ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. Discussion of 2021 items and the year-over-year comparison of changes in our financial condition and the results of operations as of and for the years ended December 31, 2022 and December 31, 2021 can be found in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 23, 2023. Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "LKQ" and similar terms refer to LKQ Corporation and its subsidiaries.
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 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, Italy, Czech Republic, Austria, Slovakia, Poland, and various other European countries. Our Specialty segment is a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada. Our Self Service segment operates self service retail facilities across the U.S. that sell recycled automotive products from end-of-life-vehicles.
Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Please refer to the factors referred to in Special Note on Forward-Looking Statements and Risk Factors 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.
Acquisitions and Investments
Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. Through 2018, our acquisition strategy was focused on consolidation to build scale in fragmented markets across North America and Europe. We targeted companies that were market leaders, expanded our geographic presence and enhanced our ability to provide a wide array of vehicle products through our distribution network. In the last few years, we have shifted our focus to acquisitions that target high synergies and/or add critical capabilities, including the acquisition of Uni-Select, completed in August 2023, that complements our existing North American paint distribution operations and provides a scaled position in the Canadian mechanical parts space, with opportunity for future consolidation and growth. Additionally, we have made investments in various businesses to advance our strategic objectives. See Note 3, "Business Combinations" and Note 11, "Equity Method Investments" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our acquisitions and investments.
35
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. During the year ended December 31, 2023, parts and services revenue represented 95.0% of our consolidated revenue. Revenue from other sources includes scrap and other metals (including precious metals - platinum, palladium and rhodium - contained in recycled parts such as catalytic converters) sales, bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from our furnace operations. Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold. See Note 13, "Revenue Recognition" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our sources of revenue.
Critical Accounting Estimates
The preparation of the Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires management to make use of certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as related disclosure of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. Historically, we have not made significant changes to the methods for determining these estimates as our actual results have not differed materially from our estimates. We do not believe it is reasonably likely that the estimates and related assumptions will change materially in the foreseeable future; however, actual results could differ from those estimates under different assumptions, judgments or conditions.
Critical accounting estimates are those that are most important to the portrayal of our financial condition and results of operations, and which require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting estimates addressed below. For additional information related to significant accounting policies used in the preparation of our Consolidated Financial Statements, see Note 2, "Summary of Significant Accounting Policies" to the accompanying Consolidated Financial Statements.
Goodwill Impairment
Description
Goodwill is obtained through business acquisitions and recorded at the estimated fair value at the date of acquisition. Goodwill is not amortized but instead tested for impairment annually or sooner if events indicate that an impairment may exist. In performing this test, we compare the carrying value of the asset to its fair value. To derive the fair value for our reporting units which carry goodwill, we consider the use of various valuation techniques, with the primary technique being an income approach via a discounted cash flow method and another being a market approach via a guideline public company method. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired and an impairment charge is recognized. In performing the test for impairment of goodwill, goodwill is allocated to the reporting units expected to benefit from the business combination.
Judgments and Uncertainties
Determining whether impairment indicators exist and estimating fair values as part of impairment testing require significant judgment. Estimating the fair values of our reporting units which have goodwill requires the use of significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. As part of applying the discounted cash flow method and guideline public company method, we use significant assumptions which include sales growth, operating margins, discount rates, perpetual growth rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data.
36
Sensitivity of Estimate to Change
The balance of our goodwill was $5,600 million and $4,319 million as of December 31, 2023 and December 31, 2022, respectively. We have not made material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years. The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses. During fiscal year 2023, we elected to perform a quantitative impairment test for our goodwill. No impairment charges were recorded as a result of the testing as the fair value of each goodwill reporting unit exceeded the calculated carrying value. A 10% decline in projected cash flows or a 10% increase in the discount rate would not have resulted in an impairment to goodwill.
Business Combinations
Description
We account for business combinations using the acquisition method of accounting, under which the acquisition purchase price is allocated to the assets acquired, including purchased intangible assets, and liabilities assumed based upon their respective fair values. The excess of the fair value of the purchase price over the fair values of these assets acquired and liabilities assumed is recorded as goodwill.
Judgments and Uncertainties
Accounting for business combinations requires management to make significant estimates and assumptions to determine the fair values of assets acquired and liabilities assumed at the acquisition date. Although we believe the assumptions and estimates we have made in relation to the acquisitions are appropriate, they are based, in part, on historical experience, information obtained from management of the acquired companies and information obtained from independent third party valuation firms and are inherently uncertain. Critical estimates in valuing certain acquired intangible assets include, but are not limited to, future expected cash flows including revenue growth rate assumptions from product sales and customer contracts, estimated royalty rates used in valuing related intangible assets, customer attrition rates and discount rates. The discount rates used to discount expected future cash flows to present value are typically derived from a weighted-average cost of capital analysis and adjusted to reflect inherent risks. Unanticipated events and circumstances may occur that could affect either the accuracy or validity of such assumptions, estimates or actual results.
Sensitivity of Estimate to Change
The amount of goodwill recorded from our 2023 acquisitions was $1,221 million as of December 31, 2023. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. Changes in the estimates applied or values of acquired assets and liabilities could have a material impact on our financial statements. As a result, during the measurement period, which may be up to one year from the business acquisition date, we may record adjustments to the originally assigned values of assets acquired and liabilities assumed with the corresponding offset to goodwill.
Recently Issued Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 2, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to new accounting standards.
Financial Information by Geographic Area
See Note 13, "Revenue Recognition" and Note 25, "Segment and Geographic Information" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our revenue and long-lived assets by geographic region.
37
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 14, "Restructuring and Transaction Related Expenses" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further details.
•Transformation expenses — Period costs incurred to execute the 1 LKQ Europe 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 selling, general and administrative ("SG&A") expenses.
•Transformation capital expenditures — Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the 1 LKQ Europe 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 Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
We are executing on the various projects associated with the 1 LKQ Europe plan and expect to be completed by the end of 2027. In the second quarter of 2023, we extended the completion date from 2025 to 2027 based on a detailed project review, after which we concluded that the common ERP system implementation would require additional time to allow for operational process reengineering to support further standardization across the segment. The extended implementation schedule and incremental process reengineering work will help to minimize potential business disruptions but increased the overall cost estimate by $85 million. We expect to achieve additional cost benefits through expanded application of shared services and productivity improvements along with working capital reductions related to inventory rationalization. We are currently realizing a portion of the benefits of the 1 LKQ Europe plan, and we expect to grow Segment EBITDA margin in the future as further actions in the plan are implemented. During the year ended December 31, 2023, we incurred $27 million 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.
Ukraine/Russia Conflict
The Russian invasion of Ukraine and resulting global governmental response impacted our business in 2022 and 2023, and are expected to continue to impact our business in 2024. Governmental sanctions imposed on Russia have restricted our ability to sell to and collect from customers based in Russia and Belarus, and Russian military activity in Ukrainian territory has temporarily changed the way in which we operate in Ukraine. Many of our branches in Ukraine have remained open, although operating at less than full capacity, during the conflict, while others have closed temporarily. We expect to continue operating in this manner unless conditions change. We currently do not expect the conflict to have a material impact on our ongoing results of operations or cash flows. Our operations in Ukraine represented approximately 1% of both our total annual revenue and total annual operating profit for fiscal year 2023 and comprised approximately $69 million of total assets as of December 31, 2023. In addition, LKQ revenue from customers in Russia and Belarus represented less than 0.3% of our total revenue in 2021 (the last full year before we stopped selling to customers in these countries). As future developments in the conflict are difficult to predict and outside of our control, it is possible that estimates underlying our financial statements may change significantly in future periods.
Key Performance Indicators
We believe that organic revenue growth, Segment EBITDA and free cash flow are key performance indicators for our business. Segment EBITDA is our key measure of segment profit or loss reviewed by our chief operating decision maker. Free cash flow is a financial measure that is not prepared in accordance with U.S. generally accepted accounting principles (“non-GAAP”).
38
•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 25, "Segment and Geographic Information" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a description of the calculation of Segment EBITDA. We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results.
•Free Cash Flow - We calculate free cash flow as net cash provided by operating activities, less purchases of property, plant and equipment. Free cash flow provides insight into our liquidity and provides useful information to management and investors concerning cash flow available to meet future debt service obligations and working capital requirements, 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:
Year Ended December 31,
Cost of goods sold 59.8 % 59.2 %
Selling, general and administrative expenses 27.9 % 27.7 %
Restructuring and transaction related expenses 0.5 % 0.2 %
Gain on disposal of businesses — % (1.2) %
Depreciation and amortization 2.0 % 1.8 %
Operating income 9.8 % 12.4 %
Total other expense, net 0.9 % 0.5 %
Income from continuing operations before provision for income taxes 8.9 % 11.9 %
Provision for income taxes 2.2 % 3.0 %
Equity in earnings of unconsolidated subsidiaries 0.1 % 0.1 %
Income from continuing operations 6.8 % 8.9 %
Net (loss) income from discontinued operations — % — %
Net income 6.8 % 9.0 %
Less: net income attributable to continuing noncontrolling interest — % — %
Net income attributable to LKQ stockholders 6.7 % 9.0 %
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
39
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Revenue
The following table summarizes the changes in revenue by category (in millions):
Year Ended December 31, Percentage Change in Revenue
2023 2022 Organic Acquisition and Divestiture Foreign Exchange Total Change
The increase in parts and services revenue of 10.4% represented increases in segment revenue of 18.2% in Wholesale - North America, 10.4% in Europe, and 2.4% in Self Service, partially offset by a decrease of 6.9% in Specialty. This overall increase was driven by organic parts and services revenue growth of 4.7%, a 4.8% increase due to the net impact of acquisitions and divestitures, and a 0.9% increase due to fluctuations in foreign exchange rates. The decrease in other revenue of19.6% was primarily driven by a decrease in organic revenue of $138 million due to unfavorable movements in precious metals and scrap steel prices compared to the prior year, primarily attributable to a $93 million decrease in our Self Service segment and a $41 million decrease in our Wholesale - North America segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in revenue by segment for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Cost of Goods Sold
Cost of goods sold as a percentage of revenue increased to 59.8% for the year ended December 31, 2023 from 59.2% for the year ended December 31, 2022. Cost of goods sold reflects increases of 0.4% from our Specialty segment, and 0.3% from our Wholesale - North America segment (including a 0.5% dilutive effect related to our acquisition of Uni-Select), partially offset by a decrease of 0.2% attributable to mix primarily due to a decline in revenue in our Specialty segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Selling, General and Administrative Expenses
Our SG&A expenses as a percentage of revenue increased to 27.9% for the year ended December 31, 2023 from 27.7% for the year ended December 31, 2022. The year over year change in SG&A expense was mostly impacted by offsetting factors including an unfavorable mix effect, and a reduction in our Wholesale - North America segment, which benefited from the Uni-Select Acquisition. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the year ended December 31, 2023 compared to the year ended December 31, 2022.
Restructuring and Transaction Related Expenses
The following table summarizes restructuring and transaction related expenses for the periods indicated (in millions):
Year Ended December 31,
Restructuring expenses $ 44 (1) $ 15 (2) $ 29
Transaction related expenses 21 (3) 5 (3) 16
Restructuring and transaction related expenses $ 65 $ 20 $ 45
(1)Restructuring expenses for the year ended December 31, 2023 primarily consisted of (i) $29 million related to our acquisition integration plans, (ii) $14 million related to our global restructuring plans, and (iii) $1 million related to our 1 LKQ Europe plan.
40
(2) Restructuring expenses for the year ended December 31, 2022 primarily consisted of (i) $11 million related to our global restructuring plans, (ii) $3 million related to our acquisition integration plans, and (iii) $1 million related to our 1 LKQ Europe plan.
(3) Transaction related expenses for the years ended December 31, 2023 and 2022 primarily related to external costs such as legal, accounting and advisory fees related to completed and potential acquisitions (including Uni-Select transaction costs in 2023).
See Note 14, "Restructuring and Transaction Related Expenses" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring and acquisition integration plans.
Gain on Disposal of Businesses
During the year ended December 31, 2022, we recorded a $159 million pretax gain from divestitures including $155 million ($127 million after tax) from the sale of PGW Auto Glass ("PGW") and $4 million from the sale of a business within our Self Service segment. See"Other Divestitures (Not Classified in Discontinued Operations)" in Note 4, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our gain on disposal of businesses.
Depreciation and Amortization
The following table summarizes depreciation and amortization for the periods indicated (in millions):
Year Ended December 31,
Depreciation and amortization $ 283 $ 237 $ 46
(1)Depreciation expense increased primarily related to anincrease in capital expenditures, primarily in our Europe and Wholesale - North America segments, and $3 million from our acquisition of Uni-Select.
(2)Amortization expense increased primarily due to (i) a $34 million increase from our acquisition of Uni-Select, partially offset by (ii) individually insignificant decreases that had a $3 million impact in the aggregate.
Total Other Expense, Net
The following table summarizes Total other expense, net for the periods indicated (in millions):
Year Ended December 31,
Loss on debt extinguishment 1 — 1
Gains on foreign exchange contracts - acquisition related (49) — (49) (2)
Interest income and other income, net (44) (15) (29) (3)
Total other expense, net $ 122 $ 63 $ 59
(1)Interest expense increased primarily due to (i) a $63 million increase from higher interest rates for the year ended December 31, 2023 compared to the prior year, (ii) a $58 million increase from higher outstanding debt primarily related to the permanent financing for the Uni-Select Acquisition, (iii) a $9 million increase related to amortization of pre-acquisition bridge loan financing costs related to the Uni-Select Acquisition, and (iv) a $6 million increase from foreign exchange translation, primarily related to an increase in the euro exchange rate.
(2)Related to the Uni-Select Acquisition. See Note 3, "Business Combinations" and Note 20, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
(3)The increase in Interest income and other income, net is primarily comprised of (i) a $20 million increase related to interest income, mostly related to the proceeds from the U.S. Notes (2028/33) that were invested in money market funds between the bond issuance date and the Uni-Select Acquisition date, (ii) a $5 million increase from funds received to settle an eminent domain matter in 2023, (iii) a $3 million increase related to fair value adjustments for equity investments
41
not accounted for under the equity method compared to the prior year, and (iv) a $2 million increase from the change in foreign currency gains and losses, partially offset by (v) individually insignificant decreases that had a $1 million impact in the aggregate.
Provision for Income Taxes
Our effective income tax rate for the year ended December 31, 2023 was 24.8%, compared to 25.3% for the year ended December 31, 2022. The decrease in the effective tax rate for the year ended December 31, 2023 compared to the year ended December 31, 2022, is primarily attributable to greater benefits from discrete items in 2023 than 2022. Discrete items had favorable effects in both years, with a 2% rate benefit in the current year, mostly related to the Uni-Select Acquisition foreign exchange forward contract gain, and a 1% rate benefit in the prior year, primarily related to the sale of PGW in the second quarter of 2022. Unfavorable rate effects in 2023 from non-deductible transaction costs and negative impacts on foreign tax credit availability caused by Uni-Select related transaction activity partially offset the benefit from discrete items.
See Note 24, "Income Taxes" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Equity in Earnings of Unconsolidated Subsidiaries
Equity in earnings of unconsolidated subsidiaries for the year ended December 31, 2023 increased by $4 million primarily related to an increase in year over year results in an immaterial investment in our Wholesale - North America 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 for the year ended December 31, 2022, the Czech koruna, euro and the pound sterling rate used to translate the 2023 statements of income increased by 5.1%, 2.7% and 0.6%, respectively, while the Canadian dollar rate decreased by 3.6%. 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 positive effect of $0.20 on diluted earnings per share for the year ended December 31, 2023, mostly related to the $49 million pretax gain on the foreign exchange forward contract related to the Uni-Select Acquisition.
Net (Loss) Income from Discontinued Operations
Discontinued operations for the year ended December 31, 2023 reflected the GSF Car Parts business, which was acquired with the Uni-Select Acquisition in August and was sold in October. The loss of $6 million represents the net of the operating results prior to the sale and the loss on disposal. Income from discontinued operations for the year ended December 31, 2022 of $6 million primarily relates to adjustments to tax reserves on our glass manufacturing business. See Note 4, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on these businesses.
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.
42
The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in millions):
Year Ended December 31,
2023 % of Total Segment Revenue 2022 % of Total Segment Revenue
Third Party Revenue
Wholesale - North America $ 5,281 $ 4,556
Total Revenue
Wholesale - North America $ 5,282 $ 4,556
Eliminations (4) (3)
Segment EBITDA
The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as Net income attributable to LKQ stockholders excluding discontinued operations; depreciation, amortization; interest; gains and losses on debt extinguishment; income tax expense; restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for and subsequent adjustments to reserves for asset recoverability and expenditures to support our employees and their families). See Note 25, "Segment and Geographic Information" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of total Segment EBITDA to net income.
43
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Wholesale - North America
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions):
Year Ended December 31, Percentage Change in Revenue
(1)Parts and services organic revenue increased 8.2%(8.6% on a per day basis) for the year ended December 31, 2023 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs and a net volume increase. Aftermarket collision parts volumes increased year over year due to reduced pressures on our supply chain. Aftermarket collision parts volumes also grew as a result of the continued rollout of State Farm's aftermarket parts program, which began on a trial basis in June 2022 and has subsequently been expanded.
(2)Other organic revenue decreased 11.8%, or $41 million, year over year primarily related to (i) a $46 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices, partially offset by higher volumes, partially offset by (ii) a$5 million increase in revenue from other scrap (e.g., aluminum) and cores due to higher volumes, partially offset by lower prices.
(3)Acquisition and divestiture parts and services revenue was a net increase of $432 million, or 10.3%, primarily due to the acquisition of Uni-Select in the third quarter of 2023, partially offset by the divestiture of our PGW aftermarket glass business in the second quarter of 2022. SeeNote 3, "Business Combinations" and "Other Divestitures (Not Classified in Discontinued Operations)" in Note 4, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the acquisition of Uni-Select and the divestiture of PGW, respectively.
Segment EBITDA
Segment EBITDA increased $123 million, or 14.5%, for the year ended December 31, 2023 compared to the prior year, which includes a $46 million positive impact related to the acquisition of Uni-Select in the third quarter of 2023 (Uni-Select increases Segment EBITDA dollars but dilutes the Segment EBITDA percentage) and a $19 million negative year over year effect related to the PGW business, which we divested in the second quarter of 2022. The remaining increase is primarily attributable to lower freight costs, higher selling prices on parts, improved aftermarket volumes, and productivity initiatives helping to offset inflationary pressures related to product cost. We estimate that precious metals and scrap steel pricing had a net unfavorable effect of $28 million, or 0.4%, on Segment EBITDA margin relative to the prior year.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment:
Wholesale - North America Percentage of Total Segment Revenue
Segment EBITDA for the year ended December 31, 2022 18.7 %
Increase (decrease) due to:
Uni-Select Acquisition (1.2) % (1)
Change in gross margin 0.7 % (2)
Change in segment operating expenses 0.1 % (3)
Change in other income and expenses, net 0.1 %
Segment EBITDA for the year ended December 31, 2023 18.5 %
44
(1)The unfavorable impact related to the acquisition of Uni-Select in the third quarter of 2023 was primarily driven by (i) a 2.1% decrease in gross margin due to product mix as the paint, body, and equipment and maintenance parts lines have a lower gross margin structure than other wholesale product lines, partially offset by (ii) a favorable impact of 0.9% related to a decrease in overhead expenses as Uni-Select operates with lower overhead expenses than our other wholesale product lines.
(2)The increase in gross margin of 0.7% was primarily driven by (i) a 0.5% benefit from lower inbound freight costs and (ii) a 0.2% mix benefit resulting from the PGW divestiture in the second quarter of 2022.
(3)The decrease in segment operating expenses as a percentage of revenue reflects the favorable impact of (i) 0.5% from decreased freight, vehicle, and fuel costs and (ii) other individually immaterial factors representing a 0.2% favorable impact in the aggregate, partially offset by (iii) 0.4% from higher professional fees and (iv) 0.2% from higher charitable contributions.
Europe
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Europe segment (in millions):
Year Ended December 31, Percentage Change in Revenue
(1)Parts and services organic revenue for the year ended December 31, 2023 increased by 6.9% (7.4% on a per day basis), primarily driven by pricing initiatives across all geographies to offset increased costs resulting from inflationary pressures and to a lesser extent, higher volumes.
(2)Acquisition and divestiture revenue was a net increase of $76 million, or 1.3%, primarily related to our acquisition of seven wholesale businesses from the beginning of 2022 through the one-year anniversary of the acquisition dates.
(3)Exchange rates increased our revenue growth by $121 million, or 2.1%, primarily due to the weaker U.S. dollar against the euro, Czech koruna and pound sterling for the year ended December 31, 2023 relative to the prior year.
Segment EBITDA
Segment EBITDA increased $29 million, or 5.1%, for the year ended December 31, 2023 compared to the prior year. On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $18 million, or 3.0%, compared to the prior year. The increase in dollar terms is attributable to organic revenue growth of $391 million and benefits from productivity initiatives. Europe's results were negatively impacted by an $11 million charge to settle a value-added tax issue in Italy related to prior years and a loss of revenue and associated margin in our German operations caused by labor strikes, which we estimate resulted in lower Segment EBITDA of $17 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 year ended December 31, 2023.
45
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
Europe Percentage of Total Segment Revenue
Segment EBITDA for the year ended December 31, 2022 10.2 %
Increase (decrease) due to:
Change in gross margin — % (1)
Change in segment operating expenses (0.4) % (2)
Change in other income and expenses, net (0.1) %
Segment EBITDA for the year ended December 31, 2023 9.7 %
(1)Gross margin was flat on a year to date basis, as favorable impacts from price increases were offset by inflationary pressures and difficult macro-economic conditions causing consumer price sensitivity, most notably in our Central and Eastern European regions.
(2)The increase in segment operating expenses as a percentage of revenue primarily reflects the unfavorable impacts of (i) 0.2% due to the settlement of a value-added tax issue in Italy and (ii) leverage effects of 0.2% caused by strike activity in Germany.
Specialty
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions):
Year Ended December 31, Percentage Change in Revenue
Other revenue — — — % — % — % — %
(1)Parts and services organic revenue for the year ended December 31, 2023, decreased by 10.1% primarily due to demand softness in the RV product line, as RV unit retail sales and wholesale shipments have declined year over year.
(2)Acquisition and divestiture revenue was a net increase of $64 million, or 3.6%, primarily related to our acquisition of one Specialty business in 2023.
Segment EBITDA
Segment EBITDA decreased $65 million, or 32.7%, for the year ended December 31, 2023 compared to the prior year primarily due to the organic revenue decline and the negative effect of inflation on overhead expenses.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
Specialty Percentage of Total Segment Revenue
Segment EBITDA for the year ended December 31, 2022 11.1 %
Increase (decrease) due to:
Change in gross margin (3.3) % (1)
Change in segment operating expenses 0.2 % (2)
Segment EBITDA for the year ended December 31, 2023 8.0 %
(1)The decrease in gross margin primarily was driven by (i) product channel mix toward lower margin auto and marine products and (ii) increased competitive pricing due to broader availability of inventory among competitors in the market.
46
(2)Segment operating expenses as a percentage of revenue decreased despite the negative leverage effect from the 10.1% organic revenue decline. This was primarily due to a 0.2% decrease in personnel costs, mainly driven by decreased workers compensation and health insurance expenses, as well as restructuring activities.
Self Service
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions):
Year Ended December 31, Percentage Change in Revenue
Parts & services revenue $ 232 $ 227 2.4 % (1) — % — % 2.4 %
(1)Parts and services organic revenue increased 2.4% for the year ended December 31, 2023 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs resulting from greater competition for vehicles.
(2)Other organic revenue decreased 19.1%, or $93 million, year over year due to (i) a $79 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices, (ii) a $20 million decrease in revenue from scrap steel related to lower prices and lower volumes, partially offset by (iii) a $6 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher volumes, partially offset by lower prices.
(3)Acquisition and divestiture revenue was a net decrease of $30 million, or 4.2% due to the divestiture of a business in the third quarter of 2022. See "Other Divestitures (Not Classified in Discontinued Operations)" in Note 4, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the divestiture.
Segment EBITDA
Segment EBITDA decreased $47 million, or 57.3%, for the year ended December 31, 2023 compared to the prior year. The decrease is driven by the decline in revenue due to unfavorable movements in commodity prices compared to the prior year and gross margin compression as vehicle procurement costs have decreased at a lesser rate than commodity prices. Decreases in precious metals prices contributed an estimated $60 million decline in Segment EBITDA relative to the year ended December 31, 2022. Net sequential changes in scrap steel prices partially offset the impact of the decline in precious metals prices. During the year ended December 31, 2023, scrap steel prices had a $5 million favorable impact on Segment EBITDA, compared to an $15 million unfavorable impact during the year ended December 31, 2022. The favorable impacts for the year ended December 31, 2023 resulted from the increase in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment:
Self Service Percentage of Total Segment Revenue
Segment EBITDA for the year ended December 31, 2022 11.7 %
Increase (decrease) due to:
Change in gross margin (1.5) % (1)
Change in segment operating expenses (4.2) % (2)
Segment EBITDA for the year ended December 31, 2023 6.0 %
(1)The decrease in gross margin reflects an unfavorable impact resulting from vehicle procurement costs decreasing at a lesser rate than commodity prices.
(2)The increase in segment operating expenses as a percentage of revenue reflects (i) a negative leverage effect of 5.7% from decreases in metals revenue, partially offset by (ii) other individually immaterial factors representing a 1.5% favorable impact in the aggregate.
47
Liquidity and Capital Resources
We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions. Our primary sources of liquidity are cash flows from operations and our revolving credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt, paying dividends or repurchasing our common stock. As we have pursued acquisitions as part of our historical growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our acquisitions, we have accessed various forms of debt financing, including revolving credit facilities and senior notes. We currently believe we have sufficient access to capital markets to support our future growth objectives.
The following table summarizes liquidity data as of the dates indicated (in millions):
Adjusted(4)
Availability under revolving credit facilities (2) 976 645 1,295
(1) Debt amounts reflect the gross values to be repaid in the next 12 months (excluding immaterial debt issuance costs as of December 31, 2023 and 2022, respectively).
(2) Availability under revolving credit facilities is derived by reducing capacity under the revolving credit facilities by our borrowings under the revolving credit facilities and outstanding letters of credit ($110 millionand $69 million at December 31, 2023 and 2022, respectively).
(3) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs and unamortized bond discount of $30 million and $6 million as of December 31, 2023 and 2022, respectively).
(4) Amounts presented represent the termination of the senior secured credit agreement ("Prior Credit Agreement") and inclusion of the new credit agreement ("Senior Unsecured Credit Agreement") as if both were in effect as of December 31, 2022. See Note 19, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
(5) Debt amount presented above reflects the gross values to be repaid (excluding debt issuance costs of $13 million as of December 31, 2022).
As of December 31, 2023, we had senior debt outstanding as follows:
Maturity Date Interest Rate Amount Outstanding
Senior Unsecured Credit Agreement:
Senior Unsecured Term Loan Agreement:
Unsecured Senior Notes:
(1) Interest rate derived via a weighted average
48
We had approximately $976 million available under our revolving credit facilities in place as of December 31, 2023. Combined with $299 millionof cash and cash equivalents at December 31, 2023, we had approximately $1,275 million in available liquidity, a decrease of $298 million from our available liquidity as of December 31, 2022, primarily as a result of reducing our overall revolving credit facility capacity by $650 millionafter entering into the Senior Unsecured Credit Agreement.
The enterprise value for the Uni-Select Acquisition at the time of the acquisition was approximately CAD 2.8 billion ($2.1 billion), which was financed with the gross proceeds from the issuance of Unsecured Senior Notes of $1,400 million, Senior Unsecured Term Loan Agreement ("CAD Note") of CAD 700 million, and borrowings under our revolving credit facility and cash on hand of approximately $150 million and $50 million, respectively.
We believe that our current liquidity, cash expected to be generated by operating activities in future periods and access to capital markets will be sufficient to meet our current operating and capital requirements. However, as noted, we accessed additional financing sources to fund the Uni-Select transaction. Our capital allocation strategy includes spending to support growth driven capital projects, complete synergistic acquisitions, and return stockholder value through the payment of dividends and repurchasing shares of our common stock.
See Part II, Item 5 of this Annual Report on Form 10-K for further information on a summary of the dividend activity for our common stock for the year ended December 31, 2023.
On February 20, 2024, our Board declared a quarterly cash dividend of $0.30 per share of common stock, payable on March 28, 2024, to stockholders of record at the close of business on March 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, and based on considerations of capital availability, and various other factors, many of which are outside of our control.
With $1,275 million of total liquidity as of December 31, 2023 and $596 million of current maturities, we have access to funds to meet our near term commitments. Our current maturities include the 3.875% €500 million Euro Notes (2024) due April 2024, which we intend to 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.
Our 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 December 31, 2023. 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 December 31, 2023:
Covenant Level Ratio Achieved as of December 31, 2023
Maximum total leverage ratio 4.00 : 1.00 2.3
Minimum interest coverage ratio 3.00 : 1.00 7.5
The total leverage ratio increased from 1.5 as of December 31, 2022 as we added debt from the U.S. Notes (2028/33) and the CAD Note in the second and third quarters of 2023. The spread applied to the interest rate on our credit facility borrowings increased in the third quarter and remained the same through the fourth quarter as a result of the total leverage ratio rising above 2.0.
The indentures relating to our U.S. Notes and Euro Notes do 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
49
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 18, "Supply Chain Financing" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further 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 December 31, 2023. Including our senior notes and CAD Note, our overall weighted average interest rate on borrowings was 5.7% at December 31, 2023. Under the Senior Unsecured Credit Agreement, our borrowings bear interest at Secured Overnight Financing Rate (i.e. SOFR) plus the applicable spread or other risk-free interest rates that are applicable for the specified currency plus a spread. Under the CAD Note, the interest rate may be (i) a forward-looking term rate based on the Canadian Dollar Offer Rate for an interest period chosen by the Company of one or three months or (ii) the Canadian Prime Rate (as defined in the CAD Note), plus in each case a spread based on the Company’s debt rating and total leverage ratio. See Note 19, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our borrowings and related interest. The interest rate swaps are described in Note 20, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
We had outstanding borrowings under our revolving credit facilities and the term loans payable of $1,943 million and $1,786 million at December 31, 2023 and 2022, respectively. Of these amounts, there were no current maturities atDecember 31, 2023 or 2022.
The scheduled maturities of long-term obligations outstanding at December 31, 2023 are as follows (in millions):
Amount
(1)Long-term obligations maturing by December 31, 2024 include $16 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 discount of $30 million as of December 31, 2023).
As of December 31, 2023, the Company had cash and cash equivalents of $299 million, of which $232 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 ("GILTI").
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.
50
The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 2023, and 2022 (in millions):
Year Ended December 31,
(1)Inventory purchases across the Wholesale - North America segment increased for the year ended December 31, 2023 compared to the prior year primarily due to a $393 million increase attributable to inventory purchases at Uni-Select from the date of acquisition through December 31, 2023, partially offset by higher purchasing levels in the prior year due to restocking efforts to rebuild inventory levels.
(2)The increase in inventory purchases in our Europe segment included an increase of $70 million attributable to the increase in the value of the euro, and to a lesser extent, the pound sterling for the year ended December 31, 2023 compared to the prior year. On a constant currency basis, inventory purchases increased compared to the prior year, primarily due to increased sales and prices for the year ended December 31, 2023 compared to the prior year.
(3)The decrease in inventory purchases in the Specialty segment compared to the prior year was primarily due to matching inventory levels with demand.
The following table sets forth a summary of our global wholesale salvage and self service procurement for the years ended December 31, 2023, and 2022 (in thousands):
Year Ended December 31,
Wholesale - North America salvage vehicles 258 246 4.9 %
Europe wholesale salvage vehicles 29 29 — %
Self Service salvage vehicles 497 517 (3.9) %
Wholesale - North America salvage purchases in 2023 increased relative to the prior year due to improved availability of vehicles at auctions. Self Service salvage purchases in 2023 decreased relative to the prior year due to a focus on reducing car cost as car costs rose faster than commodity prices in late 2022 and early 2023.
The following table summarizes the components of the change in cash provided by operating activities (in millions):
Operating Cash
Increase (decrease) due to:
Working capital accounts: (1)
Receivables 21
Accounts payable (274)
Other operating activities (54) (2)
(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.
•Receivables was a $21 million incremental cash inflow in 2023 primarily at our Wholesale - North America and Europe segments as a result of collections and timing of sales.
•Inventories represented $413 million in incremental cash inflows for the year ended December 31, 2023 compared to the same period of 2022, including $294 million in our Europe segment primarily due to improved inventory management, $93 million in our Wholesale - North America segment primarily due to higher purchasing levels in 2022 due to restocking efforts to rebuild inventory levels, and $26 million in our Specialty segment inventory due to decreasing inventory purchasing levels to align with softening demand.
51
•Accounts payable produced $274 million in incremental cash outflows for the year ended December 31, 2023 compared to the same period of 2022 on a consolidated basis. This was primarily attributable to incremental cash outflows in our Wholesale - North America segment of $295 million (partly related to accelerated vendor payments in late 2021 to ensure priority access to inventory), partially offset by our Specialty segment which contributed a $16 million lower cash outflow. Europe was roughly flat primarily attributable to higher payments in 2023, resulting from increased inventory purchases in 2022 that were in accounts payable at the end of December 2022, offset by an increase in its accounts payable under its supply chain financing program, which has longer payment terms.
(2) Primarily reflects the aggregate effect of higher interest payments (primarily due to higher interest rates and additional borrowings for the Uni-Select Acquisition), partially offset by lower cash paid for taxes during the year ended December 31, 2023 compared to the same period of 2022.
For the year ended December 31, 2023, net cash used in investing activities totaled $2,442 million compared to net cash provided by investing activities of $172 million for the same period of 2022. We invested $2,225 million and $4 million of cash in business acquisitions during the years ended December 31, 2023 and 2022, respectively. Proceeds from the disposal of businesses were $110 million for the year ended December 31, 2023, primarily related to GSF Car Parts, compared to $399 million for the year ended December 31, 2022 primarily related to PGW. Property, plant and equipment purchases were $358 million for the year ended December 31, 2023 compared to $222 million in the prior year. During the year ended December 31, 2023, we settled our foreign exchange forward contracts related to the Uni-Select purchase price 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):
Year Ended December 31,
Net cash provided by operating activities $ 1,356 $ 1,250
Less: purchases of property, plant and equipment 358 222
For the year ended December 31, 2023, net cash provided by financing activities totaled $1,102 million compared to net cash used in financing activities of $1,394 million for the same period of 2022. The increase is primarily due to proceeds (net of unamortized bond discount) of $1,394 million from the issuance of the U.S. Notes (2028/33) in 2023, decreases in repurchases of common stock of $1,002 million, and net borrowings of $111 million for the year ended December 31, 2023 (including proceeds from the CAD Note of $531 million) compared to net repayments on our debt of $48 million for the same period of 2022.
We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts.
We have various contractual obligations and commitments arising in the normal course of business. The following represent our anticipated material cash requirements from known contractual and other obligations as of December 31, 2023.
•Long-term debt of $4,281 million and related interest totaling $1,021 million, of which $596 million and $232 million, respectively, is expected to be paid within twelve months. Current maturities include the 3.875% €500 million Euro Notes (2024) due on April 1, 2024, which we intend to refinance on or before the scheduled maturity. See Note 19, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to debt amounts outstanding at December 31, 2023.
•Operating lease payments of $1,790 million, of which $317 million is expected to be paid within twelve months. See Note 22, "Leases" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to lease amounts outstanding at December 31, 2023.
•Purchase obligations of $646 million for open purchase orders for aftermarket inventory all expected to be paid within twelve months.
52
•Net pension obligations of $83 million, of which $8 million is expected to be paid within twelve months. Benefit payments for our funded plans will be made from plan assets, whereas benefit payments for our unfunded plans are made from cash flows from operating activities. See Note 23, "Employee Benefit Plans" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information related to net pension obligations at December 31, 2023.
•Self-insurance reserves of $136 million, of which$73 million is expected to be paid within twelve months. See Note 7, "Self-Insurance Reserves" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information relates to self-insurance reserves at December 31, 2023.
Summarized Guarantor Financial Information
On May 24, 2023, we completed an offering of $1,400 million aggregate principal amount of senior unsecured notes. This offering is 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 on the Company's Registration Statement on Form S-4 filed with the SEC on September 1, 2023. The guarantees are full and unconditional, joint and several, and subject to certain conditions for release. See Note 19, "Long-Term Obligations" in Part II, Item 8 of this Annual Report on Form 10-K for information related to this offering.
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)
Fiscal Year Ended December 31,
Income from continuing operations 600 811
(1)Guarantor subsidiaries recorded $53 million and $46 million of net sales to and $203 million and $148 million of purchases from non-guarantor subsidiaries for the fiscal years ended December 31, 2023 and December 31, 2022, respectively.
Summarized Balance Sheets (in millions)
December 31,
ITEM 7A. 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.
53
Foreign Exchange Rates
Foreign currency fluctuations may impact the financial results we report for the portions of our business that operate in functional currencies other than the U.S. dollar. Our operations outside of the U.S. represented 50.8% and 48.2% of our revenue during years ended December 31, 2023 and 2022, respectively. An increase or decrease in the strength of the U.S. dollar against these currencies by 10% would result in a 5.1% change in our consolidated revenue and a 3.7% change in our operating income for the year ended December 31, 2023. See our Results of Operations discussion in Part II, Item 7 of this Annual Report on Form 10-K for additional information regarding the impact of fluctuations in exchange rates on our year over year results.
Additionally, we are exposed to foreign currency fluctuations with respect to the purchase of aftermarket products from foreign countries, primarily in Europe and Asia. To the extent that our inventory purchases are not denominated in the functional currency of the purchasing location, we are exposed to exchange rate fluctuations. In several of our operations, we purchase inventory from manufacturers in Taiwan in U.S. dollars, which exposes us to fluctuations in the relationship between the local functional currency and the U.S. dollar, as well as fluctuations between the U.S. dollar and the Taiwan dollar. We hedge our exposure to foreign currency fluctuations related to a portion of inventory purchases in our Europe operations, but the notional amount and fair value of these foreign currency forward contracts at December 31, 2023 were immaterial. We do not currently attempt to hedge foreign currency exposure related to our foreign currency denominated inventory purchases in our Wholesale - North America operations, and we may not be able to pass on any resulting price increases to our customers.
To the extent that we are exposed to foreign currency fluctuations related to non-functional currency denominated transactions, we may hedge the exposure through the use of foreign currency forward contracts. In March 2023, we entered into foreign currency forward contracts related to the Uni-Select Acquisition. These contracts were settled in July 2023 ahead of closing of the Uni-Select Acquisition. See Note 3, "Business Combinations" and Note 20, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
Other than with respect to a portion of our foreign currency denominated inventory purchases and, from time to time, certain financing transactions, we do not hold derivative contracts to hedge foreign currency risk. Our net investment in foreign operations is partially hedged by the foreign currency denominated borrowings we use to fund foreign acquisitions; however, our ability to use foreign currency denominated borrowings to finance our foreign operations may be limited based on local tax laws. We have elected not to hedge the foreign currency risk related to the interest payments on foreign third party borrowings as we generate cash flows in the local currencies that can be used to fund debt payments. As of December 31, 2023, we had outstanding borrowings of €500 million under our Euro Notes (2024) and €250 million under our Euro Notes (2028), CAD 700 million under our CAD Note, and €344 million and Swedish Krona ("SEK") 60 million under our revolving credit facilities. As of December 31, 2022, we had outstanding borrowings of €500 million under our Euro Notes (2024) and €250 million under our Euro Notes (2028), and €748 million and SEK75 million under our revolving credit facilities.
Interest Rates
Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facilities, where interest rates are tied to SOFR, prime rate, Canadian Dollar Offered Rate, Euro Interbank Offered Rate, SONIA, or Swiss Average Rate Overnight. Therefore, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding variable rate debt instruments through the use of interest rate swap contracts. These contracts converted a portion of our variable rate debt to fixed rate debt, matching the currency, effective dates and maturity dates to specific debt instruments. We designated our interest rate swap contracts as cash flow hedges, and net interest payments or receipts from interest rate swap contracts are included as adjustments to interest expense.
We had none of our variable rate debt under our credit facilities at fixed rates at December 31, 2022. However, in February 2023, we entered into two sets of interest rate swap agreements to hedge the variable rates on a portion of our credit agreement borrowings. See Note 19, "Long-Term Obligations" and Note 20, "Derivative Instruments and Hedging Activities" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
At December 31, 2023, we had approximately $1,243 million of variable rate debt that was not hedged. Using sensitivity analysis, a 100 basis point movement in interest rates would change interest expense by $12 million over the next twelve months.
54
Commodity Prices
We are exposed to market risk related to price fluctuations in scrap metal and other metals (including precious metals, such as platinum, palladium, and rhodium, contained in some recycled parts, such as catalytic converters). Market prices of these metals affect the amount that we pay for our inventory and the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and inventory cost changes, and there is no guarantee that the vehicle costs will decrease or increase at the same rate as the metals prices. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metals prices, particularly when such prices move rapidly. Additionally, if market prices were to change at a higher or lower rate than our vehicle acquisition costs, we could experience a positive or negative effect on our operating margin. The average of scrap metal prices for the year ended December 31, 2023 decreasedby 6% over the average for 2022, noting there was volatility from quarter to quarter over both years. The average prices of rhodium and palladium decreased by 60% and 38%, respectively, while platinum increased by 1% for the year ended December 31, 2023 compared to the average prices for the year ended December 31, 2022.
Inflation
We are exposed to market risks related to inflation in product, labor, shipping, freight and general overhead costs. In 2022 and 2023, inflation increased to rates beyond recent history, and we experienced rising costs. We adjusted our prices and drove productivity initiatives to mitigate the inflationary effects. If these pressures continue or increase in severity, we may not be able to fully offset such higher costs through price increases and productivity initiatives. Inflationary pressures in the future may have an adverse effect on our ability to maintain current levels of gross margin and SG&A expenses as a percentage of net revenue if the selling prices of our products do not increase with these increased costs, we cannot identify cost efficiencies, or the higher prices impact demand.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
*****
INDEX TO FINANCIAL STATEMENTS
Page
LKQ CORPORATION AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34) 57
Consolidated Balance Sheets as of December 31, 2023 and 2022 63
Notes to Consolidated Financial Statements 66
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LKQ Corporation and subsidiaries (the "Company") as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill Impairment Assessment - Refer to Notes 2 and 10 to the financial statements.
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a discounted cash flow model and the market approach, which require management to make significant estimates and assumptions.
Auditing the estimates and assumptions that impacted the valuation of certain reporting units involved especially subjective judgment; specifically, the forecasts of future revenue and profit margins (“forecasts”), the selection of discount rates, and the determination of market multiples.
57
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts, the selection of discount rates, and determination of market multiples included the following, among others:
•We tested the effectiveness of controls over the goodwill impairment assessments, including those over the forecasts and the selection of the discount rates and market multiples.
•We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, (3) analyst and industry reports of the Company and companies in its peer group, and (4) forecasts used in the preceding impairment assessments.
•With the assistance of our fair value specialists, we evaluated the discount rates, including (1) testing the underlying source information and the mathematical accuracy of the calculations, (2) developing a range of independent estimates and comparing those to the discount rates used by management, and (3) comparing the discount rates used by management to those used in the preceding impairment assessments.
•With the assistance of our fair value specialists, we evaluated the market multiples, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline public companies and the multiples used in the preceding impairment assessments.
Business Combinations - Refer to Note 3 to the financial statements.
Critical Audit Matter Description
The Company completed the acquisition of Uni-Select Inc. for approximately $2.1 billion on August 1, 2023. The Company accounted for this acquisition using the acquisition method of accounting, under which the acquisition purchase price is allocated to the assets acquired, including purchased intangible assets, and liabilities assumed based on their respective fair values.
The purchase price allocation included customer and supplier relationship intangible assets of $669 million and trade name intangible assets of $17 million. The Company’s estimation of the value of the customer and supplier relationships and the trade names required management to make significant estimates and assumptions, including future expected cash flows including revenue growth assumptions from product sales and customer contracts, royalty rates, customer attrition rates and discount rates.
We identified the valuation of the customer and supplier relationship and trade name intangible assets for Uni-Select Inc. as a critical audit matter because of the significant estimates and assumptions management made to determine the fair value of these assets discussed above. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate management’s valuation methodologies and the reasonableness of management’s assumptions related to future expected cash flows and the selection of royalty rates, customer attrition rates and discount rates.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the fair value of the acquired intangible assets discussed above included the following, among others:
•We tested the effectiveness of controls over the purchase price allocation, including management’s controls over the appropriateness of the valuation methodology, forecast of future expected cash flows, and selection of the royalty rates, customer attrition rates and discount rates.
•We assessed the reasonableness of management’s forecast of future expected cash flows by comparing the projections to historical results and certain peer companies. We also evaluated whether the estimated future expected cash flows were consistent with evidence obtained in other areas of the audit.
58
•With the assistance of our internal fair value specialists, we evaluated the reasonableness of the valuation methodology, royalty rates, customer attrition rates and discount rates by:
◦Testing the mathematical accuracy of the calculations.
◦Testing the source information underlying the determination of the royalty, customer attrition and discount rates.
◦Developing ranges of independent estimates and comparing those to the rates selected by management.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 22, 2024
We have served as the Company's auditor since 1998.
59
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2023, of the Company and our report dated February 22, 2024, expressed an unqualified opinion on those financial statements.
As described in the Report of Management on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Uni-Select Inc., which was acquired on August 1, 2023, and whose financial statements constitute 16% of total assets (inclusive of goodwill and acquired intangible assets) and 4% of revenue of the consolidated financial statement amounts as of and for the year ended December 31, 2023. Accordingly, our audit did not include the internal control over financial reporting at Uni-Select Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
February 22, 2024
60
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In millions, except per share data)
Year Ended December 31,
Selling, general and administrative expenses 3,870 3,544 3,568
Restructuring and transaction related expenses 65 20 20
Gain on disposal of businesses (1) — (159) —
Other expense (income):
Loss on debt extinguishment 1 — 24
Gains on foreign exchange contracts - acquisition related (2) (49) — —
Interest income and other income, net (44) (15) (21)
Equity in earnings of unconsolidated subsidiaries 15 11 23
Net (loss) income from discontinued operations (6) 6 1
Less: net income attributable to continuing noncontrolling interest 2 1 1
Net income attributable to LKQ stockholders $ 936 $ 1,149 $ 1,091
Basic earnings per share: (3)
Income from continuing operations $ 3.53 $ 4.13 $ 3.68
Net (loss) income from discontinued operations (0.02) 0.02 —
Less: net income attributable to continuing noncontrolling interest 0.01 0.01 —
Net income attributable to LKQ stockholders $ 3.50 $ 4.15 $ 3.68
Diluted earnings per share: (3)
Income from continuing operations $ 3.52 $ 4.12 $ 3.67
Net (loss) income from discontinued operations (0.02) 0.02 —
Less: net income attributable to continuing noncontrolling interest 0.01 0.01 —
Net income attributable to LKQ stockholders $ 3.49 $ 4.13 $ 3.66
(1) Primarily related to the sale of PGW Auto Glass ("PGW"). Refer to Note 4, "Discontinued Operations and Divestitures" for further information.
(2) Related to the Uni-Select Inc. ("Uni-Select") acquisition. Refer to Note 3, "Business Combinations" and Note 20, "Derivative Instruments and Hedging Activities" for further information.
(3) The sum of the individual earnings per share amounts may not equal the total due to rounding.
The accompanying notes are an integral part of the Consolidated Financial Statements.
61
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions)
Year Ended December 31,
Less: net income attributable to continuing noncontrolling interest 2 1 1
Net income attributable to LKQ stockholders 936 1,149 1,091
Other comprehensive income (loss):
Foreign currency translation, net of tax 90 (212) (64)
Net change in unrealized gains/losses on cash flow hedges, net of tax (11) — 1
Net change in unrealized gains/losses on pension plans, net of tax (5) 35 9
Other comprehensive income from unconsolidated subsidiaries 9 7 —
Other comprehensive income (loss) 83 (170) (54)
Comprehensive income attributable to LKQ stockholders $ 1,019 $ 979 $ 1,037
The accompanying notes are an integral part of the Consolidated Financial Statements.
62
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except per share data)
December 31,
Assets
Current assets:
Cash and cash equivalents $ 299 $ 278
Receivables, net of allowance for credit losses 1,165 998
Prepaid expenses and other current assets 283 230
Property, plant and equipment, net 1,516 1,236
Equity method investments 159 141
Other noncurrent assets 287 204
Liabilities and Stockholders' Equity
Current liabilities:
Accrued expenses:
Accrued payroll-related liabilities 260 218
Current portion of operating lease liabilities 224 188
Current portion of long-term obligations 596 34
Other current liabilities 149 89
Long-term operating lease liabilities, excluding current portion 1,163 1,091
Long-term obligations, excluding current portion 3,655 2,622
Other noncurrent liabilities 314 283
Commitments and contingencies
Redeemable noncontrolling interest — 24
Stockholders' equity:
Accumulated other comprehensive loss (240) (323)
Total Company stockholders' equity 6,167 5,453
Noncontrolling interest 14 14
Total liabilities and stockholders' equity $ 15,079 $ 12,038
The accompanying notes are an integral part of the Consolidated Financial Statements.
63
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
Year Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:
Gain on disposal of businesses — (159) —
Stock-based compensation expense 40 38 34
Loss on debt extinguishment 1 — 24
Gains on foreign exchange contracts - acquisition related (49) — —
Deferred income taxes 13 6 (27)
Prepaid income taxes/income taxes payable (12) 33 (65)
Other operating assets and liabilities 18 21 30
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (358) (222) (293)
Proceeds from disposals of property, plant and equipment 11 9 20
Acquisitions, net of cash acquired (2,225) (4) (124)
Proceeds from disposals of businesses 110 399 7
Other investing activities, net (29) (10) (29)
Net cash (used in) provided by investing activities (2,442) 172 (419)
CASH FLOWS FROM FINANCING ACTIVITIES:
Early-redemption premium — — (16)
Debt issuance costs (33) — —
Repayment of Euro Notes (2026) — — (883)
Borrowings under revolving credit facilities 2,186 1,644 5,035
Repayments under revolving credit facilities (3,074) (1,675) (3,717)
Borrowings under term loans 1,031 — —
Repayments under term loans — — (324)
Repayments of other debt, net (32) (17) (26)
Settlement of derivative instruments (13) — (89)
Dividends paid to LKQ stockholders (302) (284) (73)
Other financing activities, net (17) (22) (15)
Net cash provided by (used in) financing activities 1,102 (1,394) (985)
Effect of exchange rate changes on cash and cash equivalents 5 (24) (1)
Net increase (decrease) in cash and cash equivalents 21 4 (38)
Cash and cash equivalents, beginning of period 278 274 312
Cash and cash equivalents, end of period $ 299 $ 278 $ 274
Supplemental disclosure of cash paid for:
Income taxes, net of refunds $ 305 $ 346 $ 423
The accompanying notes are an integral part of the Consolidated Financial Statements.
64
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In millions, except per share data)
LKQ Stockholders
Shares Amount Shares Amount
Other comprehensive loss — — — — — — (54) — (54)
Purchase of treasury stock — — (17.3) (877) — — — — (877)
Stock-based compensation expense — — — — 34 — — — 34
Dividends declared to LKQ stockholders ($0.25 per share) — — — — — (73) — — (73)
Other comprehensive loss — — — — — — (170) — (170)
Purchase of treasury stock — — (20.5) (1,043) — — — — (1,043)
Stock-based compensation expense — — — — 38 — — — 38
Other comprehensive income — — — — — — 83 — 83
Purchase of treasury stock — — (0.8) (35) — — — — (35)
Stock-based compensation expense — — — — 40 — — — 40
The accompanying notes are an integral part of the Consolidated Financial Statements.
65
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
Description of Business
LKQ Corporation, a Delaware corporation, is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We are a global distributor of vehicle products, including replacement parts, components, and systems used in the repair and maintenance of vehicles, and specialty aftermarket products and accessories designed to improve the performance, functionality and appearance of vehicles. We operate in the United States, Canada, Germany, the U.K., the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Austria, Slovakia, Poland, and various other European countries.
We are organized into four operating segments: Wholesale - North America; Europe; Specialty; and Self Service, each of which is presented as a reportable segment.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods. We base our estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from those estimates.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. For most of our international operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses are reported as a component of Accumulated other comprehensive income (loss) in stockholders' equity.
Revenue Recognition
We recognize revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable and we have satisfied its performance obligations per the sales arrangement. The majority of our revenue originates from contracts with a single performance obligation to deliver parts, whereby the performance obligation is satisfied when control of the parts is transferred to the customer per the arranged shipping terms. Some of our contracts contain a combination of delivering parts and performing services, which are distinct and accounted for as separate performance obligations. Revenue for the service component is recognized as the services are rendered.
Our revenue is measured at the determinable transaction price, net of any variable considerations granted to customers. Variable considerations include the right to return parts, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels.
66
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sales tax and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue in the Consolidated Statements of Income and are shown as a current liability on the Consolidated Balance Sheets until remitted.
Any incremental costs to obtain a contract (commissions earned by our sales representatives on product sales) are expensed when incurred, as the amortization period of the asset would be one year or less due to the short-term nature of our contracts.
Cost of Goods Sold
Cost of goods sold includes: the price we pay for inventory, net of vendor discounts, rebates or other incentives; inbound freight and other transportation costs to bring inventory into our facilities; and overhead costs related to purchasing, warehousing and transporting our products from our distribution warehouses to our selling locations. For our salvage, remanufactured, refurbished and manufactured products, cost of goods sold also includes direct and indirect labor, equipment costs, depreciation, and other overhead to transform inventory into finished products suitable for sale. Cost of goods sold also includes expenses for service-type warranties and for assurance-type warranty programs.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses include: personnel costs for employees in SG&A functions; costs to operate branch locations, corporate offices and back office support centers; costs to transport products from facilities to our customers; and other expenses, such as professional fees, supplies, and advertising expenses. The costs included in SG&A expenses do not relate to inventory processing or conversion activities, and, as such, are classified below Gross margin in the Consolidated Statements of Income.
Stock-Based Compensation
For the restricted stock units ("RSUs") that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense using the accelerated attribution method, pursuant to which expense is recognized straight-line over the requisite service period for each separate vesting tranche of the award. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the entire award.
For performance-based RSUs ("PSUs"), the expense is calculated using the projected award value, which is based on an estimate of the achievement of the performance objectives, and is recognized on a straight-line basis over the performance period.
The impacts of forfeitures on RSUs and PSUs expense are recorded as they occur.
Income Taxes
Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred income taxes are provided for temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or that future deductibility is uncertain. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
We recognize the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include any interest and penalties associated with income tax obligations in income tax expense.
67
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash.
Allowance for Credit Losses
Receivables are reported net of an allowance for credit losses. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions (e.g., management's evaluation of the aging of customer receivable balances and the financial condition of our customers) as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate, gross domestic product growth rate or credit default rates.
Concentrations of Credit Risks
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents and receivables. We control our exposure to credit risk associated with these instruments by (i) placing cash and cash equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed of a large number of geographically diverse customers.
Inventories
Our inventory is stated at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.
The cost of our inventory is determined differently based on the category of inventory; (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products.
An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For aftermarket products, cost is established based on the average price paid for parts. Inventory cost for aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; we will apply new parts, products or materials to these parts to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing. The cost of refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs.
A salvage product is a recycled vehicle part suitable for sale as a replacement part. Salvage product cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling the vehicle. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based on a part's number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores and expenses incurred for freight in, direct manufacturing costs and other overhead costs.
A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Manufactured product cost is established using the first-in first-out method.
68
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter. Depreciation expense associated with refurbishing, remanufacturing, manufacturing and furnace operations as well as distribution centers are recorded in Cost of goods sold in the Consolidated Statements of Income. Depreciation expense resulting from restructuring programs is recorded in Restructuring and transaction related expenses in the Consolidated Statements of Income. All other depreciation expense is reported in Depreciation and amortization in the Consolidated Statements of Income.
Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. Expenditures for maintenance and repairs are recorded as incurred to SG&A expenses in the Consolidated Statements of Income. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. We performed annual impairment tests during the fourth quarters of 2023, 2022 and 2021. Goodwill and indefinite-lived intangible assets impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates of our goodwill reporting units were established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach.
Based on the annual goodwill and indefinite-lived intangible assets impairment test performed in the fourth quarter of 2023, we determined no impairment existed. The goodwill reporting units had a fair value estimate which exceeded the carrying value by at least 20%.
Leases
We determine if an arrangement is a lease at contract inception with lease right-of-use ("ROU") assets and lease liabilities being recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. In determining the present value of future lease payments, we use the incremental borrowing rate based on the information available at commencement date when the implicit rate is not readily determinable. We determine the incremental borrowing rate by analyzing yield curves with consideration of lease term, country and Company specific factors. In assessing the ROU asset, we include any lease prepayments and exclude lease incentives. We account for the lease and non-lease components of a contract as a single lease component and for leases with an initial term of 12 months or less, we have elected to not record an ROU asset and lease liability. In assessing the lease term, we include options to renew only when it is reasonably certain that the option will be exercised.
For certain lease agreements, rental payments are adjusted periodically for inflation. Typically, these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
Net Assets Held for Sale
We record the net assets of held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values are based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for the discounted cash flow analyses of the businesses are based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to the estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in management's analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a
69
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
non-recurring basis as of December 31, 2023. As of December 31, 2023 and 2022, assets and liabilities held for sale were insignificant. For the year ended December 31, 2023, we recorded an insignificant amount of impairment on our net assets held for sale.
Impairment of Long-Lived Assets