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 2024 Form 10-K and our Quarterly Reports on Form 10-Q (including this Quarterly Report). Overview We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty 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 body repair related 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, France 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. 19 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. 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 4, "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 2024 Form 10-K includes a summary of the critical accounting estimates we believe are the most important to aid in understanding our financial results. There have been no changes to those critical accounting estimates that have had a material impact on our reported amounts of assets, liabilities, revenues or expenses during the three months ended March 31, 2025. 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 4, "Revenue Recognition" and Note 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for information related to our revenue and long-lived assets by geographic region. 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. 20 • Segment EBITDA - See Note 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a description of the calculation of Segment EBITDA. We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results. • Free Cash Flow - We calculate free cash flow as net cash provided by (used in) 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. Results of Operations—Consolidated The following table sets forth statements of income data as a percentage of total revenue for the periods indicated: Three Months Ended March 31, 2025 2024 Revenue 100.0 % 100.0 % Cost of goods sold 60.2 % 60.8 % Gross margin 39.8 % 39.2 % Selling, general and administrative expenses 28.6 % 28.2 % Restructuring and transaction related expenses 0.3 % 0.8 % Depreciation and amortization 2.6 % 2.4 % Operating income 8.3 % 7.8 % Total other expense, net 1.5 % 1.6 % Income before provision for income taxes 6.8 % 6.3 % Provision for income taxes 1.9 % 1.9 % Equity in losses of unconsolidated subsidiaries — % 0.1 % Net income 4.9 % 4.3 % Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 Revenue The following table summarizes the changes in revenue by category (in millions): Three Months Ended March 31, 2025 2024 Change Parts & services revenue $ 3,295 $ 3,535 $ (240) Other revenue 168 168 — Total revenue $ 3,463 $ 3,703 $ (240) The decrease in parts and services revenue of $240 million, or 6.8%, represented decreases in segment revenue of $122 million, or 7.4%, in Europe, $86 million, or 6.0%, in Wholesale - North America, $29 million, or 6.8%, in Specialty and $3 million, or 5.7%, in Self Service. This overall decrease was driven by an organic parts and services revenue decrease of $151 million, or 4.3% (3.1% decrease on a per day basis), a $56 million, or 1.6%, decrease due to fluctuations in foreign exchange rates and a $32 million, or 0.9%, decrease due to the net impact of acquisitions and divestitures. Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. 21 Cost of Goods Sold Cost of goods sold decreased by $165 million, or 7.3%, to $2,086 million for the three months ended March 31, 2025. Cost of goods sold primarily reflects decreases of $90 million from Europe, $52 million from Wholesale - North America, $18 million from Specialty, and $5 million from Self Service. Cost of goods sold as a percentage of revenue decreased to 60.2% for the three months ended March 31, 2025 from 60.8% for the three months ended March 31, 2024. Cost of goods sold as a percentage of revenue primarily reflects decreases of 0.2% from Europe and 0.2% attributable to restructuring. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold by segment for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Selling, General and Administrative Expenses Our SG&A expenses decreased by $55 million, or 5.3%, to $989 million for the three months ended March 31, 2025. The year over year decrease in SG&A expense primarily reflects decreases of $34 million from Europe, $16 million from Wholesale - North America, and $5 million from Specialty. SG&A as a percentage of revenue increased to 28.6% for the three months ended March 31, 2025 from 28.2% for the three months ended March 31, 2024. SG&A as a percentage of revenue primarily reflects an increase of 0.3% from Wholesale - North America. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses by segment for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Restructuring and Transaction Related Expenses Restructuring and transaction related expenses decreased by $19 million, primarily due to a $9 million decrease in restructuring expenses related to our 2024 Global Restructuring plan and a $5 million decrease in restructuring expenses related to our Acquisition Integration plans. Provision for Income Taxes Our effective income tax rate for the three months ended March 31, 2025 was 27.7%, compared to 30.7% for the three months ended March 31, 2024. The decrease in the effective tax rate for the three months ended March 31, 2025 compared to the three months ended March 31, 2024 is primarily attributable to the 3.2% year over year decrease in the unfavorable impact of discrete items, mostly related to the nonrecurring unfavorable tax effects of the 2024 Global Restructuring Plan impairments in the prior year. See Note 5, "Restructuring and Transaction Related Expenses" for further information on the impairments. Foreign Currency Impact We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used during the three months ended March 31, 2024, the Canadian dollar, euro, Czech koruna and pound sterling rates used to translate the three months ended March 31, 2025 statements of income decreased by 6.0%, 3.1%, 3.0% and 0.6%, respectively. Realized and unrealized currency gains and losses combined with the translation effect of the change in foreign currencies against the U.S. dollar had a net negative effect of $0.01 on diluted earnings per share relative to the prior year period. 22 Results of Operations—Segment Reporting We have four reportable segments: Wholesale - North America; Europe; Specialty; and Self Service. The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in millions): Three Months Ended March 31, 2025 % of Total Segment Revenue 2024 % of Total Segment Revenue Third Party Revenue Wholesale - North America $ 1,412 $ 1,500 Europe 1,522 1,644 Specialty 393 422 Self Service 136 137 Total third party revenue $ 3,463 $ 3,703 Total Revenue Wholesale - North America $ 1,412 $ 1,500 Europe 1,522 1,644 Specialty 394 423 Self Service 136 137 Eliminations (1) (1) Total revenue $ 3,463 $ 3,703 Segment EBITDA Wholesale - North America $ 222 15.7 % $ 244 16.3 % Europe 141 9.3 % 143 8.7 % Specialty 21 5.4 % 27 6.4 % Self Service 20 14.6 % 16 11.7 % 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. The CODM uses 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 13, "Segment and Geographic Information" to the Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of total Segment EBITDA to net income. 23 Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024 Wholesale - North America The following table provides a reconciliation of Revenue to Segment EBITDA in our Wholesale - North America segment (in millions): Three Months Ended March 31, Wholesale - North America 2025 % of Total Segment Revenue 2024 % of Total Segment Revenue $ Change Parts & services revenue $ 1,336 $ 1,422 $ (86) (1) Other revenue 76 78 (2) Total segment revenue 1,412 1,500 (88) Cost of goods sold 785 837 (52) Gross margin 627 44.4 % 663 44.2 % (36) (2) Selling, general and administrative expenses 410 29.0 % 426 28.3 % (16) (3) Less: Other segment items (4) (5) (7) 2 Segment EBITDA $ 222 15.7 % $ 244 16.3 % $ (22) (1) Parts and services revenue decreased by $86 million, or 6.0%, to $1,336 million for the three months ended March 31, 2025. This decrease was primarily due to a parts and services organic revenue decrease of $76 million, or 5.4% (4.1% on a per day basis), primarily due to a reduction in repairable claims and having one fewer selling days in the current year, partially offset by targeted actions to increase market penetration. The decrease was also driven by an exchange rate decrease of $14 million, or 1.0%, primarily due to the stronger U.S. dollar against the Canadian dollar. (2) Gross margin decreased by $36 million, or 5.5%, to $627 million for the three months ended March 31, 2025. This decrease was driven by lower revenue as described above, partially offset by pricing initiatives. (3) SG&A expenses decreased by $16 million, or 3.6%, to $410 million for the three months ended March 31, 2025. The decrease in SG&A expense is primarily due to (i) $24 million from decreased personnel costs, (ii) $4 million from decreased freight expenses, and (iii) other individually immaterial factors representing a $2 million favorable impact in the aggregate, partially offset by (iv) $5 million from increased vehicle costs, (v) $5 million from increased professional fees, and (vi) $4 million from increased facility costs due to increased rent and insurance. (4) Amounts primarily represent other non operating income and expenses, as well as reconciling items to remove depreciation - cost of goods sold and restructuring - cost of goods sold, which are excluded from the calculation of Segment EBITDA. See Note 5, "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 additional information on restructuring charges. 24 Europe The following table provides a reconciliation of Revenue to Segment EBITDA in our Europe segment (in millions): Three Months Ended March 31, Europe 2025 % of Total Segment Revenue 2024 % of Total Segment Revenue $ Change Parts & services revenue $ 1,515 $ 1,637 $ (122) (1) Other revenue 7 7 — Total segment revenue 1,522 1,644 (122) Cost of goods sold 931 1,021 (90) Gross margin 591 38.8 % 623 37.9 % (32) (2) Selling, general and administrative expenses 459 30.1 % 493 30.0 % (34) (3) Less: Other segment items (4) (9) (13) 4 Segment EBITDA $ 141 9.3 % $ 143 8.7 % $ (2) (1) Parts and services revenue decreased by $122 million, or 7.4%, to $1,515 million for the three months ended March 31, 2025. This decrease was primarily due to (i) a parts and services organic revenue decrease of $45 million, or 2.8% (1.8% on a per day basis), driven by decreased volumes primarily due to difficult economic conditions, heightened competition in certain markets and a negative effect from one fewer selling days, (ii) an exchange rate decrease of $40 million, or 2.5%, primarily due to the stronger U.S. dollar against the euro, and to a lesser extent, the Czech koruna and pound sterling, and (iii) an acquisition and divestiture decrease of $36 million, or 2.2%, primarily related to the divestiture of certain operations in Poland, Slovenia and Bosnia in 2024. (2) Gross margin decreased by $32 million, or 5.2%, to $591 million for the three months ended March 31, 2025. The decrease was primarily attributable to decreased revenue, partially offset by an $8 million reduction in cost of goods sold primarily related to restructuring expenses incurred as part of the 2024 Global Restructuring Plan in the prior year period. These restructuring expenses are excluded from the calculation of Segment EBITDA. See Note 5, "Restructuring and Transaction Related Expenses" and Note 13, "Segment and Geographic Information" for further information. The increase in gross margin as a percentage of total segment revenue was primarily driven by a benefit from the divestiture of certain operations in Poland, Slovenia and Bosnia in 2024 and lower restructuring expense in the current year as described above. (3) SG&A expenses decreased by $34 million, or 7.2%, to $459 million for the three months ended March 31, 2025. The decrease in SG&A expense is primarily due to (i) $23 million of lower personnel costs mainly due to a reduction in personnel related accruals recorded in the prior year as a result of union related negotiations, the divestiture of certain operations in Poland, Slovenia and Bosnia in 2024, foreign exchange impacts of a strengthening U.S. dollar, and productivity initiatives which were largely offset by inflationary pressures, (ii) $5 million from lower freight costs, and (iii) other individually immaterial factors representing a $6 million favorable impact in the aggregate. (4) Amounts primarily represent other non operating income and expenses, as well as reconciling items to remove depreciation - cost of goods sold and restructuring - cost of goods sold, which are excluded from the calculation of Segment EBITDA. See Note 5, "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 additional information on restructuring charges. 25 Specialty The following table provides a reconciliation of Revenue to Segment EBITDA in our Specialty segment (in millions): Three Months Ended March 31, Specialty 2025 % of Total Segment Revenue 2024 % of Total Segment Revenue $ Change Parts & services revenue $ 393 $ 422 $ (29) (1) Intersegment revenue 1 1 — Total segment revenue 394 423 (29) Cost of goods sold 299 317 (18) Gross margin 95 24.2 % 106 25.0 % (11) (2) Selling, general and administrative expenses 76 19.4 % 81 19.1 % (5) (3) Less: Other segment items (4) (2) (2) — Segment EBITDA $ 21 5.4 % $ 27 6.4 % $ (6) (1) Parts and services revenue decreased by $29 million, or 6.8%, to $393 million for the three months ended March 31, 2025. This was primarily due to a parts and services organic revenue decrease of $27 million, or 6.4% (4.9% on a per day basis), driven by demand softness in the automotive and RV product lines resulting from declining consumer sentiment and reduced unit retail sales for RVs. (2) Gross margin decreased by $11 million, or 9.6%, to $95 million for the three months ended March 31, 2025. This decrease was primarily driven by decreases in parts and services revenue and unfavorable sales mix with lower volumes on higher margin product lines. (3) SG&A expenses decreased by $5 million, or 5.7%, to $76 million for the three months ended March 31, 2025. The decrease in SG&A expenses was primarily driven by $4 million of lower freight costs and other individually immaterial factors representing a $1 million favorable impact in the aggregate. (4) Amounts primarily represent other non operating income and expenses, as well as reconciling items to remove depreciation - cost of goods sold and restructuring - cost of goods sold, which are excluded from the calculation of Segment EBITDA. See Note 5, "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 additional information on restructuring charges. Self Service The following table provides a reconciliation of Revenue to Segment EBITDA in our Self Service segment (in millions): Three Months Ended March 31, Self Service 2025 % of Total Segment Revenue 2024 % of Total Segment Revenue $ Change Parts & services revenue $ 51 $ 54 $ (3) Other revenue 85 83 2 Total segment revenue 136 137 (1) Cost of goods sold 72 77 (5) Gross margin 64 47.0 % 60 43.9 % 4 (1) Selling, general and administrative expenses 44 32.7 % 44 32.3 % — Segment EBITDA $ 20 14.6 % $ 16 11.7 % $ 4 (1) Gross margin increased by $4 million, or 6.4%, to $64 million for the three months ended March 31, 2025. The increase is attributable to improvements in vehicle procurement costs. 26 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): March 31, 2025 December 31, 2024 Capacity under revolving credit facilities $ 2,000 $ 2,000 Less: Revolving credit facilities borrowings 824 664 Less: Letters of credit 114 114 Availability under credit revolving facilities 1,062 1,222 Add: Cash and cash equivalents 227 234 Total liquidity $ 1,289 $ 1,456 We had $1,062 million available under our revolving credit facilities as of March 31, 2025 . Combined with $227 million of cash and cash equivalents at March 31, 2025, we had $1,289 million i n available liquidity, a decrease of $167 million from our available liquidity as of December 31, 2024, primarily as a result of increasing our revolving credit facilities borrowings by $160 million. See Note 9, "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 regarding total debt outstanding. 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, return 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 three months ended March 31, 2025 is as follows: Dividend Amount Declaration Date Record Date Payment Date $0.30 February 18, 2025 March 13, 2025 March 27, 2025 On April 22, 2025, our Board of Directors declared a quarterly cash dividend of $0.30 per share of common stock, payable on May 29, 2025, to stockholders of record at the close of business on May 15, 2025. 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 $1,289 million of total liquidity as of March 31, 2025 and $558 million of current maturities, we have access to funds to meet our near term commitments. Our current maturities include the $500 million term loan payable under our Senior Unsecured Credit Agreement due January 2026, which we intend to extend or refinance on or before the scheduled maturity. 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 27 both our Senior Unsecured Credit Agreement and CAD Note as of March 31, 2025. The required debt covenants per both the Senior Unsecured Credit Agreement and CAD Note and our actual ratios with respect to those covenants are as follows as of March 31, 2025: Covenant Level Ratio Achieved as of March 31, 2025 Maximum total leverage ratio 4.00 : 1.00 2.5 Minimum interest coverage ratio 3.00 : 1.00 7.4 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. 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 5.6% at March 31, 2025. Including our senior notes and CAD Note, our overall weighted average interest rate on borrowings was 5.2% at March 31, 2025. 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 Canadian Overnight Repo Rate Average 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 9, "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 10, "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 $1,811 million and $1,651 million at March 31, 2025 and December 31, 2024, respectively. Of these amounts, t here wer e current maturities of $500 million at March 31, 2025 related to the term loan payable under our Senior Unsecured Credit Agreement due January 2026. There were no current maturities at December 31, 2024. The scheduled maturities of long-term obligations outstanding at March 31, 2025 are as follows (in millions): Amount Nine months ending December 31, 2025 (1) $ 51 Years ending December 31: 2026 1,013 2027 20 2028 1,909 2029 8 Thereafter 1,428 Total debt (2) $ 4,429 (1) Long-term obligations maturing by December 31, 2025 include $23 million of short-term debt that may be extended beyond the current year ending December 31, 2025. (2) The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs and unamortized bond discounts of $31 million as of March 31, 2025). 28 As of March 31, 2025, the Company had cash and cash equivalents of $227 million, of which $197 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. 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 8, "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. For the three months ended March 31, 2025, net cash used in operating activities totaled $3 million compared to net cash provided by operating activities of $253 million for the same period of 2024. 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. Accounts receivable represented $7 million in incremental cash outflows for the three months ended March 31, 2025 compared to the same period of 2024. Inventories represented $34 million in incremental cash outflows for the three months ended March 31, 2025 compared to the same period of 2024. Accounts payable produced $212 million in lower cash inflows for the three months ended March 31, 2025 compared to the same period of 2024. For the three months ended March 31, 2025, net cash used in investing activities totaled $50 million compared to $88 million for the same period of 2024. We invested $17 million of cash in business acquisitions during the three months ended March 31, 2024. There were no business acquisitions during the three months ended March 31, 2025. Property, plant and equipment purchases were $54 million in the three months ended March 31, 2025 compared to $66 million in the prior year period. The following table reconciles Net Cash (Used in) Provided by Operating Activities to Free Cash Flow (in millions): Three Months Ended March 31, 2025 2024 Net cash (used in) provided by operating activities $ (3) $ 253 Less: purchases of property, plant and equipment 54 66 Free cash flow $ (57) $ 187 For the three months ended March 31, 2025, net cash provided by financing activities totaled $40 million compared to net cash used in financing activities of $113 million for the same period in 2024. Cash outflows for share repurchases were $40 million and dividends paid were $78 million for the three months ended March 31, 2025 compared to $30 million for share repurchases and $81 million for dividends paid for the same period of 2024. Net debt borrowings (net of unamortized bond discounts) were $170 million for the three months ended March 31, 2025 compared to $35 million for the same period of 2024. 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. 29 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 IV, Item 15 of our 2024 Form 10-K. The guarantees are full and unconditional, joint and several, and subject to certain conditions for release. See Note 18, "Long-Term Obligations" in Item 8 of Part II of our 2024 Form 10-K for information related to the Euro Notes (2031) and 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) Three Months Ended March 31, 2025 Fiscal Year Ended December 31, 2024 Revenue $ 1,711 $ 6,968 Cost of goods sold 1,016 4,192 Gross margin (1) 695 2,776 Income from continuing operations 94 428 Net income $ 94 $ 428 (1) Guarantor subsidiaries recorded $14 million and $53 million of net sales to and $57 million and $205 million of purchases from non-guarantor subsidiaries for the three months ended March 31, 2025 and fiscal year ended December 31, 2024, respectively. Summarized Balance Sheets (in millions) March 31, 2025 December 31, 2024 Current assets $ 2,497 $ 2,321 Noncurrent assets 5,664 5,722 Current liabilities (1) 1,781 1,206 Noncurrent liabilities 3,731 4,163 (1) Current liabilities for guarantor subsidiaries included $214 million and $219 million of short term notes payable to non-guarantor subsidiaries as of March 31, 2025 and December 31, 2024, respectively. 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 2024 Form 10-K. 30