Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Interim Financial Statements
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 have prepared the accompanying Unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC on February 23, 2023 ("2022 Form 10-K").
Interest income on the Unaudited Condensed Consolidated Statements of Income was updated to conform with the 2022 Form 10-K presentation.
Recently Adopted Accounting Pronouncements
During the first quarter of 2023, we adopted Accounting Standards Update No. 2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations” ("ASU 2022-04"), which requires the buyer in a supplier finance program to disclose certain information about its program, including key terms, balance sheet presentation of amounts, outstanding amounts at the end of each period, and rollforwards of balances. We adopted the provisions of ASU 2022-04 on a retrospective basis (see Note 15, "Supply Chain Financing"), except for the disclosure of rollforward information, which is effective prospectively for fiscal years beginning after December 15, 2023. The adoption of ASU 2022-04 did not have a material impact on our unaudited condensed consolidated financial statements.
Note 2. Discontinued Operations and Divestitures
Glass Manufacturing Business
For the three months ended March 31, 2022, we recorded to discontinued operations a $4 million benefit primarily related to the reassessment of a previously recorded valuation allowance on a deferred tax asset related to our glass manufacturing business sold in 2017.
Other Divestitures (Not Classified in Discontinued Operations)
In April 2022, we completed the sale of PGW Auto Glass ("PGW"), our aftermarket glass business within our Wholesale - North America segment, to a third party for $361 million.
Note 3. Uni-Select Acquisition
On February 26, 2023, we entered into a definitive agreement to acquire all of Uni-Select Inc.'s (“Uni-Select”) issued and outstanding shares for Canadian dollar (“CAD”) 48.00 per share in cash, representing a total enterprise value of approximately CAD 2.8 billion ($2.1 billion at the March 31, 2023 exchange rate) (the "Uni-Select Acquisition"). Uni-Select is a leading distributor of automotive refinish and industrial coatings and related products in North America through its FinishMaster segment, and in the automotive aftermarket parts business in Canada through its Canadian Automotive Group segment and in the United Kingdom (“U.K.”) through its GSF Car Parts segment. This acquisition will complement 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. On April 27, 2023, Uni-Select's shareholders approved the proposed acquisition. The Uni-Select Acquisition is expected to be completed in the second half of 2023 and is subject to regulatory approvals and other
customary closing conditions. We intend to divest the GSF Car Parts segment on or shortly after the acquisition closing date and the remaining businesses will be reported within our Wholesale - North America segment. See Note 11, "Restructuring and Transaction Related Expenses" for information related to transaction expenses related to the Uni-Select Acquisition.
In order to reduce the risk related to changes in CAD foreign exchange rates for the CAD purchase price between signing and closing, we entered into foreign exchange contracts. These foreign exchange contracts do not qualify for hedge accounting, and therefore the changes in fair value are reported in Gains on foreign exchange contracts - acquisition related in the Unaudited Condensed Consolidated Statements of Income. As of March 31, 2023, we reported an asset of $23 million with a corresponding gain for the first quarter of 2023. See Note 17, "Derivative Instruments and Hedging Activities" for information related to these foreign exchange contracts.
In connection with the Uni-Select Acquisition, we entered into a commitment letter for a $2.1 billion senior unsecured bridge loan facility ("Bridge Loan") with various banks. The capacity under the Bridge Loan was reduced to $1.6 billion as of March 31, 2023 upon execution of a term loan agreement as discussed below. There were no draws on the facility as of March 31, 2023. We incurred $9 million in upfront fees related to the facility and may incur additional fees and holding costs if the bridge loan facility is not canceled by specified dates. During the three months ended March 31, 2023, we amortized $3 million of these upfront fees (reported in Interest expense) with the remaining balance to be amortized over the expected term of the facility.
For the permanent financing, on March 27, 2023, we entered into a new term loan credit agreement ("CAD Note") which establishes an unsecured term loan facility of up to CAD 700 million scheduled to mature three years from the date of funding. Proceeds from the CAD Note may only be used (i) to finance a portion of the aggregate cash consideration for the Uni-Select Acquisition, (ii) to refinance certain outstanding debt of Uni-Select and (iii) to pay fees, costs and expenses related to the Uni-Select Acquisition. The CAD Note is expected to fund one business day prior to the consummation of the Uni-Select Acquisition transaction and includes a non-usage fee that will be incurred through the date the proceeds are drawn on the facility. There were no borrowings against the CAD Note as of March 31, 2023.
The CAD Note contains customary covenants for an unsecured term loan for a company that has debt ratings that are investment grade, such as requirements to comply with a total leverage ratio and interest coverage ratio, each calculated in accordance with the terms of the CAD Note, and limits on the Company’s and its subsidiaries’ ability to incur liens and indebtedness.
The interest rate applicable to the CAD Note 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.
We anticipate funding the remainder of the purchase price with cash on hand and the issuance of senior notes. To hedge the movement of market interest rates for senior notes prior to the expected issuance date, we entered into forward-starting interest rate swaps to lock interest rates for the potential five and ten year senior notes. See Note 17, "Derivative Instruments and Hedging Activities" for information related to these interest rate instruments.
Note 4. Inventories
We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products.
Inventories consist of the following (in millions):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| Aftermarket and refurbished products | $ | 2,219 | | | $ | 2,279 | |
| Salvage and remanufactured products | 464 | | | 427 | |
| Manufactured products | 50 | | | 46 | |
| Total inventories | $ | 2,733 | | | $ | 2,752 | |
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of March 31, 2023, manufactured products inventory was composed of $29 million of raw materials, $7 million of work in process, and $14 million of finished goods. As of December 31, 2022, manufactured products inventory was composed of $26 million of raw materials, $5 million of work in process, and $15 million of finished goods.
Note 5. Allowance for Credit Losses
Our allowance for credit losses was $58 million and $54 million as of March 31, 2023 and December 31, 2022, respectively. The provision for credit losses was $5 million and $8 million for the three months ended March 31, 2023 and 2022, respectively.
Note 6. Noncontrolling Interest
We present redeemable noncontrolling interest on our balance sheet related to redeemable shares issued to a minority shareholder in conjunction with a previous acquisition. The redeemable shares contain (i) a put option for all noncontrolling interest shares at a fixed price of $24 million (€21 million) for the minority shareholder exercisable in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $26 million (€23 million) for us exercisable beginning in the first quarter of 2026 through the end of the fourth quarter of 2027, and (iii) a guaranteed dividend to be paid quarterly to the minority shareholder through the fourth quarter of 2023. The redeemable shares do not provide the minority shareholder with rights to participate in the profits and losses of the subsidiary prior to the exercise date of the put option. As the put option is outside our control, we recorded a $24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Unaudited Condensed Consolidated Balance Sheets.
Note 7. Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. We performed our annual impairment test during the fourth quarter of 2022, and determined no impairment existed as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 40%. The fair value estimates of our reporting units were established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. 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. We did not identify any indicators of impairment in the first three months of 2023 that necessitated an interim test of goodwill impairment or indefinite-lived intangible assets impairment.
Note 8. Equity Method Investments
The carrying value of our Equity method investments were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Ownership as of March 31, 2023 | | March 31, 2023 | | December 31, 2022 |
MEKO AB(1)(2) | Europe | | 26.6% | | $ | 143 | | | $ | 129 | |
| Other | | | | | 13 | | | 12 | |
| Total | | | | | $ | 156 | | | $ | 141 | |
(1) As of March 31, 2023, the Level 1 fair value of our investment in MEKO AB ("Mekonomen") was $178 million based on the quoted market price for Mekonomen's common stock using the same foreign exchange rate as the carrying value.
(2) As of March 31, 2023, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $8 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We record our equity in the net earnings of Mekonomen on a one quarter lag.
Note 9. Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of our remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products.
The changes in the warranty reserve are as follows (in millions):
| | | | | |
| Warranty Reserve |
| Balance as of December 31, 2022 | $ | 32 | |
| Warranty expense | 19 | |
| Warranty claims | (19) | |
| |
| |
| Balance as of March 31, 2023 | $ | 32 | |
Note 10. Revenue Recognition
Disaggregated Revenue
We report revenue in two categories: (i) parts and services and (ii) other.
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 to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services.
For Wholesale - North America and Self Service, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; mirrors; grilles; wheels; and large mechanical items such as engines and transmissions. For Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. For our Specialty operations, we serve seven product segments: truck and off-road; speed and performance; recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories.
Other revenue includes sales of scrap and precious metals (platinum, palladium, and rhodium), bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from furnace operations. We derive scrap metal and other precious metals from several sources in both our Wholesale - North America and Self Service segments, including vehicles that have been used in our recycling operations and vehicles from original equipment manufacturers ("OEMs") and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in our Wholesale - North America and Self Service segments is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap.
The following table sets forth our revenue disaggregated by category and reportable segment (in millions):
| | | | | | | | | | | | | | |
| Three Months Ended March 31, | |
| | 2023 | | 2022 | | | |
| Wholesale - North America | $ | 1,148 | | | $ | 1,106 | | | | |
| Europe | 1,548 | | | 1,481 | | | | |
| Specialty | 396 | | | 460 | | | | |
| Self Service | 60 | | | 57 | | | | |
| Parts and services | 3,152 | | | 3,104 | | | | |
| Wholesale - North America | 81 | | | 95 | | | | |
| Europe | 7 | | | 7 | | | | |
| | | | | | |
| Self Service | 109 | | | 142 | | | | |
| Other | 197 | | | 244 | | | | |
| Total revenue | $ | 3,349 | | | $ | 3,348 | | | | |
Variable Consideration
Amounts related to variable consideration on our Unaudited Condensed Consolidated Balance Sheets are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | Classification | | March 31, 2023 | | December 31, 2022 |
| Return asset | | Prepaid expenses and other current assets | | $ | 62 | | | $ | 58 | |
| Refund liability | | Refund liability | | 119 | | | 109 | |
| Variable consideration reserve | | Receivables, net of allowance for credit losses | | 99 | | | 136 | |
Revenue by Geographic Area
Our net sales are attributed to geographic area based on the location of the selling operation. The following table sets forth our revenue by geographic area (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Revenue | | | | | | | |
| United States | $ | 1,681 | | | $ | 1,750 | | | | | |
| United Kingdom | 415 | | | 425 | | | | | |
| Germany | 416 | | | 386 | | | | | |
| Other countries | 837 | | | 787 | | | | | |
| Total revenue | $ | 3,349 | | | $ | 3,348 | | | | | |
Note 11. Restructuring and Transaction Related Expenses
From time to time, we initiate restructuring plans to integrate acquired businesses, to align our workforce with strategic business activities, or to improve efficiencies in our operations. Below is a summary of our current restructuring plans:
2022 Global Restructuring Plan
In the fourth quarter of 2022, we began a restructuring initiative covering all of our reportable segments designed to reduce costs, streamline operations, consolidate facilities and implement other strategic changes to the overall organization. We have incurred and expect to incur costs primarily for employee severance, inventory or other asset write-downs, and exiting facilities. This plan is scheduled to be substantially complete by the end of 2024 with an estimated total incurred cost of between $30 million and $40 million.
1 LKQ Europe Plan
In 2019, we announced a multi-year plan called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe plan, we are reorganizing our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2025 with a total incurred cost of between $30 million and $40 million.
2019/2020 Global Restructuring Plan
In 2019, we commenced a cost reduction initiative, covering all of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. This plan was expanded in 2020 as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. We have incurred and expect to incur costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives. This plan is expected to be completed in 2023 with a total incurred cost of between $108 million to $115 million.
Acquisition Integration Plans
As we complete the acquisition of a business, we may incur costs related to integrating the acquired business into our current business structure and systems. These costs are typically incurred within a year from the acquisition date and vary in magnitude depending on the size and complexity of the related integration activities. We expect to incur an insignificant amount of future expenses to complete any open integration plans.
The following table sets forth the expenses incurred related to our restructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| Plan | | Expense Type | | 2023 | | 2022 |
| 2022 Global Plan | | Employee related costs | | $ | 2 | | | $ | — | |
| | Facility exit costs | | 2 | | | — | |
| | | | | | |
| | Other costs | | 1 | | | — | |
| | Total | | $ | 5 | | | $ | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| 1 LKQ Europe Plan | | Employee related costs | | $ | 1 | | | $ | — | |
| | | | | | |
| | | | | | |
| | Total | | $ | 1 | | | $ | — | |
| | | | | | |
| | | | | | |
| Acquisition Integration Plans | | Facility exit costs | | $ | 2 | | | $ | — | |
| | | | | | |
| | Total | | $ | 2 | | | $ | — | |
| | | | | | |
| Total restructuring expenses | | | | $ | 8 | | | $ | — | |
The following table sets forth the cumulative plan costs by segment related to our restructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Program Costs |
| | Wholesale - North America | | Europe | | Specialty | | Self Service | | Total |
| 2022 Global Plan | | $ | 1 | | | $ | 11 | | | $ | 2 | | | $ | 1 | | | $ | 15 | |
| 2019/2020 Global Plan | | 43 | | | 59 | | | 2 | | | 2 | | | 106 | |
| 1 LKQ Europe Plan | | — | | | 8 | | | — | | | — | | | 8 | |
The following table sets forth the liabilities recorded related to our restructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 Global Plan | | 2019/20 Global Plan | | 1 LKQ Europe Plan |
| | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 | | March 31, 2023 | | December 31, 2022 |
Employee related costs (1) | | $ | 1 | | | $ | 3 | | | $ | — | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
Facility exit costs (2) | | 4 | | | 1 | | | 3 | | | 6 | | | — | | | — | |
| Other costs | | — | | | — | | | 2 | | | 2 | | | — | | | — | |
| Total | | $ | 5 | | | $ | 4 | | | $ | 5 | | | $ | 9 | | | $ | 1 | | | $ | 1 | |
(1) Reported in Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.
(2) Reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Unaudited Condensed Consolidated Balance Sheets.
Transaction Related Expenses
The following table sets forth the transaction related expenses incurred (in millions):
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Professional fees (1) | | $ | 10 | | | $ | 3 | |
Transaction related expenses | | $ | 10 | | | $ | 3 | |
(1) Included external costs such as legal, accounting and advisory fees related to completed and potential transactions (including Uni-Select transaction costs in 2023).
Note 12. Stock-Based Compensation
RSUs
The following table summarizes activity related to our restricted stock units ("RSUs") under the LKQ Corporation 1998 Equity Incentive Plan (the "Equity Incentive Plan") for the three months ended March 31, 2023 (in millions, except years and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Unvested as of January 1, 2023 | 1.3 | | | $ | 41.02 | | | | | |
Granted (2) | 0.5 | | | $ | 56.99 | | | | | |
| Vested | (0.3) | | | $ | 39.37 | | | | | |
| | | | | | | |
| Unvested as of March 31, 2023 | 1.5 | | | $ | 47.30 | | | | | |
| Expected to vest after March 31, 2023 | 1.3 | | | $ | 47.87 | | | 3.1 | | $ | 73 | |
(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of the period multiplied by the number of units) that would have been received by the holders had all the expected to vest RSUs vested. This amount changes based on the market price of LKQ’s common stock.
(2) The weighted average grant date fair value of RSUs granted during the three months ended March 31, 2022 was $48.97.
The fair value of RSUs that vested during the three months ended March 31, 2023 was $16 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
PSUs
The following table summarizes activity related to our performance-based RSUs ("PSUs") under the Equity Incentive Plan for the three months ended March 31, 2023 (in millions, except years and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Unvested as of January 1, 2023 | 0.5 | | | $ | 37.87 | | | | | |
Granted (2) | 0.1 | | | $ | 56.99 | | | | | |
| Vested | (0.2) | | | $ | 32.53 | | | | | |
| | | | | | | |
| Unvested as of March 31, 2023 | 0.4 | | | $ | 46.86 | | | | | |
| Expected to vest after March 31, 2023 | 0.3 | | | $ | 46.22 | | | 1.6 | | $ | 18 | |
(1) The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all the expected to vest PSUs vested. This amount changes based on the market price of LKQ’s common stock and the achievement of the performance metrics relative to the established targets.
(2) Represents the number of PSUs at target payout. The weighted average grant date fair value of PSUs granted during the three months ended March 31, 2022 was $48.92.
The fair value of PSUs that vested during the three months ended March 31, 2023 was $12 million; the fair value of PSUs vested is based on the market price of LKQ stock on the date vested.
Stock-Based Compensation Expense
Pre-tax stock-based compensation expense for RSUs and PSUs totaled $10 million and $13 million for the three months ended March 31, 2023 and 2022, respectively. As of March 31, 2023, unrecognized compensation expense related to unvested RSUs and PSUs was $71 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs differs from current achievement estimates.
Note 13. Earnings Per Share
The following chart sets forth the computation of earnings per share (in millions, except per share amounts):
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| Income from continuing operations | $ | 270 | | | $ | 269 | | | | | |
| Denominator for basic earnings per share—Weighted-average shares outstanding | 267.4 | | | 285.7 | | | | | |
| Effect of dilutive securities: | | | | | | | |
| RSUs | 0.7 | | | 0.8 | | | | | |
| PSUs | 0.2 | | | 0.3 | | | | | |
| | | | | | | |
| Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 268.3 | | 286.8 | | | | |
| Basic earnings per share from continuing operations | $ | 1.01 | | | $ | 0.94 | | | | | |
Diluted earnings per share from continuing operations (1) | $ | 1.01 | | | $ | 0.94 | | | | | |
(1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities.
The number of antidilutive securities was insignificant for all periods presented.
Note 14. Accumulated Other Comprehensive Loss
The components of Accumulated Other Comprehensive Loss are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
| | | Foreign Currency Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized Gain on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive Income (Loss) |
Balance as of January 1, 2023 | | $ | (333) | | | $ | — | | | $ | 11 | | | $ | (1) | | | $ | (323) | |
| Pretax income (loss) | | 57 | | | (22) | | | — | | | — | | | 35 | |
| Income tax effect | | — | | | 5 | | | — | | | — | | | 5 | |
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| | | | | | | | | | |
| Other comprehensive income from unconsolidated subsidiaries | | — | | | — | | | — | | | 3 | | | 3 | |
Balance as of March 31, 2023 | | $ | (276) | | | $ | (17) | | | $ | 11 | | | $ | 2 | | | $ | (280) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | | Foreign Currency Translation | | | | Unrealized Loss on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of January 1, 2022 | | $ | (121) | | | | | $ | (24) | | | $ | (8) | | | $ | (153) | |
| Pretax loss | | (54) | | | | | — | | | — | | | (54) | |
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| Other comprehensive income from unconsolidated subsidiaries | | — | | | | | — | | | 1 | | | 1 | |
| Balance as of March 31, 2022 | | $ | (175) | | | | | $ | (24) | | | $ | (7) | | | $ | (206) | |
During the three months ended March 31, 2023, we reclassified an immaterial amount of gains on our interest rate swaps to Interest expense in the Unaudited Condensed Consolidated Statements of Income.
Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.
Note 15. Supply Chain Financing
We utilize voluntary supply chain finance programs to support our efforts in negotiating payment term extensions with suppliers as part of our effort to improve our operating cash flows. These programs provide participating suppliers the opportunity to sell their LKQ receivables to financial institutions at the sole discretion of both the suppliers and the financial institutions. We are not a party to the agreement between the suppliers and financial institutions. The financial institutions participate in the supply chain financing initiative on an uncommitted basis and can cease purchasing receivables from our suppliers at any time. Our obligation to our suppliers, including amount due and payment date, are not impacted by the supplier’s decision to sell amounts under these agreements. Our payment terms to the financial institutions, including the timing and amount of payments, are unchanged from the original supplier invoice. All outstanding payments owed under the supply chain finance programs with the participating financial institutions are recorded within Accounts payable in our Unaudited Condensed Consolidated Balance Sheets. As of March 31, 2023 and December 31, 2022, we had $240 million and $248 million of Accounts payable outstanding under the arrangements, respectively.
Note 16. Long-Term Obligations
Long-term obligations consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2023 | | December 31, 2022 |
| | Maturity Date | | Interest Rate | | Amount | | Interest Rate | | Amount |
| Senior Unsecured Credit Agreement: | | | | | | | | | | |
| Term loans payable | | January 2026 | | 6.16 | % | | $ | 500 | | | — | % | | $ | — | |
| Revolving credit facilities | | January 2028 | | 4.79 | % | (1) | 1,335 | | | — | % | | — | |
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| Senior Secured Credit Agreement: | | | | | | | | | | |
| Revolving credit facilities | | January 2024 | | — | % | | — | | | 4.24 | % | (1) | 1,786 | |
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| Senior Notes: | | | | | | | | | | |
| Euro Notes (2024) | | April 2024 | | 3.88 | % | | 542 | | | 3.88 | % | | 535 | |
| Euro Notes (2028) | | April 2028 | | 4.13 | % | | 271 | | | 4.13 | % | | 268 | |
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| Notes payable | | Various through October 2030 | | 3.43 | % | (1) | 14 | | | 3.25 | % | (1) | 16 | |
| Finance lease obligations | | | | 4.32 | % | (1) | 61 | | | 3.69 | % | (1) | 48 | |
| Other debt | | | | 3.03 | % | (1) | 17 | | | 2.28 | % | (1) | 9 | |
| Total debt | | | | | | 2,740 | | | | | 2,662 | |
| Less: long-term debt issuance costs | | | | | | (12) | | | | | (6) | |
| | | | | | | | | | |
| Total debt, net of debt issuance costs | | | | | | 2,728 | | | | | 2,656 | |
| Less: current maturities, net of debt issuance costs | | | | | | (44) | | | | | (34) | |
| Long term debt, net of debt issuance costs | | | | | | $ | 2,684 | | | | | $ | 2,622 | |
(1) Interest rate derived via a weighted average
Senior Unsecured Credit Agreement
On January 5, 2023, we and certain other subsidiaries of ours entered into a new credit agreement (the “Senior Unsecured Credit Agreement”) which establishes: (i) an unsecured revolving credit facility of up to a U.S. Dollar equivalent of $2.0 billion, which includes a $150 million sublimit for the issuance of letters of credit and a $150 million sublimit for swing line loans and (ii) an unsecured term loan facility of up to $500 million. Borrowings under the agreement bear interest at the 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. The maturity date of the term loan is January 5, 2026 and may be extended by one additional year. The term loan has no required amortization payments prior to its maturity date. The maturity date for the revolving credit facility is January 5, 2028, and may be extended by up to two additional years in one year increments.
The Senior Unsecured Credit Agreement contains customary covenants for an unsecured credit facility for a company that has debt ratings that are investment grade, such as, requirements to comply with a total leverage ratio and interest coverage ratio, each calculated in accordance with the terms of the Senior Unsecured Credit Agreement, and limits on the Company’s and its subsidiaries’ ability to incur liens and indebtedness.
Proceeds from the Senior Unsecured Credit Agreement were used to repay the outstanding principal amount under our prior Senior Secured Credit Agreement (the "Prior Credit Agreement"), to pay fees and expenses related to the Senior Unsecured Credit Agreement, and for other general corporate purposes.
Senior Secured Credit Agreement
In connection with entering into the Senior Unsecured Credit Agreement noted above, Wells Fargo Bank, National Association and the various lending parties terminated the Prior Credit Agreement and each amendment thereto resulting in an immaterial loss on extinguishment of debt.
Unsecured Senior Notes
Interest on the Euro Notes (2024) and Euro Notes (2028) are payable in arrears on April 1 and October 1 of each year.
Note 17. Derivative Instruments and Hedging Activities
We are exposed to market risks, including the effect of changes in interest rates, foreign currency exchange rates and commodity prices. Under current policies, we may use derivatives to manage our exposure to variable interest rates on our debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Derivative Instruments Designated as Cash Flow Hedges
In February 2023, we entered into interest rate swap agreements to mitigate the risk of changing interest rates on our variable interest rate payments related to borrowings under our Senior Unsecured Credit Agreement. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive a variable interest rate based on term SOFR that matches a contractually specified rate under the Senior Unsecured Credit Agreement. The agreements include a total $400 million notional amount maturing in February 2025 with a weighted average fixed interest rate of 4.63% and a total $300 million notional amount maturing in February 2026 with a weighted average fixed interest rate of 4.23%. Changes in the fair value of the interest rate swaps are recorded in Accumulated other comprehensive loss and reclassified to Interest expense when the hedged interest payments affect earnings. The activity related to the interest rate swaps is classified in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows.
In March 2023, we entered into forward starting interest rate swaps to hedge the risk of changes in interest rates related to forecasted debt issuance to finance a portion of the Uni-Select Acquisition. Under the agreements, we will receive a variable interest rate based on SOFR and pay a fixed rate for the notional amount and term of the forecasted debt issuance. We are required to terminate the swaps at September 30, 2023, and we intend to terminate the agreements upon issuance of the debt if earlier. The forward starting interest rate swaps include a total $600 million notional amount covering interest payments from September 2023 through September 2028 at a rate of 3.20%, and a total $600 million notional amount covering interest payments from September 2023 through September 2033 at a rate of 3.34%. Changes in the fair value of the interest rate swaps are recorded in Accumulated other comprehensive loss and the fair value at the termination date will be reclassified to Interest expense over the term of the debt. The activity related to the forward starting interest swaps will be classified in operating activities in our Unaudited Condensed Consolidated Statements of Cash Flows.
All of our interest rate swap contracts have been executed with counterparties that we believe are creditworthy, and we closely monitor the credit ratings of these counterparties.
As of March 31, 2023, the notional amounts, balance sheet classification and fair values of our derivative instruments designated as cash flow hedges were as follows (in millions) (there were no such hedges as of December 31, 2022):
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| | Notional Amount | | Balance Sheet Caption | | Fair Value - Asset / (Liability) |
| Interest rate swap agreements | | $ | 700 | | | Other noncurrent liabilities | | $ | (9) | |
| Forward starting interest rate swaps | | $ | 1,200 | | | Other accrued expenses | | $ | (13) | |
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The activity related to our cash flow hedges is included in Note 14, "Accumulated Other Comprehensive Loss." As of March 31, 2023, we estimate that an insignificant amount of derivative gains (net of tax) included in Accumulated other comprehensive loss will be reclassified into our Unaudited Condensed Consolidated Statements of Income within the next 12 months.
Derivative Instruments Not Designated as Hedges
To manage the foreign currency exposure related to the Uni-Select Acquisition purchase price (denominated in CAD), we entered into foreign exchange contracts in March to purchase CAD 1.6 billion for approximately $1.2 billion. These contracts are set to expire on September 29, 2023. These contract do not qualify for hedge accounting, and therefore, the contracts are adjusted to fair value through the results of operations as of each balance sheet date. The fair values of these foreign exchange contracts are recorded within Prepaid expenses and other current assets on the Unaudited Condensed Consolidated Balance Sheet as of March 31, 2023, with a corresponding amount recorded to Gains on foreign exchange contracts - acquisition related on the Unaudited Condensed Consolidated Statements of Income for $23 million.
Additionally, we hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability in the cash flows related to inventory purchases denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions. The notional amount and fair value of these contracts at March 31, 2023 and December 31, 2022, along with the effect on our results of operations during the three months ended March 31, 2023 and 2022, were not material.
Gross vs. Net Presentation for Derivative Instruments
While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge and other derivative instruments on a gross basis in our Unaudited Condensed Consolidated Balance Sheets. The impact of netting the fair values of these contracts would result in a decrease to Prepaid expenses and other current assets and Other accrued expenses on our Unaudited Condensed Consolidated Balance Sheets of $6 million at March 31, 2023.
Note 18. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three months ended March 31, 2023, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following tables present information about our financial assets and liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value (in millions):
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| | March 31, 2023 | | December 31, 2022 |
| Assets: | | | | |
| Foreign currency forward contracts (Level 2) | | $ | 23 | | | $ | — | |
| Total Assets | | $ | 23 | | | $ | — | |
| Liabilities: | | | | |
| Contingent consideration liabilities (Level 3) | | $ | 7 | | | $ | 7 | |
| Interest rate swaps (Level 2) | | 22 | | | — | |
| | | | |
| Total Liabilities | | $ | 29 | | | $ | 7 | |
For contingent consideration liabilities, the current portion is included in Other current liabilities and the noncurrent portion is included in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swap agreements and foreign currency forward contracts is presented in Note 17, "Derivative Instruments and Hedging Activities."
We value derivative instruments using a third party valuation model that performs discounted cash flow analysis based on the terms of the contracts and market observable inputs such as current and forward interest rates and current and forward foreign exchange rates.
Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of March 31, 2023, the fair value of the Senior Unsecured Credit Agreement borrowings reasonably approximated the carrying value of $1,835 million. As of December 31, 2022, the fair value of the Prior Credit Agreement borrowings reasonably approximated the carrying value of $1,786 million. As of March 31, 2023 and December 31, 2022, the fair values of the Euro Notes (2024) were approximately $540 million and $535 million, respectively, compared to carrying values of $542 million and $535 million, respectively. As of March 31, 2023 and December 31, 2022, the fair values of the Euro Notes (2028) were $263 million and $254 million, respectively, compared to carrying values of $271 million and $268 million, respectively.
The fair value measurements of the borrowings under the credit agreements are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at March 31, 2023 and December 31, 2022 to assume these obligations. The fair values of the Euro Notes (2024) and Euro Notes (2028) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy.
We have immaterial equity investments recorded in Other noncurrent assets in which we have elected to use net asset value as a practical expedient to value and thus they are excluded from the fair value hierarchy disclosure. We have deferred compensation liabilities which are recorded in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets. These liabilities are determined based on the values of investments in participants' phantom accounts, which is not a fair value measurement, and thus the liabilities are not included in the fair value hierarchy disclosure.
Note 19. Employee Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits.
As of both March 31, 2023 and December 31, 2022, the aggregate funded status of the defined benefit plans was a liability of $72 million, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.
Net periodic benefit cost for our defined benefit plans were insignificant for each of the three-month periods ended March 31, 2023 and 2022. The service cost component is recorded in Selling, general and administrative ("SG&A") expenses, while the other components are recorded to Interest income and other income, net on the Unaudited Condensed Consolidated Statements of Income.
Note 20. Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.
Our effective income tax rate for the three months ended March 31, 2023 was 26.1%, compared to 25.0% for the three months ended March 31, 2022. The increase in the effective tax rate for the three months ended March 31, 2023 compared to the three months ended March 31, 2022 is primarily attributable to the geographic distribution of income and 0.2% resulting from higher non-deductible transaction costs in 2023, mostly related to the Uni-Select Acquisition. For the three months ended March 31, 2023, the effective tax rate was decreased by 0.4% compared to the three months ended March 31, 2022, related primarily to net favorable discrete items including excess tax benefits from stock-based payments.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was signed into law in the United States. The IRA, among other provisions, enacted a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022 and a 1% excise tax on the repurchase of corporate stock after December 31, 2022. We do not currently expect the corporate minimum tax provisions of the IRA to have a material impact on our financial results. The impact of the excise tax provisions will be dependent upon the volume of any future stock repurchases.
Note 21. Segment and Geographic Information
We have four operating segments: Wholesale - North America, Europe, Specialty and Self Service, each of which is presented as a reportable segment.
The segments are organized based on a combination of geographic areas served and type of product lines offered. The segments are managed separately as the businesses serve different customers and are affected by different economic conditions. Wholesale - North America and Self Service have similar economic characteristics and have common products and services, customers and methods of distribution. We are reporting these operating segments separately to provide greater transparency to investors.
The following tables present our financial performance by reportable segment for the periods indicated (in millions):
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| Wholesale - North America | | Europe | | Specialty | | Self Service | | Eliminations | | Consolidated |
| Three Months Ended March 31, 2023 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 1,229 | | | $ | 1,555 | | | $ | 396 | | | $ | 169 | | | $ | — | | | $ | 3,349 | |
| Intersegment | — | | | — | | | 1 | | | — | | | (1) | | | — | |
| Total segment revenue | $ | 1,229 | | | $ | 1,555 | | | $ | 397 | | | $ | 169 | | | $ | (1) | | | $ | 3,349 | |
| Segment EBITDA | $ | 252 | | | $ | 151 | | | $ | 31 | | | $ | 22 | | | $ | — | | | $ | 456 | |
Total depreciation and amortization (1) | 19 | | | 34 | | | 8 | | | 4 | | | — | | | 65 | |
| Three Months Ended March 31, 2022 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 1,201 | | | $ | 1,488 | | | $ | 460 | | | $ | 199 | | | $ | — | | | $ | 3,348 | |
| Intersegment | — | | | — | | | 1 | | | — | | | (1) | | | — | |
| Total segment revenue | $ | 1,201 | | | $ | 1,488 | | | $ | 461 | | | $ | 199 | | | $ | (1) | | | $ | 3,348 | |
| Segment EBITDA | $ | 218 | | | $ | 131 | | | $ | 58 | | | $ | 40 | | | $ | — | | | $ | 447 | |
Total depreciation and amortization (1) | 19 | | | 34 | | | 8 | | | 4 | | | — | | | 65 | |
(1) Amounts presented include depreciation and amortization expense recorded within Cost of goods sold, SG&A expenses and Restructuring and transaction related expenses.
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 excluding discontinued operations; depreciation, amortization; interest (which includes 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).
The table below provides a reconciliation of Net Income to Segment EBITDA (in millions):
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Net income | $ | 270 | | | $ | 273 | | | | | |
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| Subtract: | | | | | | | |
| Net income from discontinued operations | — | | | 4 | | | | | |
| Net income from continuing operations | 270 | | 269 | | | | |
| Add: | | | | | | | |
| Depreciation and amortization - SG&A | 58 | | | 59 | | | | | |
| Depreciation and amortization - cost of goods sold | 7 | | | 6 | | | | | |
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| Interest expense, net of interest income | 33 | | | 15 | | | | | |
| Loss on debt extinguishment | 1 | | | — | | | | | |
| Provision for income taxes | 94 | | | 89 | | | | | |
| EBITDA | 463 | | | 438 | | | | | |
| Subtract: | | | | | | | |
Equity in earnings of unconsolidated subsidiaries (1) | 3 | | | 2 | | | | | |
Gains on foreign exchange contracts - acquisition related (2) | 23 | | | — | | | | | |
| Equity investment fair value adjustments | (1) | | | (1) | | | | | |
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| Add: | | | | | | | |
Restructuring and transaction related expenses (3) | 18 | | | 3 | | | | | |
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| Losses on previously held equity interests | — | | | 1 | | | | | |
Direct impacts of Ukraine/Russia conflict (4) | — | | | 6 | | | | | |
| Segment EBITDA | $ | 456 | | | $ | 447 | | | | | |
(1) Refer to Note 8, "Equity Method Investments" for further information.
(2) Refer to Note 3, "Uni-Select Acquisition" and Note 17, "Derivative Instruments and Hedging Activities" for further information.
(3) Refer to Note 11, "Restructuring and Transaction Related Expenses" for further information.
(4) Adjustments include provisions for and subsequent adjustments to reserves for asset recoverability (receivables and inventory) and expenditures to support our employees and their families in Ukraine.
The following table presents capital expenditures by reportable segment (in millions):
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| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
| Capital Expenditures | | | | | | | |
Wholesale - North America | $ | 20 | | | $ | 29 | | | | | |
| Europe | 33 | | | 23 | | | | | |
| Specialty | 13 | | | 4 | | | | | |
| Self Service | 4 | | | 3 | | | | | |
| Total capital expenditures | $ | 70 | | | $ | 59 | | | | | |
The following table presents assets by reportable segment (in millions):
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| March 31, 2023 | | December 31, 2022 |
| Receivables, net of allowance for credit losses | | | |
Wholesale - North America | $ | 402 | | | $ | 351 | |
| Europe | 700 | | | 547 | |
| Specialty | 144 | | | 92 | |
| Self Service | 11 | | | 8 | |
| Total receivables, net of allowance for credit losses | 1,257 | | | 998 | |
| Inventories | | | |
Wholesale - North America | 822 | | | 822 | |
| Europe | 1,442 | | | 1,418 | |
| Specialty | 416 | | | 469 | |
| Self Service | 53 | | | 43 | |
| Total inventories | 2,733 | | | 2,752 | |
| Property, plant and equipment, net | | | |
Wholesale - North America | 500 | | | 505 | |
| Europe | 574 | | | 547 | |
| Specialty | 101 | | | 94 | |
| Self Service | 90 | | | 90 | |
| Total property, plant and equipment, net | 1,265 | | | 1,236 | |
| Operating lease assets, net | | | |
Wholesale - North America | 545 | | | 541 | |
| Europe | 472 | | | 466 | |
| Specialty | 87 | | | 85 | |
| Self Service | 145 | | | 135 | |
| Total operating lease assets, net | 1,249 | | | 1,227 | |
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| Other unallocated assets | 6,004 | | | 5,825 | |
| Total assets | $ | 12,508 | | | $ | 12,038 | |
We report net receivables; inventories; net property, plant and equipment; and net operating lease assets by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid expenses and other current and noncurrent assets, goodwill, other intangibles and equity method investments.
Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries. Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India.
The following table sets forth our tangible long-lived assets by geographic area (in millions):
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| March 31, 2023 | | December 31, 2022 |
Long-lived assets | | | |
| United States | $ | 1,386 | | | $ | 1,371 | |
| Germany | 302 | | | 290 | |
| United Kingdom | 263 | | | 256 | |
| Other countries | 563 | | | 546 | |
| Total long-lived assets | $ | 2,514 | | | $ | 2,463 | |