LKQ (LKQ) - 2022 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's unaudited condensed consolidated financial statements and accompanying notes for the period Unaudited Condensed Consolidated Statements of Income Condensed Consolidated Statements of Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $3,341 | $3,435 | $6,689 | $6,606 | | Cost of goods sold | $1,974 | $2,020 | $3,965 | $3,897 | | Gross margin | $1,367 | $1,415 | $2,724 | $2,709 | | Operating income | $559 | $445 | $930 | $816 | | Income from continuing operations | $420 | $306 | $689 | $572 | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Basic earnings per share (continuing operations) | $1.49 | $1.01 | $2.43 | $1.89 | | Diluted earnings per share (continuing operations) | $1.49 | $1.01 | $2.42 | $1.89 | Unaudited Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Other comprehensive (loss) income | $(149) | $25 | $(202) | $(2) | | Comprehensive income attributable to LKQ stockholders | $271 | $330 | $491 | $569 | - Foreign currency translation resulted in a significant loss of $150 million for the three months ended June 30, 2022, compared to a gain of $22 million in the prior year, and a loss of $204 million for the six months ended June 30, 2022, compared to a loss of $3 million in the prior year[10] Unaudited Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :-------------- | :---------------- | | Cash and cash equivalents | $265 | $274 | | Total current assets | $4,331 | $4,254 | | Total assets | $12,134 | $12,606 | | Total current liabilities | $2,485 | $2,165 | | Long-term obligations, excluding current portion | $2,313 | $2,777 | | Total stockholders' equity | $5,605 | $5,787 | | Total liabilities and stockholders' equity | $12,134 | $12,606 | - Goodwill decreased from $4,540 million at December 31, 2021, to $4,290 million at June 30, 2022[13] - Accounts payable increased significantly from $1,176 million at December 31, 2021, to $1,457 million at June 30, 2022[13] Unaudited Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $737 | $933 | | Net cash provided by (used in) investing activities | $265 | $(109) | | Net cash used in financing activities | $(985) | $(809) | | Net (decrease) increase in cash and cash equivalents | $(9) | $17 | | Cash and cash equivalents, end of period | $265 | $329 | - Net cash provided by investing activities significantly improved to $265 million in H1 2022 from a net use of $109 million in H1 2021, primarily due to $372 million in proceeds from the disposal of businesses[15] - Net cash used in financing activities increased to $985 million in H1 2022 from $809 million in H1 2021, driven by increased treasury stock purchases ($528 million vs $344 million) and dividend payments ($142 million vs $0)[15] Unaudited Condensed Consolidated Statements of Stockholders' Equity Key Changes in Stockholders' Equity (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Other comprehensive (loss) income | $(149) | $25 | $(202) | $(2) | | Purchase of treasury stock | $(404) | $(304) | $(548) | $(361) | | Dividends declared to LKQ stockholders | $(71) | — | $(143) | — | | Stock-based compensation expense | $10 | $9 | $23 | $17 | | Balance as of June 30, 2022 | $5,605 | $5,895 | $5,605 | $5,895 | - The company repurchased 8.1 million shares for $404 million during the three months ended June 30, 2022, and 10.8 million shares for $548 million during the six months ended June 30, 2022[17][21] Notes to Unaudited Condensed Consolidated Financial Statements Note 1. Interim Financial Statements - The financial statements are unaudited and prepared in accordance with SEC rules for interim financial statements, condensing or omitting certain GAAP disclosures[25] - Interim results are not necessarily indicative of full-year results and should be read in conjunction with the 2021 Form 10-K[26] Note 2. Financial Statement Information Allowance for Credit Losses (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------- | :-------------- | :---------------- | | Reserve for expected credit losses | $56 | $53 | | Provision for credit losses (3M) | $1 | $1 | | Provision for credit losses (6M) | $9 | $4 | Inventories Breakdown (in millions) | Inventory Type | June 30, 2022 | December 31, 2021 | | :----------------------------- | :-------------- | :---------------- | | Aftermarket and refurbished products | $2,172 | $2,168 | | Salvage and remanufactured products | $439 | $406 | | Manufactured products | $39 | $37 | | Total inventories | $2,650 | $2,611 | - In April 2022, the company completed the sale of PGW Auto Glass for $361 million, recognizing a $155 million pretax gain ($127 million after tax)[30] Investments in Unconsolidated Subsidiaries (in millions) | Investment | Ownership (June 30, 2022) | Carrying Value (June 30, 2022) | Carrying Value (December 31, 2021) | | :------------------- | :------------------------ | :----------------------------- | :--------------------------------- | | MEKO AB | 26.6% | $141 | $145 | | Other | N/A | $13 | $36 | | Total | N/A | $154 | $181 | Warranty Reserve (in millions) | Metric | Amount | | :-------------------------- | :----- | | Balance as of December 31, 2021 | $30 | | Warranty expense | $38 | | Warranty claims | $(38) | | Balance as of June 30, 2022 | $30 | Note 3. Revenue Recognition - Revenue is primarily derived from the sale of vehicle parts, recognized when control transfers to the customer, generally upon shipment or delivery[39] Revenue by Category and Segment (in millions) | Segment/Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Parts and services | | | | | | Wholesale - North America | $1,050 | $1,024 | $2,156 | $1,993 | | Europe | $1,470 | $1,570 | $2,951 | $3,025 | | Specialty | $512 | $531 | $972 | $989 | | Self Service | $60 | $53 | $117 | $103 | | Total Parts and services | $3,092 | $3,178 | $6,196 | $6,110 | | Other revenue | | | | | | Wholesale - North America | $94 | $94 | $189 | $176 | | Europe | $7 | $7 | $14 | $15 | | Self Service | $148 | $156 | $290 | $305 | | Total Other revenue | $249 | $257 | $493 | $496 | | Total revenue | $3,341 | $3,435 | $6,689 | $6,606 | - Service-type warranty revenue deferred and recognized was $28 million for the six months ended June 30, 2022, with a balance of $32 million as of June 30, 2022[43] - Refund liability was $108 million and return asset was $58 million as of June 30, 2022[46] Note 4. Restructuring and Transaction Related Expenses - Global Restructuring Programs (2019 & 2020) are substantially complete or expected to be completed by 2023, with estimated total costs between $108 million and $115 million[48] - Restructuring liabilities related to these programs totaled $11 million as of June 30, 2022[49] - Acquisition integration plans incurred $2 million in restructuring expenses for both the three and six months ended June 30, 2022, with up to $5 million expected for future Specialty segment integrations[50] - The '1 LKQ Europe' program, aimed at centralization and standardization, is scheduled for completion by the end of 2024, with estimated personnel and inventory-related restructuring charges of $40 million to $50 million through 2024[52][53] - Transaction related expenses were $1 million and $4 million for the three and six months ended June 30, 2022, respectively[54] Note 5. Stock-Based Compensation Restricted Stock Units (RSUs) Activity (in millions, except per share data) | Metric | Number Outstanding | Weighted Average Grant Date Fair Value | | :-------------------------- | :----------------- | :------------------------------------- | | Unvested as of January 1, 2022 | 1.4 | $34.85 | | Granted | 0.6 | $49.00 | | Vested | (0.4) | $36.34 | | Unvested as of June 30, 2022 | 1.6 | $40.14 | | Expected to vest after June 30, 2022 | 1.3 | $40.28 | Performance-Based RSUs (PSUs) Activity (in millions, except per share data) | Metric | Number Outstanding | Weighted Average Grant Date Fair Value | | :-------------------------- | :----------------- | :------------------------------------- | | Unvested as of January 1, 2022 | 0.5 | $31.96 | | Granted | 0.1 | $48.92 | | Vested | (0.2) | $27.74 | | Unvested as of June 30, 2022 | 0.4 | $38.64 | | Expected to vest after June 30, 2022 | 0.4 | $38.64 | - Pre-tax stock-based compensation expense totaled $10 million and $23 million for the three and six months ended June 30, 2022, respectively[57] Note 6. Earnings Per Share Earnings Per Share Computation (in millions, except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income from continuing operations | $420 | $306 | $689 | $572 | | Weighted-average shares outstanding (basic) | 281.4 | 300.6 | 283.5 | 301.8 | | Adjusted weighted-average shares outstanding (diluted) | 282.3 | 301.5 | 284.5 | 302.6 | | Basic EPS from continuing operations | $1.49 | $1.01 | $2.43 | $1.89 | | Diluted EPS from continuing operations | $1.49 | $1.01 | $2.42 | $1.89 | Note 7. Accumulated Other Comprehensive Income (Loss) Components of Accumulated Other Comprehensive Income (Loss) (in millions) | Component | Balance as of April 1, 2022 | Three Months Ended June 30, 2022 Change | Balance as of June 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------------------- | :-------------------------- | | Foreign Currency Translation | $(175) | $(150) | $(325) | | Unrealized Gain (Loss) on Pension Plans | $(24) | — | $(24) | | Income (Loss) from Unconsolidated Subsidiaries | $(7) | $1 | $(6) | | Total Accumulated Other Comprehensive Income (Loss) | $(206) | $(149) | $(355) | - Accumulated Other Comprehensive Loss increased significantly from $(153) million at January 1, 2022, to $(355) million at June 30, 2022, primarily due to a pretax foreign currency translation loss of $(208) million[60] Note 8. Long-Term Obligations Long-Term Obligations (in millions) | Debt Type | Maturity Date | Interest Rate (June 30, 2022) | Amount (June 30, 2022) | Amount (December 31, 2021) | | :-------------------------- | :------------ | :---------------------------- | :--------------------- | :------------------------- | | Revolving credit facilities | January 2024 | 1.72% | $1,494 | $1,887 | | Euro Notes (2024) | April 2024 | 3.88% | $524 | $569 | | Euro Notes (2028) | April 2028 | 4.13% | $262 | $284 | | Total debt | N/A | N/A | $2,369 | $2,824 | - S&P Global Ratings assigned LKQ an issuer credit rating of 'BBB-' with a stable outlook on April 18, 2022, triggering the release and suspension of collateral requirements under the Credit Agreement[67] - Moody's Investors Services upgraded the rating on LKQ Italia's and LKQ Euro Holdings' senior unsecured notes to Baa3 with a stable outlook on May 31, 2022, triggering a Covenant Suspension Event[74][81] Note 9. Derivative Instruments and Hedging Activities - No cash flow hedges (interest rate swap agreements or cross currency swaps) were outstanding as of June 30, 2022, or December 31, 2021, as they were settled by June 2021[82] - Other short-term derivative instruments, such as foreign currency forward contracts for inventory purchases, were not material in notional amount or fair value[84] Note 10. Fair Value Measurements Financial Liabilities Measured at Fair Value (in millions) | Liability Type | Balance as of June 30, 2022 | Level 1 | Level 2 | Level 3 | | :----------------------------- | :-------------------------- | :------ | :------ | :------ | | Contingent consideration liabilities | $13 | $— | $— | $13 | | Deferred compensation liabilities | $71 | $— | $71 | $— | | Total Liabilities | $84 | $— | $71 | $13 | - Contingent consideration liabilities are classified as Level 3 due to significant unobservable inputs, while deferred compensation liabilities are Level 2, valued using third-party and market observable data[87][88] - The fair value of Euro Notes (2024) was approximately $527 million (carrying value $524 million) and Euro Notes (2028) was $251 million (carrying value $262 million) as of June 30, 2022[90] Note 11. Employee Benefit Plans - The aggregate funded status of defined benefit plans was a liability of $119 million as of June 30, 2022, a decrease from $131 million at December 31, 2021[93] - Net periodic benefit cost for defined benefit plans was $3 million for the six months ended June 30, 2022, consistent with the prior year[94] Note 12. Income Taxes - The effective income tax rate for the six months ended June 30, 2022, was 24.1%, down from 26.3% in the prior year, primarily due to net favorable discrete items (1.2%) related to the PGW sale and geographic income distribution[97] Note 13. Segment and Geographic Information - Beginning in 2022, Wholesale - North America and Self Service operating segments are reported separately, providing greater transparency[98][99] Segment Financial Performance (in millions) | Segment | Third Party Revenue (3M Q2 2022) | Third Party Revenue (3M Q2 2021) | Segment EBITDA (3M Q2 2022) | Segment EBITDA (3M Q2 2021) | | :-------------------- | :------------------------------- | :------------------------------- | :-------------------------- | :-------------------------- | | Wholesale - North America | $1,144 | $1,118 | $214 | $219 | | Europe | $1,477 | $1,577 | $160 | $168 | | Specialty | $512 | $531 | $69 | $80 | | Self Service | $208 | $209 | $32 | $56 | | Total | $3,341 | $3,435 | $475 | $523 | | Segment | Third Party Revenue (6M H1 2022) | Third Party Revenue (6M H1 2021) | Segment EBITDA (6M H1 2022) | Segment EBITDA (6M H1 2021) | | :-------------------- | :------------------------------- | :------------------------------- | :-------------------------- | :-------------------------- | | Wholesale - North America | $2,345 | $2,169 | $432 | $413 | | Europe | $2,965 | $3,040 | $291 | $309 | | Specialty | $972 | $989 | $127 | $141 | | Self Service | $407 | $408 | $72 | $112 | | Total | $6,689 | $6,606 | $922 | $975 | Capital Expenditures by Reportable Segment (in millions) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Wholesale - North America | $16 | $12 | $45 | $23 | | Europe | $19 | $22 | $42 | $48 | | Specialty | $4 | $8 | $8 | $10 | | Self Service | $1 | $4 | $4 | $7 | | Total | $40 | $46 | $99 | $88 | Revenue by Geographic Area (in millions) | Geographic Area | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $1,747 | $1,750 | $3,497 | $3,355 | | United Kingdom | $393 | $422 | $818 | $825 | | Germany | $390 | $419 | $776 | $807 | | Other countries | $811 | $844 | $1,598 | $1,619 | | Total revenue | $3,341 | $3,435 | $6,689 | $6,606 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of financial performance, condition, and key operational drivers Forward-Looking Statements - The report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially[107][108] Overview - LKQ Corporation is a global distributor of vehicle products, focusing on alternative parts (aftermarket, recycled, refurbished, remanufactured) for collision and mechanical repair[109][110][111] - The company operates through four reportable segments: Wholesale - North America, Europe, Specialty, and Self Service, with the latter two separated from the previous North America segment in 2022[112] Acquisitions and Investments - The company has shifted its acquisition strategy from large-scale consolidation to smaller 'tuck-in' acquisitions that offer high synergies or critical capabilities[114] Sources of Revenue - Revenue is categorized into 'parts and services' (vehicle products, warranties, diagnostic services) and 'other' (scrap, precious metals, bulk sales), with 'other' revenue fluctuating based on commodity prices and volumes[115] Critical Accounting Estimates - There have been no material changes to critical accounting estimates during the six months ended June 30, 2022[116] Financial Information by Geographic Area - Geographic revenue and long-lived asset information is detailed in Note 13, 'Segment and Geographic Information'[117] 1 LKQ Europe Program - The '1 LKQ Europe' program aims for structural centralization and standardization, with projects scheduled for completion by the end of 2024[118][120] - Costs incurred for the program were $8 million (3M) and $14 million (6M) ended June 30, 2022, with expected costs of $25-$45 million in 2022 and $50-$70 million in 2023-2024[120] Ukraine/Russia Conflict - The conflict has impacted operations in Ukraine and restricted sales to Russia, but is not expected to have a material impact on overall results, as Ukraine operations represent less than 1% of total annual revenue and operating profit[121] Key Performance Indicators - Key performance indicators include organic revenue growth, Segment EBITDA, and Free Cash Flow, used to evaluate growth, profitability, and cash generation[122][123] - Organic revenue growth excludes effects of acquisitions, divestitures, and foreign currency movements[123] - Free Cash Flow is calculated as net cash provided by operating activities less purchases of property, plant and equipment[123] Results of Operations—Consolidated Consolidated Income Statement as % of Revenue Consolidated Income Statement as Percentage of Total Revenue | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 59.1 % | 58.8 % | 59.3 % | 59.0 % | | Gross margin | 40.9 % | 41.2 % | 40.7 % | 41.0 % | | Selling, general and administrative expenses | 26.8 % | 26.2 % | 27.2 % | 26.5 % | | Operating income | 16.7 % | 12.9 % | 13.9 % | 12.4 % | | Net income attributable to LKQ stockholders | 12.6 % | 8.9 % | 10.4 % | 8.6 % | Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 Revenue Changes (Three Months Ended June 30, 2022 vs. 2021) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $3,092 | $3,178 | 3.8 % | (1.0)% | (5.6)% | (2.7)% | | Other revenue | $249 | $257 | (2.9)% | 0.4 % | (0.4)% | (2.9)% | | Total revenue | $3,341 | $3,435 | 3.3 % | (0.9)% | (5.2)% | (2.7)% | - Cost of goods sold increased to 59.1% of revenue in Q2 2022 from 58.8% in Q2 2021, reflecting impacts in Self Service and Wholesale - North America, partially offset by Europe and mix shift[127] - SG&A expenses as a percentage of revenue increased to 26.8% in Q2 2022 from 26.2% in Q2 2021, with increases across Europe, Specialty, and Self Service segments[128] - A $155 million pretax gain ($127 million after tax) was recorded from the sale of PGW Auto Glass in Q2 2022[130] - Total depreciation and amortization decreased by $4 million to $61 million in Q2 2022, primarily due to lower depreciation from foreign currency translation and the PGW sale, partially offset by increased software amortization[131] - Other expense, net decreased by $18 million to $16 million in Q2 2022, mainly due to a $24 million decrease in loss on debt extinguishment (Euro Notes 2026 redemption in prior year) and lower net interest expense, partially offset by unfavorable equity investment fair value adjustments and foreign currency variances[132] - The effective income tax rate decreased to 23.4% in Q2 2022 from 26.3% in Q2 2021, driven by favorable discrete items (2.0%) related to the PGW sale and geographic income distribution[133] - Foreign currency impact resulted in a negative $0.03 effect on diluted EPS in Q2 2022 due to the stronger U.S. dollar[135] Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 Revenue Changes (Six Months Ended June 30, 2022 vs. 2021) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $6,196 | $6,110 | 5.3 % | 0.3 % | (4.2)% | 1.4 % | | Other revenue | $493 | $496 | (0.5)% | 0.3 % | (0.3)% | (0.5)% | | Total revenue | $6,689 | $6,606 | 4.9 % | 0.3 % | (3.9)% | 1.3 % | - Cost of goods sold increased to 59.3% of revenue in H1 2022 from 59.0% in H1 2021, primarily due to impacts in the Self Service segment[138] - SG&A expenses as a percentage of revenue increased to 27.2% in H1 2022 from 26.5% in H1 2021, reflecting increases in Europe and Specialty segments[139] - Restructuring and transaction related expenses decreased by $6 million to $7 million in H1 2022, primarily due to lower global restructuring and 1 LKQ Europe program charges in the prior year[140] - Total depreciation and amortization decreased by $11 million to $120 million in H1 2022, mainly due to foreign currency translation, the PGW sale, and lower amortization of customer relationship intangible assets[142] - Other expense, net decreased by $21 million to $31 million in H1 2022, primarily due to a $24 million decrease in loss on debt extinguishment and lower net interest expense, partially offset by unfavorable equity investment fair value adjustments and foreign currency variances[143] - The effective income tax rate decreased to 24.1% in H1 2022 from 26.3% in H1 2021, driven by favorable discrete items (1.2%) related to the PGW sale and geographic income distribution[144] - Equity in earnings of unconsolidated subsidiaries decreased by $3 million in H1 2022, primarily due to a decline in Mekonomen's results[145] - Foreign currency impact resulted in a negative $0.05 effect on diluted EPS in H1 2022 due to the stronger U.S. dollar[146] Results of Operations—Segment Reporting - Constant currency presentation, a non-GAAP measure, excludes the impact of foreign currency exchange rate fluctuations to provide valuable supplemental information on growth and profitability[148] Segment Financial Performance Overview Segment EBITDA as % of Total Segment Revenue | Segment | 3M Q2 2022 % | 3M Q2 2021 % | 6M H1 2022 % | 6M H1 2021 % | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Wholesale - North America | 18.7 % | 19.6 % | 18.4 % | 19.0 % | | Europe | 10.8 % | 10.7 % | 9.8 % | 10.2 % | | Specialty | 13.4 % | 14.9 % | 13.1 % | 14.2 % | | Self Service | 15.3 % | 27.2 % | 17.6 % | 27.5 % | Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 (Segment) Wholesale - North America Wholesale - North America Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $1,050 | $1,024 | 10.7 % | (8.0)% | (0.2)% | 2.5 % | | Other revenue | $94 | $94 | (0.9)% | 1.1 % | (0.2)% | — % | | Total | $1,144 | $1,118 | 9.8 % | (7.2)% | (0.2)% | 2.3 % | - Segment EBITDA decreased by $5 million (2.3%), impacted by a $12 million decline from the PGW divestiture and an $8 million decline from lower precious metals prices[152] - Precious metals and scrap steel pricing had an unfavorable effect of 0.9% on Segment EBITDA margin[152] Europe Europe Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $1,470 | $1,570 | 4.2 % | 0.5 % | (11.0)% | (6.4)% | | Other revenue | $7 | $7 | 14.4 % | — % | (11.6)% | 2.8 % | | Total | $1,477 | $1,577 | 4.3 % | 0.5 % | (11.0)% | (6.3)% | - Segment EBITDA decreased by $8 million (5.2%), with a negative $19 million impact from foreign currency translation; on a constant currency basis, Segment EBITDA increased by $10 million (6.0%)[156] - Gross margin increased by 0.8% due to net price increases and margin improvement initiatives[157] Specialty Specialty Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $512 | $531 | (11.5)% | 8.2 % | (0.4)% | (3.6)% | | Other revenue | $— | $— | — % | — % | — % | — % | | Total | $512 | $531 | (11.5)% | 8.2 % | (0.4)% | (3.6)% | - Parts and services organic revenue decreased by 11.5% due to strong prior-year growth, demand softness from lower new vehicle sales, and decreased drop shipment volumes[159] - Segment EBITDA decreased by $11 million (13.1%) due to organic revenue decline and inflationary effects on overhead[160] Self Service Self Service Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $60 | $53 | 13.2 % | — % | — % | 13.2 % | | Other revenue | $148 | $156 | (4.8)% | — % | — % | (4.8)% | | Total | $208 | $209 | (0.3)% | — % | — % | (0.3)% | - Segment EBITDA decreased by $24 million (43.7%), primarily due to unfavorable commodity price movements, with precious metals contributing an estimated $18 million decline[165] - Precious metals and scrap steel pricing had an unfavorable effect of 8.4% on Segment EBITDA margin[165] Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 (Segment) Wholesale - North America Wholesale - North America Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $2,156 | $1,993 | 12.1 % | (3.8)% | (0.1)% | 8.2 % | | Other revenue | $189 | $176 | 6.9 % | 0.8 % | (0.1)% | 7.6 % | | Total | $2,345 | $2,169 | 11.7 % | (3.5)% | (0.1)% | 8.1 % | - Segment EBITDA increased by $19 million (4.6%), driven by higher prices and productivity initiatives offsetting inflation, despite a $12 million decline from precious metals prices[168] - Precious metals and scrap steel pricing had an unfavorable effect of 0.9% on Segment EBITDA margin[168] Europe Europe Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $2,951 | $3,025 | 5.5 % | 0.4 % | (8.3)% | (2.4)% | | Other revenue | $14 | $15 | 2.8 % | — % | (8.7)% | (6.0)% | | Total | $2,965 | $3,040 | 5.5 % | 0.4 % | (8.3)% | (2.5)% | - Segment EBITDA decreased by $18 million (5.9%), with a negative $26 million impact from foreign currency translation; on a constant currency basis, Segment EBITDA increased by $8 million (2.6%)[173] - Gross margin increased by 0.1% due to net price increases and margin improvement initiatives[174] Specialty Specialty Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $972 | $989 | (10.0)% | 8.5 % | (0.2)% | (1.8)% | | Other revenue | $— | $— | — % | — % | — % | — % | | Total | $972 | $989 | (10.0)% | 8.5 % | (0.2)% | (1.8)% | - Parts and services organic revenue decreased by 10.0% due to strong comparative growth in the prior year and demand softness[176] - Segment EBITDA decreased by $14 million (9.8%) due to organic revenue decline and inflationary effects on overhead expenses[177] Self Service Self Service Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $117 | $103 | 13.9 % | — % | — % | 13.9 % | | Other revenue | $290 | $305 | (4.9)% | — % | — % | (4.9)% | | Total | $407 | $408 | (0.2)% | — % | — % | (0.2)% | - Segment EBITDA decreased by $40 million (36.2%), primarily due to unfavorable commodity price movements, with precious metals contributing an estimated $27 million decline[181] - Precious metals and scrap steel pricing had an unfavorable effect of 9.7% on Segment EBITDA margin[181] Liquidity and Capital Resources Liquidity Data (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :---------------------------------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $265 | $274 | | Total debt | $2,369 | $2,824 | | Capacity under credit facilities | $3,150 | $3,150 | | Availability under credit facilities | $1,587 | $1,194 | | Total liquidity (cash + availability) | $1,852 | $1,468 | - Total liquidity increased by $384 million to $1,852 million as of June 30, 2022[185] - The company's debt structure includes $1,494 million outstanding under revolving credit facilities (maturing Jan 2024), $524 million Euro Notes (2024), and $262 million Euro Notes (2028)[187] Dividend Activity (2022) | Dividend Amount | Declaration Date | Record Date | Payment Date | | :---------------- | :--------------- | :---------- | :----------- | | $0.25 | February 15, 2022 | March 3, 2022 | March 24, 2022 | | $0.25 | April 26, 2022 | May 19, 2022 | June 2, 2022 | Debt Covenants as of June 30, 2022 | Covenant | Covenant Level | Ratio Achieved | | :-------------------------- | :------------- | :------------- | | Maximum net leverage ratio | 4.00 : 1.00 | 1.2 | | Minimum interest coverage ratio | 3.00 : 1.00 | 32.7 | - Investment grade ratings from S&P and Moody's in Q2 2022 mean the company is no longer required to comply with certain restrictive covenants under the credit agreement[192] Scheduled Maturities of Long-Term Obligations (in millions) | Period | Amount | | :-------------------------- | :----- | | Six months ending Dec 31, 2022 | $38 | | Years ending Dec 31, 2023 | $18 | | Years ending Dec 31, 2024 | $2,026 | | Years ending Dec 31, 2025 | $9 | | Years ending Dec 31, 2026 | $3 | | Thereafter | $275 | | Total debt | $2,369 | Inventory Procurement (in millions) | Segment | Aftermarket & Manufactured (3M Q2 2022) | Aftermarket & Manufactured (3M Q2 2021) | Aftermarket & Manufactured (6M H1 2022) | Aftermarket & Manufactured (6M H1 2021) | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Wholesale - North America | $302 | $262 | $619 | $522 | | Europe | $924 | $1,005 | $1,879 | $1,899 | | Specialty | $306 | $362 | $709 | $753 | | Total | $1,532 | $1,629 | $3,207 | $3,174 | | Segment | Salvage & Self Service Vehicles (3M Q2 2022, in thousands) | Salvage & Self Service Vehicles (3M Q2 2021, in thousands) | Salvage & Self Service Vehicles (6M H1 2022, in thousands) | Salvage & Self Service Vehicles (6M H1 2021, in thousands) | | :-------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | | Wholesale - North America | 65 | 63 | 125 | 113 | | Europe | 8 | 6 | 16 | 13 | | Self Service | 139 | 140 | 274 | 277 | - Net cash provided by operating activities decreased by $196 million to $737 million for the six months ended June 30, 2022, primarily due to increased cash outflows from inventories ($266 million) and receivables ($25 million), partially offset by higher cash inflows from accounts payable ($128 million)[204][206] Free Cash Flow (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $737 | $933 | | Less: purchases of property, plant and equipment | $99 | $88 | | Free cash flow | $638 | $845 | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's exposure to market risks including foreign exchange, interest rates, and commodity prices Foreign Exchange Rates - Operations outside the U.S. accounted for 47.7% of revenue in H1 2022, making the company exposed to foreign currency fluctuations; a 10% change in the U.S. dollar's strength could result in a 4.8% change in consolidated revenue and a 2.6% change in operating income[210] - The company hedges a portion of foreign currency exposure related to inventory purchases in Europe but does not currently hedge for Wholesale - North America operations[211] Interest Rates - The company is exposed to variable interest rates on $1,494 million of unhedged debt under its credit facilities as of June 30, 2022[216] - A 100 basis point movement in interest rates would change interest expense by $15 million over the next twelve months[216] Commodity Prices - The company is exposed to price fluctuations in scrap metal and precious metals (platinum, palladium, rhodium), which affect both revenue and inventory costs, creating a natural hedge but with potential lag effects[217] - Average scrap metal prices increased by 5% in Q2 2022 over Q1 2022, while average prices of rhodium, palladium, and platinum decreased by 35%, 27%, and 19% respectively in Q2 2022 compared to Q2 2021[217] Inflation - The company is exposed to inflation in product, labor, shipping, freight, and overhead costs, and is mitigating these effects through price adjustments and productivity initiatives[218] Item 4. Controls and Procedures This section confirms the effectiveness of disclosure controls and procedures as of the reporting date Evaluation of Disclosure Controls and Procedures - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[219] Changes in Internal Control over Financial Reporting - There were no material changes in internal control over financial reporting during the quarter ended June 30, 2022[220] PART II OTHER INFORMATION Item 1. Legal Proceedings This section details outstanding legal claims and lawsuits, including a recent demand from the U.S. EPA - Management expects that currently outstanding claims and suits will not materially affect the company's financial position, results of operations, or cash flows[223] - On July 7, 2022, the company received a demand from the U.S. EPA Region 4 seeking penalties totaling $787,750 for alleged violations of federal stormwater regulations[224] Item 1A. Risk Factors This section refers to previous SEC filings for a comprehensive discussion of business and financial risks - Readers are referred to the 2021 Form 10-K and the Quarterly Report on Form 10-Q for the three months ended March 31, 2022, for information concerning risk factors[225] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase program activity and remaining authorization Issuer Purchases of Equity Securities - On May 10, 2022, the Board of Directors authorized a $500 million increase to the existing stock repurchase program, raising the aggregate authorization to $2,500 million as of June 30, 2022[226] Stock Repurchases for Three Months Ended June 30, 2022 (in millions, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | | :-------------------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------------------------- | | April 1, 2022 - April 30, 2022 | 1.6 | $49.56 | $428 | | May 1, 2022 - May 31, 2022 | 3.1 | $50.00 | $772 | | June 1, 2022 - June 30, 2022 | 3.4 | $49.31 | $606 | | Total | 8.1 | N/A | N/A | Item 6. Exhibits This section lists all exhibits filed with the report, including certifications and XBRL documents - Exhibits include certifications from the CEO and CFO (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350) and various Inline XBRL documents[228] SIGNATURES Signatories This section confirms the report's authorization by the company's designated financial officers - The report was signed on August 2, 2022, by Varun Laroyia (Executive Vice President and Chief Financial Officer) and Michael S. Clark (Vice President - Finance and Controller)[230][231]