Part I Business LKQ Corporation is a global distributor of alternative vehicle parts and specialty products, operating through four segments with a strategy focused on growth, technology adaptation, and asset optimization Overview LKQ Corporation is an S&P 500 global distributor of alternative vehicle parts and accessories, operating through four segments to serve the vehicle repair and maintenance industry - LKQ is a global distributor of vehicle products, offering alternative parts (aftermarket, recycled, refurbished, remanufactured) as a substitute for new OEM parts1516 - The company is organized into four reportable operating segments: Wholesale - North America, Europe, Specialty, and Self Service1718 History Formed in 1998, LKQ expanded significantly through approximately 300 acquisitions, including Uni-Select Inc. in 2023, enhancing its North American paint distribution and Canadian mechanical parts market presence - The company was formed in 1998 and has grown through approximately 300 acquisitions19 - The 2023 acquisition of Uni-Select Inc. complements LKQ's North American paint distribution and provides a scaled entry into the Canadian mechanical parts market22 Strategy LKQ's strategy focuses on four pillars: growing offerings, geographic expansion, technology adaptation, and asset rationalization, with the '1 LKQ Europe' plan as a key integration initiative leveraging AI and prioritizing free cash flow and profitable growth - The company's strategy focuses on four pillars: growing offerings, geographic expansion, adapting to technology, and rationalizing assets25 - The "1 LKQ Europe" plan is a multi-year business transformation to create a single, integrated Pan-European organization by leveraging scale in procurement, logistics, and product strategy24 - LKQ utilizes artificial intelligence (AI) in its salvage business to make more accurate purchasing decisions and control inventory26 Wholesale - North America Segment The Wholesale - North America segment is a leading provider of alternative collision and mechanical replacement products, expanded by the Uni-Select acquisition, sourcing from diverse vendors and utilizing AI for salvage procurement to serve professional repair shops - The segment is a leading provider of alternative vehicle collision and mechanical replacement products in the U.S. and Canada28 - The acquisition of Uni-Select expanded the segment's paint business and provided entry into the Canadian mechanical parts market30 - Approximately 51% of aftermarket purchases in 2023 were from the top seven vendors. The largest vendor accounted for about 12% of the segment's annual inventory purchases32 - The segment uses proprietary software with embedded AI to assist in the procurement of salvage vehicles from auctions3435 Europe Segment The Europe segment distributes aftermarket mechanical parts across over 20 countries, focusing on the '1 LKQ Europe' integration plan to standardize operations, optimize purchasing, and reduce inventory complexity, serving customers through multi-step models - The "1 LKQ Europe" plan aims to integrate European operations to optimize purchasing, logistics, and systems, with a projected completion by the end of 20274855 - The segment's inventory is primarily composed of mechanical aftermarket parts, with over 900,000 unique part numbers. A key goal is to reduce this complexity49 - In 2023, the top supplier represented 9% of the segment's aftermarket inventory purchases, and no other supplier comprised more than 5%50 Specialty Segment The Specialty segment is a leading North American distributor of aftermarket equipment for RVs, trucks, marine, and performance vehicles, sourcing from a fragmented supplier base and primarily relying on online sales through a hub-and-spoke distribution model - The segment distributes specialty aftermarket products for RV, truck, towing, marine, and performance vehicles in North America56 - The supplier base is highly fragmented. In 2023, the top three suppliers accounted for approximately 19% of purchases, with the largest supplier providing about 9%5758 - Online sales represent the majority of the segment's sales, primarily through platforms like ekeystone.com61 Self Service Segment The Self Service segment operates 'LKQ Pick Your Part' retail yards where customers self-remove parts from older salvage vehicles, with remaining hulks sold as scrap metal, serving DIY mechanics and small shops, and utilizing a mobile app for customer engagement - The segment operates retail self-service yards where customers can pull parts directly from salvage vehicles65 - Inventory consists of older, lower-priced salvage vehicles sourced from towing companies, auctions, and the general public66 - The segment utilizes a mobile app that sends push notifications to customers about vehicle inventory, allowing them to search for specific parts69 Human Capital As of December 31, 2023, LKQ employed approximately 49,000 people globally, with a human capital strategy focused on attracting, retaining, and developing talent through competitive compensation, comprehensive benefits, and a strong ethical culture - As of December 31, 2023, the company employed approximately 49,000 people globally (20,000 in North America, 29,000 outside)73 - Many employees in Europe are represented by unions and/or works councils, and approximately 1,000 employees in North America are represented by unions73 - The company provides competitive compensation and benefits, including medical coverage, paid parental leave, retirement plan contributions, and a scholarship program for employees' children7778 Sustainability Matters LKQ's sustainability efforts encompass environmental stewardship through vehicle recycling, social responsibility via an inclusive work environment and community support, and enhanced corporate governance with a refreshed, diverse Board and a global Code of Ethics - Environmental efforts focus on vehicle recycling and reuse, contributing to a circular economy and reducing raw material use8687 - Social initiatives include fostering an inclusive work environment and community support via the LKQ Community Foundation8889 - Governance enhancements include significant board refreshment (over half added since August 2018), with 44% of the current board from underrepresented groups, and the adoption of proxy access9091 Risk Factors LKQ faces diverse risks including economic downturns, intense competition, reliance on insurance companies, fluctuating accident rates, commodity price volatility, supply chain disruptions, substantial debt, and regulatory challenges from intellectual property claims, environmental laws, and data privacy regulations - Business is sensitive to economic conditions, competition from OEMs who may restrict the use of alternative parts, and reliance on insurance companies to promote alternative parts usage95103107 - OEMs are increasingly using intellectual property claims (design patents) and vehicle telematics to limit the use of aftermarket and recycled parts104105110 - The business is dependent on vehicle accident rates, which could decline due to advanced accident avoidance systems, and is exposed to fluctuations in scrap metal and precious metal commodity prices115116119 - A substantial amount of debt ($4.3 billion as of Dec 31, 2023) and related service obligations could limit operational flexibility and ability to obtain future financing137139 - The company faces risks from laws that may prohibit or restrict the sale of aftermarket or recycled products, as well as complex environmental regulations153158 - Cybersecurity and data privacy are significant risks, with evolving regulations like GDPR and new SEC rules imposing stringent requirements and potential liabilities176177 Unresolved Staff Comments The company reports that it has no unresolved staff comments - None189 Cybersecurity LKQ's cybersecurity risk management, overseen by the Board and CISO, employs a cross-functional strategy including technical safeguards, incident response, third-party risk management, and employee training, with no material impact reported from threats - The Board of Directors, supported by the Audit Committee and a management-level Risk Management Committee, oversees the cybersecurity risk management program191198 - The company's strategy includes technical safeguards, incident response plans, third-party risk management, and regular mandatory employee training193194195196 - The Chief Information Security Officer (CISO) has over 26 years of experience and holds multiple professional certifications (CISSP, CISM, GCIH)200 - The company states that cybersecurity threats have not materially affected its business strategy, results of operations, or financial condition201 Properties As of December 31, 2023, LKQ operated approximately 1,650 mostly leased facilities globally, including key headquarters in Chicago, Antioch, and Zug, which are deemed sufficient for current needs - As of December 31, 2023, the company operated approximately 1,650 facilities, most of which are leased202 - Facility distribution includes approximately 550 in the U.S. and 1,100 in over 25 other countries202 - Key headquarters are located in Chicago (Global), Antioch, TN (North America), and Zug, Switzerland (Europe)203204 Legal Proceedings In November 2023, a Uni-Select subsidiary pleaded guilty to environmental violations and paid a C$600,000 fine, while other ongoing legal claims are not expected to materially affect LKQ's financial position - A subsidiary, Plastique Royal Inc., pleaded guilty to environmental violations and paid a C$600,000 fine in November 2023207 - Management believes that other currently outstanding claims and lawsuits will not have a material adverse effect on the company's financial position, results of operations, or cash flows208 Mine Safety Disclosures This item is not applicable to the company - Not applicable209 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities LKQ's common stock trades on Nasdaq, paid increased quarterly dividends in 2023, and maintains an active stock repurchase program with $1.1 billion remaining authorized, while its stock performance outperformed peers but lagged the S&P 500 over five years | Dividend Amount | Declaration Date | Record Date | Payment Date | | :--- | :--- | :--- | :--- | | $0.275 | February 21, 2023 | March 16, 2023 | March 30, 2023 | | $0.275 | April 25, 2023 | May 18, 2023 | June 1, 2023 | | $0.275 | July 25, 2023 | August 17, 2023 | August 31, 2023 | | $0.30 | October 24, 2023 | November 16, 2023 | November 30, 2023 | | Period | Total Number of Shares Purchased (millions) | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program (millions) | | :--- | :--- | :--- | :--- | | Oct 1 - Oct 31, 2023 | 0.2 | $43.73 | $1,099 | | Nov 1 - Nov 30, 2023 | 0.1 | $43.83 | $1,096 | | Dec 1 - Dec 31, 2023 | 0.4 | $45.65 | $1,076 | | Total Q4 2023 | 0.7 | | $1,076 | - The Board has authorized a stock repurchase program of up to $3.5 billion, with a scheduled duration through October 25, 2025218 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, LKQ's revenue grew 8.4% to $13.9 billion, driven by acquisitions and organic growth, despite a decline in operating income to $1.4 billion and net income to $936 million due to margin pressure and restructuring costs, while generating $1.0 billion in free cash flow and maintaining $1.3 billion in liquidity after the Uni-Select acquisition Results of Operations—Consolidated For 2023, total revenue increased 8.4% to $13.87 billion, driven by parts and services growth, though partially offset by lower commodity prices and a decline in gross margin and operating income due to higher costs and Uni-Select acquisition expenses | | 2023 | 2022 | |:---|:---:|:---:| | Revenue | $13,866M | $12,794M | | Gross margin | 40.2% | 40.8% | | Operating income | $1,357M | $1,581M | | Net income attributable to LKQ stockholders | $936M | $1,149M | | Diluted EPS attributable to LKQ stockholders | $3.49 | $4.13 | | Revenue Category | 2023 (in millions) | 2022 (in millions) | Total Change | Organic Change | Acquisition/Divestiture Change | Foreign Exchange Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Parts & services | $13,174 | $11,933 | 10.4% | 4.7% | 4.8% | 0.9% | | Other revenue | $692 | $861 | (19.6)% | (16.0)% | (3.4)% | (0.1)% | | Total revenue | $13,866 | $12,794 | 8.4% | 3.3% | 4.2% | 0.8% | - Restructuring and transaction related expenses increased to $65 million in 2023 from $20 million in 2022, primarily due to costs associated with the Uni-Select acquisition250 - Total other expense increased to $122 million from $63 million, largely due to a $136 million increase in interest expense from higher rates and debt related to the Uni-Select acquisition. This was partially offset by a $49 million gain on foreign exchange contracts related to the acquisition254 Results of Operations—Segment Reporting In 2023, Wholesale - North America and Europe segments saw revenue growth, while Specialty and Self Service experienced revenue declines and compressed EBITDA margins due to market softness and lower commodity prices, respectively | Segment | 2023 Revenue (M) | 2022 Revenue (M) | 2023 Segment EBITDA (M) | 2023 EBITDA Margin | 2022 EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | :--- | | Wholesale - North America | $5,281 | $4,556 | $975 | 18.5% | 18.7% | | Europe | $6,323 | $5,735 | $614 | 9.7% | 10.2% | | Specialty | $1,665 | $1,788 | $134 | 8.0% | 11.1% | | Self Service | $597 | $715 | $36 | 6.0% | 11.7% | Liquidity and Capital Resources As of December 31, 2023, LKQ maintained $1.28 billion in liquidity despite total debt increasing to $4.3 billion to finance the $2.1 billion Uni-Select acquisition, while generating $1.36 billion in operating cash flow and remaining compliant with debt covenants | Liquidity Data (in millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $299 | $278 | | Total debt | $4,281 | $2,662 | | Availability under revolving credit facilities | $976 | $645 | | Total liquidity | $1,275 | $923 | | Cash Flow Data (in millions) | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,356 | $1,250 | | Purchases of property, plant and equipment | ($358)| ($222)| | Free cash flow | $998 | $1,028 | - The Uni-Select acquisition was financed with $1.4 billion from new senior notes, a CAD 700 million ($531 million) term loan, and borrowings under the revolving credit facility and cash on hand290419420 - The company was in compliance with its debt covenants as of December 31, 2023, with a maximum total leverage ratio of 2.3 (covenant: 4.00) and a minimum interest coverage ratio of 7.5 (covenant: 3.00)295 Quantitative and Qualitative Disclosures About Market Risk LKQ faces market risks from foreign exchange rates, interest rates on variable debt, commodity price volatility for scrap and precious metals, and inflationary pressures on costs, which could impact revenue, expenses, and margins - Foreign currency fluctuations are a key risk, as operations outside the U.S. accounted for 50.8% of revenue in 2023. A 10% change in the U.S. dollar's strength would alter consolidated revenue by 5.1%319 - The company is exposed to interest rate risk on its variable-rate debt. As of December 31, 2023, $1.24 billion of this debt was unhedged. A 100 basis point change in rates would affect annual interest expense by approximately $12 million325 - The company is exposed to price fluctuations in scrap metal and precious metals (platinum, palladium, rhodium), which affect both revenue and inventory costs, potentially compressing margins during periods of rapid price changes326 - Inflationary pressures on product, labor, and shipping costs are a significant risk. The company attempts to offset these through price increases and productivity initiatives, but may not be able to fully mitigate the impact on margins327 Financial Statements and Supplementary Data This section presents LKQ's audited consolidated financial statements for 2023 and Deloitte & Touche LLP's unqualified opinion on both financial statements and internal controls, noting critical audit matters related to goodwill impairment and the Uni-Select acquisition Reports of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on LKQ's 2023 financial statements and internal controls, excluding Uni-Select from the latter, while highlighting critical audit matters concerning goodwill impairment and Uni-Select business combination valuation - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting332346 - The audit of internal controls excluded Uni-Select Inc., acquired on August 1, 2023, which constituted 16% of total assets and 4% of revenue for the year348 - Critical Audit Matters identified were the Goodwill Impairment Assessment and the valuation of intangible assets related to the Uni-Select Business Combination336339 Consolidated Financial Statements LKQ's 2023 consolidated financial statements show $13.87 billion in revenue and $936 million net income, with total assets increasing to $15.08 billion and liabilities to $8.90 billion primarily due to the Uni-Select acquisition, while generating $1.36 billion in operating cash flow | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Revenue | $13,866 | $12,794 | | Operating income | $1,357 | $1,581 | | Net income attributable to LKQ stockholders | $936 | $1,149 | | Diluted EPS attributable to LKQ stockholders | $3.49 | $4.13 | | (In millions) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $4,868 | $4,258 | | Total assets | $15,079 | $12,038 | | Total current liabilities | $3,318 | $2,271 | | Total liabilities | $8,898 | $6,571 | | Total stockholders' equity | $6,181 | $5,467 | | (In millions) | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,356 | $1,250 | | Net cash (used in) provided by investing activities | ($2,442)| $172 | | Net cash provided by (used in) financing activities | $1,102 | ($1,394)| Notes to Consolidated Financial Statements The notes detail the $2.1 billion Uni-Select acquisition, its impact on goodwill and debt structure, segment performance showing mixed revenue trends, the 2023 effective tax rate of 24.8%, and information on restructuring, leases, and pension plans Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2023, excluding the recently acquired Uni-Select from the internal control assessment, with no material changes during the quarter - Management concluded that disclosure controls and procedures were effective as of December 31, 2023586 - The assessment of internal control over financial reporting excluded Uni-Select, which was acquired in 2023 and constituted 16% of total assets and 4% of revenue588 - Based on its assessment, management determined that the company maintained effective internal control over financial reporting as of December 31, 2023592 Other Information During the fiscal year ended December 31, 2023, none of the company's directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted, modified, or terminated any Rule 10b5-1 trading plans or other trading arrangements during the fiscal year594 Part III Directors, Executive Officers and Corporate Governance This section provides information on directors and executive officers, including the upcoming CEO succession plan where Dominick Zarcone will retire and be succeeded by Justin L. Jude, with further details incorporated from the Proxy Statement and the company's Code of Ethics available online - Information regarding directors is incorporated by reference from the Proxy Statement for the May 7, 2024 Annual Meeting596 - A leadership succession plan was approved in November 2023: Dominick Zarcone will retire as President and CEO on June 30, 2024, and will be succeeded by Justin L. Jude598605 - The company's Code of Ethics is applicable to its principal executive, financial, and accounting officers and is available on its website608 Executive Compensation All information related to executive compensation is incorporated by reference from the company's Proxy Statement - All information related to executive compensation is incorporated by reference from the company's Proxy Statement610 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated from the Proxy Statement, with 1.6 million securities issuable from outstanding options and 7.5 million available for future issuance under approved equity compensation plans as of December 31, 2023 | Plan Category | Securities to be issued upon exercise (a) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 1.6 million | 7.5 million | | Equity compensation plans not approved by stockholders | 0 | 0 | | Total | 1.6 million | 7.5 million | Certain Relationships and Related Transactions, and Director Independence All information related to certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement - All information related to certain relationships, related transactions, and director independence is incorporated by reference from the company's Proxy Statement612 Principal Accountant Fees and Services All information related to principal accountant fees and services is incorporated by reference from the company's Proxy Statement - All information related to principal accountant fees and services is incorporated by reference from the company's Proxy Statement613 Part IV Exhibits and Financial Statement Schedules This section lists financial statements included in Item 8, notes the omission of financial statement schedules, and provides a comprehensive list of exhibits filed with the report, including governance documents, debt agreements, and management compensatory plans - The financial statements are referenced in Part II, Item 8615 - All financial statement schedules have been omitted because they are not required, not applicable, or the information is included elsewhere616 - A detailed list of exhibits filed with the Form 10-K is provided, including management contracts and compensatory plans617618 Form 10-K Summary This item is not applicable to the company's filing - Not applicable621
LKQ (LKQ) - 2023 Q4 - Annual Report