wholesale product lines. The year over year effect was noted through the third quarter, and the impact now has been annualized. Additionally, gross margin was negatively affected by the related mix effect resulting from lower aftermarket revenue, which has a higher margin than our other wholesale lines as well as decreases in salvage margins tied to softening salvage revenue and a decline in commodities prices. (2) The decrease in segment operating expenses as a percentage of revenue primarily reflects favorable impacts of (i) 0.7% from lower incentive compensation, (ii) 0.3% from decreased freight, vehicle, and fuel costs, (iii) 0.2% from higher charitable contributions in the prior year period and (iv) other individually immaterial factors representing a 0.4% favorable impact in the aggregate. (3) The unfavorable 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): Nine Months Ended September 30, Percentage Change in Revenue Europe 2024 2023 Organic Acquisition and Divestiture (2) Foreign Exchange (3) Total Change Parts & services revenue $ 4,879 $ 4,762 1.6 % (1) 0.4 % 0.5 % 2.4 % Other revenue 17 15 15.0 % (0.1) % 0.9 % 15.9 % Total third party revenue $ 4,896 $ 4,777 1.6 % 0.4 % 0.5 % 2.5 % 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 nine months ended September 30, 2024 increased by 1.6% (1.0% on a per day basis), primarily driven by increased volumes in the first quarter of 2024 and, to a lesser extent, pricing initiatives to offset increased costs resulting from inflationary pressures. (2) Acquisition and divestiture revenue was a net increase of $18 million, or 0.4%, primarily related to our acquisition of six wholesale businesses from the beginning of 2023 through the one-year anniversary of the acquisition dates, partially offset by our divestment of three wholesale businesses in 2024. (3) Exchange rates increased our revenue growth by $23 million, or 0.5%, primarily due to the weaker U.S. dollar against the pound sterling and euro, partially offset by the stronger U.S. dollar against the Czech koruna for the nine months ended September 30, 2024 relative to the prior year period. Segment EBITDA Segment EBITDA decreased $4 million, or 0.9%, for the nine months ended September 30, 2024 compared to the prior year period. On a constant currency basis (i.e., excluding translation impact), Segment EBITDA decreased by $6 million, or 1.3%, com pared to the prior year period. The decrease in dollar terms is mainly attributable to lower gross margin and the negative impact of higher operating expenses that more than offset the effects of organic revenue growth of $78 million. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the nine months ended September 30, 2024. 42 The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment: Europe Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2023 10.2 % Increase (decrease) due to: Change in gross margin (0.5) % (1) Segment EBITDA adjustments 0.3 % (1) Change in segment operating expenses (0.2) % (2) Segment EBITDA for the nine months ended September 30, 2024 9.8 % 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 was primarily attributable to unfavorable customer mix and inflationary pressures that were not fully offset by pricing initiatives. Additionally, reported gross margin includes a 0.3% reduction primarily related to restructuring expenses incurred as part of the 2024 Global Restructuring Plan. These costs are excluded from the calculation of Segment EBITDA. See Note 9, "Restructuring and Transaction Related Expenses" and Note 19, "Segment and Geographic Information" for further information. (2) The increase in segment operating expenses as a percentage of revenue reflects unfavorable impacts of (i) 0.2% from increased personnel costs mainly due wage inflation, (ii) 0.2% from increased outbound freight and logistics costs, (iii) 0.2% from professional fees related to several strategic central and regional information technology initiatives, and (iv) other individually immaterial factors representing a 0.1% unfavorable impact in aggregate, partially offset by favorable impacts of (v) 0.3% due to lower energy and utilities costs compared to the prior year period across all geographies, and (vi) 0.2% due to the settlement of a value-added tax issue in Italy in the prior year. Specialty Third Party Revenue The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Specialty 2024 2023 Organic (1) Acquisition and Divestiture (2) Foreign Exchange Total Change Parts & services revenue $ 1,305 $ 1,294 (4.1) % 5.1 % (0.1) % 0.8 % Other revenue — — — % — % — % — % Total third party revenue $ 1,305 $ 1,294 (4.1) % 5.1 % (0.1) % 0.8 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue for the nine months ended September 30, 2024 decreased by 4.1% (4.6% on a per day basis) primarily due to demand softness in the RV and automotive product lines, as unit retail sales for RV and certain automotive categories have declined year over year. (2) Acquisition and divestiture revenue was a net increase of $66 million, or 5.1%, primarily related to our acquisition of one Specialty business in 2023. Segment EBITDA Segment EBITDA decreased $14 million, or 12.4%, for the nine months ended September 30, 2024 compared to the prior year period primarily due to the organic revenue decline and the decline in gross margin as explained below. 43 The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment: Specialty Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2023 8.7 % Increase (decrease) due to: Change in gross margin (0.6) % (1) Change in segment operating expenses (0.5) % (2) Segment EBITDA for the nine months ended September 30, 2024 7.6 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The decrease in gross margin was primarily driven by higher discounts to help maintain sales volume in the first six months of the year. (2) The increase in segment operating expenses as a percentage of revenue was primarily due to unfavorable impacts of 0.3% related to higher credit loss reserves compared to the prior year and 0.2% due to duplicate facility costs associated with consolidating distribution centers . Self Service Third Party Revenue The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions): Nine Months Ended September 30, Percentage Change in Revenue Self Service 2024 2023 Organic Acquisition and Divestiture Foreign Exchange Total Change Parts & services revenue $ 161 $ 181 (10.7) % (1) — % — % (10.7) % Other revenue 240 298 (19.5) % (2) — % — % (19.5) % Total third party revenue $ 401 $ 479 (16.2) % — % — % (16.2) % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) Parts and services organic revenue decreased 10.7% (11.1% on a per day basis) for the nine months ended September 30, 2024 compared to the prior year period, primarily driven by lower parts volumes from a reduced number of customer admissions. (2) Other organic revenue decreased 19.5%, or $58 million, year over year due to a $32 million decrease in revenue from precious metals due to lower prices and lower volumes and a $26 million decrease in revenue from scrap steel primarily related to lower volumes and, to a lesser extent, lower prices. Segment EBITDA Segment EBITDA increased $11 million, or 36.2%, for the nine months ended September 30, 2024 compared to the prior year period. This is driven by improved vehicle procurement costs and operational productivity, partially offset by lower volumes and lower commodities prices compared to the prior year period. Decreases in precious metals prices contributed an estimated $13 million decline in Segment EBITDA relative to the nine months ended September 30, 2023. During the nine months ended September 30, 2024, scrap steel prices had a $2 million unfavorable impact on Segment EBITDA, compared to a $3 million favorable impact during the nine months ended September 30, 2023. The unfavorable impacts for the nine months ended September 30, 2024 resulted from decreases 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. 44 The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment: Self Service Percentage of Total Segment Revenue Segment EBITDA for the nine months ended September 30, 2023 6.0 % Increase (decrease) due to: Change in gross margin 6.4 % (1) Change in segment operating expenses (2.7) % (2) Segment EBITDA for the nine months ended September 30, 2024 9.7 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. (1) The increase in gross margin is attributable to improvements in vehicle procurement costs, partially offset by lower commodities prices. (2) The increase in segment operating expenses as a percentage of revenue reflects negative leverage effect of 4.2% from decreases in metals revenue, partially offset by other individually immaterial factors representing a 1.5% favorable impact in the aggregate. Liquidity and Capital Resources We assess our liquidity and capital resources 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 revolving credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards paying dividends, repurchasing our common stock, paying down outstanding debt, or funding acquisitions. 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, term loans, and senior notes. We currently believe we have sufficient access to capital markets to support our future growth objectives. The following table summarizes liquidity data as of the dates indicated (in millions): September 30, 2024 December 31, 2023 Capacity under revolving credit facilities $ 2,000 $ 2,000 Less: Revolving credit facilities borrowings 713 914 Less: Letters of credit 116 110 Availability under credit revolving facilities 1,171 976 Add: Cash and cash equivalents 353 299 Total liquidity $ 1,524 $ 1,275 We had $1,171 million available under our revolving credit facilities as of September 30, 2024 . Combined with $353 million of cash and cash equivalents at September 30, 2024, we had $1,524 million i n available liquidity, an increase of $249 million from our available liquidity as of December 31, 2023, primarily as a result of reducing our revolving credit facilities borrowings by $201 million. 45 As of September 30, 2024, we had $4,371 million total debt outstanding and $44 million current debt, including the following senior debt (in millions): September 30, 2024 Maturity Date Interest Rate Amount Outstanding Senior Unsecured Credit Agreement: Term loan payable January 2026 6.32 % $ 500 Revolving credit facilities January 2028 6.33 % (1) 713 Senior Unsecured Term Loan Agreement: Term loan payable (CAD 700 million) July 2026 5.92 % 518 Unsecured Senior Notes: U.S. Notes (2028) June 2028 5.75 % 800 U.S. Notes (2033) June 2033 6.25 % 600 Euro Notes (2028) (€250 million) April 2028 4.13 % 278 Euro Notes (2031) (€750 million) March 2031 4.13 % 835 (1) Interest rate derived via a weighted average In March 2024, we completed an offering of €750 million aggregate principal amount of the 4.125% Euro Notes (2031). We used the net proceeds from the offering and cash on hand to pay outstanding indebtedness, including all of the outstanding €500 million aggregate principal amount of the 3.875% Euro Notes (2024) and revolver borrowings, and pay accrued interest and related fees, premiums and expenses. 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. Our capital allocation strategy includes spending to support growth driven capital projects, returning stockholder value through the payment of dividends and repurchasing shares of our common stock, completing highly synergistic tuck-in acquisitions and debt repayment. A summary of the dividend activity for our common stock for the nine months ended September 30, 2024 is as follows: Dividend Amount Declaration Date Record Date Payment Date $0.30 February 20, 2024 March 14, 2024 March 28, 2024 $0.30 April 22, 2024 May 16, 2024 May 30, 2024 $0.30 July 23, 2024 August 15, 2024 August 29, 2024 On October 22, 2024, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock, payable on November 27, 2024, to stockholders of record at the close of business on November 14, 2024. 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. With $1,524 million of total liquidity as of September 30, 2024 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. O ur Senior Unsecured Credit Agreement and our CAD Note both include 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 both the Senior Unsecured Credit Agreement and CAD Note, and differ in specified ways from comparable GAAP or common usage terms. We were in compliance with all applicable covenants under both our Senior Unsecured Credit Agreement and CAD Note as of September 30, 2024. The required debt covenants per both 46 the Senior Unsecured Credit Agreement and CAD Note and our actual ratios with respect to those covenants are as follows as of September 30, 2024: Covenant Level Ratio Achieved as of September 30, 2024 Maximum total leverage ratio 4.00 : 1.00 2.4 Minimum interest coverage ratio 3.00 : 1.00 7.6 The indentures relating to our U.S. Notes and 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 Senior Unsecured Credit Agreement and CAD Note as needed. While we believe that we have adequate capacity under our existing revolving 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 Senior Unsecured Credit Agreement to finance additional investments or to refinance existing debt obligations. There can be no assurance that additional funding, or refinancing of our Senior Unsecured Credit Agreement, 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 12, "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 outstanding, the weighted average interest rate on borrowings outstanding under our Senior Unsecured Credit Agreement was 6.0% at September 30, 2024. Including our senior notes and CAD Note, our overall weighted average interest rate on borrowings was 5.5% at September 30, 2024. Under the Senior Unsecured Credit Agreement, our borrowings bear interest at SOFR plus the applicable spread or other risk-free interest rates that are applicable for the specified currency plus a spread. Under the CAD Note, the interest rate may be (i) a forward-looking term rate based on the CORRA 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. See Note 13, "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 14, "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 borrowin gs under our revolving credit facilities and term loans payable of $1,731 million and $1,943 million at September 30, 2024 and December 31, 2023, respectively. Of these amounts, t here wer e no current maturities at September 30, 2024 or December 31, 2023. The scheduled maturities of long-term obligations outstanding at September 30, 2024 are as follows (in millions): Amount Three months ending December 31, 2024 (1) $ 17 Years ending December 31: 2025 38 2026 1,042 2027 17 2028 1,801 Thereafter 1,456 Total debt (2) $ 4,371 (1) Long-term obligations maturing by December 31, 2024 include $8 million of short-term debt that may be extended beyond the current year ending December 31, 2024. (2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs and unamortized bond discounts of $35 million as of September 30, 2024). 47 As of September 30, 2024, the Company had cash and cash equivalents of $353 million, of which $289 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 and nine months ended September 30, 2024 and 2023 (in millions): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 Change 2024 2023 Change Wholesale - North America $ 448 $ 423 $ 25 $ 1,498 $ 959 $ 539 (1) Europe 946 930 16 2,830 2,764 66 (2) Specialty 290 356 (66) 969 916 53 (3) Total $ 1,684 $ 1,709 $ (25) $ 5,297 $ 4,639 $ 658 (1) Inventory purchases across the Wholesale - North America segment increased in the nine months ended September 30, 2024 compared to the prior year period primarily due to the acquisition of Uni-Select. (2) The increase in inventory purchases in our Europe segment included an increase of $25 million attributable to the increase in the value of the pound sterling and, to a lesser extent, the euro in the nine months ended September 30, 2024 compared to the prior year period. (3) The increase in inventory purchases in the Specialty segment compared to the prior year period was primarily due to lower purchasing activity in the prior year as purchasing activity was reduced to align inventory levels with demand. The following table sets forth a summary of our global wholesale salvage and self service procurement for the three and nine months ended September 30, 2024 and 2023 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 % Change 2024 2023 % Change Wholesale - North America salvage vehicles 62 60 3.3 % 189 189 — % Europe wholesale salvage vehicles 6 7 (14.3) % 22 22 — % Self Service salvage vehicles 117 117 — % 340 397 (14.4) % Self Service salvage purchases decreased in the nine months ended September 30, 2024 relative to the prior year period due to a focus on reducing car cost. 48 The following table summarizes the components of the year over year changes in cash provided by operating activities (in millions): Operating Cash Net cash provided by operating activities for the nine months ended September 30, 2023 $ 1,144 Increase (decrease) due to: Working capital accounts: (1) Receivables (19) Inventories (176) Accounts payable 53 Other operating activities (116) (2) Net cash provided by operating activities for the nine months ended September 30, 2024 $ 886 (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 $176 million in incremental cash outflows in the first nine months of 2024 compared to the same period of 2023, including $112 million in our Europe segment primarily due to lower purchasing levels in the prior period following higher purchasing levels in 2022 due to restocking efforts to rebuild inventory levels, $40 million in our Specialty segment due to the benefit in the prior year period of decreasing inventory purchasing levels to align with softening demand and $28 million in our Wholesale - North America segment, partially offset by our Self Service segment which contributed a $4 million higher cash inflow. • Accounts payable produced $53 million in incremental cash inflows in the first nine months of 2024 compared to the same period of 2023. This was primarily attributable to higher cash inflows in our Wholesale - North America segment of $34 million and $15 million in our Specialty segment due to timing of payments. (2) Primarily reflects the aggregate effect of lower cash earnings and higher interest payments (primarily due to additional borrowings for the Uni-Select Acquisition and higher interest rates), partially offset by lower cash paid for taxes during the nine months ended September 30, 2024 compared to the same period of 2023. Net cash used in investing activities totaled $300 million and $2,389 million during the nine months ended September 30, 2024 and 2023, respectively. We invested $46 million and $2,199 million of cash in business acquisitions during the nine months ended September 30, 2024 and 2023, respectively. Property, plant and equipment purchases were $225 million in the nine months ended September 30, 2024 compared to $233 million in the prior year period. During the nine months ended September 30, 2023, we settled our foreign exchange forward contracts with the counterparties and received $49 million due primarily to strengthening in the Canadian exchange rate relative to the contract rates. The following table reconciles Net Cash Provided by Operating Activities to Free Cash Flow (in millions): Nine Months Ended September 30, 2024 2023 Net cash provided by operating activities $ 886 $ 1,144 Less: purchases of property, plant and equipment 225 233 Free cash flow $ 661 $ 911 For the nine months ended September 30, 2024, net cash used in financing activities totaled $516 million compared to net cash provided by financing activities of $1,391 million for the same period in 2023. The decrease is primarily due to proceeds (net of unamortized bond discounts) of $1,394 million from the issuance of the U.S. Notes (2028/33) for the nine months ended September 30, 2023. Cash outflows for share repurchases were $280 million and dividends paid were $240 million for the nine months ended September 30, 2024 compared to $8 million for share repurchases and $222 million for dividends paid for the same period of 2023. Net debt borrowings (net of unamortized bond discounts) were $45 million for the nine months ended September 30, 2024 compared to $282 million (excluding proceeds from the issuance of the U.S. Notes (2028/33) of $1,394 million) for the same period of 2023. 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. 49 Summarized Guarantor Financial Information Our U.S. Notes (2028/2033) and Euro Notes (2031) are guaranteed on a senior, unsecured basis by certain of our subsidiaries (each, a “subsidiary guarantor” and, together with LKQ, the “Obligor Group”), which are listed in Exhibit 22.1 in Part II, Item 6 of this Quarterly Report on Form 10-Q. The guarantees are full and unconditional, joint and several, and subject to certain conditions for release. See Note 13, "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 the Euro Notes (2031) and Note 19, "Long-Term Obligations" in Item 8 of Part II of our 2023 Form 10-K for information related to the U.S. Notes (2028/2033). Holders of the notes have a direct claim only against the Obligor Group. The following summarized financial information is presented for the Obligor Group on a combined basis after elimination of intercompany transactions and balances within the Obligor Group and equity in the earnings from and investments in any non-guarantor subsidiary. Summarized Statements of Income (in millions) Nine Months Ended September 30, 2024 Fiscal Year Ended December 31, 2023 (2) Revenue $ 5,347 $ 6,954 Cost of goods sold 3,211 4,079 Gross margin (1) 2,136 2,875 Income from continuing operations 329 602 Net income $ 329 $ 589 (1) Guarantor subsidiaries recorded $41 million and $53 million of net sales to and $157 million and $203 million of purchases from non-guarantor subsidiaries for the nine months ended September 30, 2024 and fiscal year ended December 31, 2023, respectively. (2) Information reflects the current Obligor Group listed in Exhibit 22.1 in Part II, Item 6 of this Quarterly Report on Form 10-Q. Summarized Balance Sheets (in millions) September 30, 2024 December 31, 2023 (1) Current assets $ 2,253 $ 2,167 Noncurrent assets 5,762 5,699 Current liabilities (2) 1,059 925 Noncurrent liabilities 4,201 4,031 (1) Information reflects the current Obligor Group listed in Exhibit 22.1 in Part II, Item 6 of this Quarterly Report on Form 10-Q. (2) Current liabilities for guarantor subsidiaries included $111 million of short term notes payable to non-guarantor subsidiaries as of September 30, 2024. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risks arising from adverse changes in foreign exchange rates, interest rates, commodity prices and inflation. There have been no material changes to our market risks from what was disclosed in Item 7A of Part II of our 2023 Form 10-K. 50