UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20192022
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission File Number: 000-50404
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LKQ CORPORATION
(Exact name of registrant as specified in its charter)
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| Delaware | | 36-4215970 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| 500 West Madison Street, | Suite 2800 | | |
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| Chicago, | Illinois | | | 60661 |
| (Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (312) (312) 621-1950
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | |
| Common Stock, par value $.01 per share | LKQ | NASDAQThe Nasdaq Global Select Market | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | Accelerated filer | ☐ | Emerging growth company | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
As of June 30, 2019,2022, the aggregate market value of common stock outstanding held by stockholders who were not affiliates (as defined by regulations of the Securities and Exchange Commission) of the registrant was approximately $8.2$13.5 billion (based on the closing sale price on the NASDAQThe Nasdaq Global Select Market on such date). The number of outstanding shares of the registrant's common stock as of February 21, 202017, 2023 was 307,148,085.267,065,154.
Documents Incorporated by Reference
Those sections or portions of the registrant's proxy statement for the Annual Meeting of Stockholders to be held on May 12, 2020,9, 2023, described in Part III hereof, are incorporated by reference in this report.
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TABLE OF CONTENTS
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| Item | | Page |
| PART I | | |
| Item 1. | | |
| Item 1A. | | |
| Item 1B. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| PART II | | |
| Item 5. | | |
| Item 6. | | |
| Item 7. | | |
| Item 7A. | | |
| Item 8. | | |
| Item 9. | | |
| Item 9A. | | |
| Item 9B. | | |
| Item 9C. | | |
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| PART III | | |
| Item 10. | | |
| Item 11. | | |
| Item 12. | | |
| Item 13. | | |
| Item 14. | | |
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| PART IV | | |
| Item 15. | | |
| Item 16. | | |
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PART I
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Statements and information in this Annual Report on Form 10-K that are not historical are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are made pursuant to the “safe harbor” provisions of such Act.
Forward-looking statements include, but are not limited to, statements regarding our outlook, guidance, expectations, beliefs, hopes, intentions and strategies. Words such as "may," "will," "plan," "should," "expect," "anticipate," "believe," "if," "estimate," "intend," "project" and similar words or expressions are used to identify these forward-looking statements. These statements are subject to a number of risks, uncertainties, assumptions and other factors including those identified below.that may cause our actual results, performance or achievements to be materially different. All forward-looking statements are based on information available to us at the time the statements are made. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should not place undue reliance on our forward-looking statements. Actual events or results may differ materially from those expressed or implied in the forward-looking statements. The risks, uncertainties, assumptions and other factors that could cause actual results to differ from the results predicted or implied by our forward-looking statements include the following (not necessarily in order of importance):
changes in economic, political and social conditionsthose identified in the U.S. and other countriessection entitled "Risk Factors" in which we are located or do business, including the U.K. withdrawal from the European Union (also known as Brexit), and the impact of these changes on our businesses, the demand for our products and our ability to obtain financing for operations;
increasing competition in the automotive parts industry (including parts sold on online marketplaces and the potential competitive advantage to original equipment manufacturers ("OEMs") with "connected car" technology);
fluctuations in the pricing of new OEM replacement products;
changes in the level of acceptance and promotion of alternative automotive parts by insurance companies and vehicle repairers;
changes to our business relationships with insurance companies or changes by insurance companies to their business practices relating to the use of our products;
our ability to identify acquisition candidates at reasonable prices and our ability to successfully divest underperforming businesses;
our ability to integrate, realize expected synergies, and successfully operate acquired companies and any companies acquired in the future, and the risks associated with these companies;
the implementation of a border tax or tariff on imports and the negative impact on our business due to the amount of inventory we import;
restrictions or prohibitions on selling certain aftermarket products through enforcement by OEMs or government agencies of intellectual property rights;
restrictions or prohibitions on importing certain aftermarket products by border enforcement agencies based on, among other things, intellectual property infringement claims;
variations in the number of vehicles manufactured and sold, vehicle accident rates, miles driven, and the age profile of vehicles in accidents;
the increase of accident avoidance systems being installed in vehicles;
the potential loss of sales of certain mechanical parts due to the rise of electric vehicle sales;
fluctuations in the prices of fuel, scrap metal and other commodities;
changes in laws or regulations affecting our business;
higher costs and the resulting potential inability to service our customers to the extent that our suppliers decide to discontinue business relationships with us;
price increases, interruptions or disruptions to the supply of vehicle parts from aftermarket suppliers and vehicles from salvage auctions;
changes in the demand for our products and the supply of our inventory due to severity of weather and seasonality of weather patterns;
the risks associated with operating in foreign jurisdictions, including foreign laws and economic and political instabilities;
declines in the values of our assets;
additional unionization efforts, new collective bargaining agreements, and work stoppages;
our ability to develop and implement the operational and financial systems needed to manage our operations;
interruptions, outages or breaches of our operational systems, security systems, or infrastructure as a result of attacks on, or malfunctions of, our systems;
costs of complying with laws relating to the security of personal information;
product liability claims by the end users of our products or claims by other parties who we have promised to indemnify for product liability matters;
costs associated with recalls of the products we sell;
potential losses of our right to operate at key locations if we are not able to negotiate lease renewals;
inaccuracies in the data relating to our industry published by independent sources upon which we rely;
currency fluctuations in the U.S. dollar, pound sterling and euro versus other currencies;
our ability to obtain financing on acceptable terms to finance our growth;
our ability to satisfy our debt obligations and to operate within the limitations imposed by financing arrangements;
changes to applicable U.S. and foreign tax laws, changes to interpretations of tax laws, and changes in our mix of earnings among the jurisdictions in which we operate; and
disruptions to the management and operations of our business and the uncertainties caused by activist investors.
Other matters set forth in this Annual Report may also cause our actual results to differ materially from our forward-looking statements, including the risk factors disclosed in ItemPart 1A of this Annual Report.Report on Form 10-K.
Copies of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge through our website (www.lkqcorp.com) as soon as reasonably practicable after we electronically file the material with, or furnish it to, the Securities and Exchange Commission.
ITEM 1. BUSINESS
BUSINESS
OVERVIEW
LKQ Corporation ("LKQ", the "Company" or "we"), a member of the "Company"Standard & Poor's 500 Stock Index ("S&P 500 Index"), is a global distributor 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.
Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by original equipment manufacturers ("OEMs"); new products produced by companies other than the OEMs, which are referred to as aftermarket products; recycled products obtained from salvage and total loss vehicles; recycled products that have been refurbished; and recycled products that have been remanufactured. We distribute a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical products; recycled collision and mechanical products; refurbished collision products such as wheels, bumper covers and lights; and remanufactured engines and transmissions. Collectively, we refer to the four sources that are not new OEM products as alternative parts.
We are a leading provider of alternative vehicle collision replacement products and alternative vehicle mechanical replacement products, with our sales, processing, and distribution facilities reaching most major markets in the United States and Canada. We are also a leading provider of alternative vehicle replacement and maintenance products in Germany, the United Kingdom Germany,("U.K."), the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland,Austria, Slovakia, Austria,Poland, and various other European countries. In addition to our wholesale operations, we operate self service retail facilities across the U.S. that sell recycled automotive products from end-of-life vehicles. We are also a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada.
We are organized into four operating segments: Wholesale - North America, Europe, Specialty,America; Europe; Specialty; and Self Service. We aggregate ourService, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segments into onesegment results were separated from the previous reportable segment, North America, resulting in three reportable segments:and each of Wholesale - North America Europe and Specialty.Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change. See Note 16,24, "Segment and Geographic Information" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for financial information by reportable segment and by geographic region.
HISTORY
We were initially formed in 1998 through the combination of a number of wholesale recycled products businesses and subsequently expanded through internal development and acquisitions of aftermarket, recycled, refurbished, and remanufactured product suppliers and manufacturers; self service retail businesses; and specialty vehicle aftermarket equipment and accessories suppliers. We have completed approximately 280300 business acquisitions. Our most significant acquisitions include:
•2007 acquisition of Keystone Automotive Industries, Inc., which, at the time of acquisition, was the leading domestic distributor of aftermarket products, including collision replacement products, paint products, refurbished steel bumpers, bumper covers and alloy wheels.
•2011 acquisition of Euro Car Parts Holdings Limited ("ECP"), a vehicle mechanical aftermarket parts distribution company operating in the United Kingdom.U.K. This acquisition served as our entry into the European automotive aftermarket business, from which we have expanded our European footprint through organic growth and subsequent acquisitions.
•2013 acquisition of Sator Beheer B.V. ("Sator",Sator," now known as Fource), a vehicle mechanical aftermarket parts distribution company based in the Netherlands, with operations in the Netherlands, Belgium and Northern France. This acquisition allowed us to further expand our geographic presence into continental Europe.
•2014 acquisition of Keystone Automotive Holdings, Inc. (“("Keystone Specialty”Specialty"), which expanded our product offering and increased our addressable market to include specialty vehicle aftermarket equipment and accessories.
•2016 acquisition of Rhiag-Inter Auto Parts Italia S.r.l. (“Rhiag”("Rhiag"), a distributor of aftermarket spare parts for passenger cars and commercial vehicles in Italy, Czech Republic, Slovakia, Switzerland, Hungary, Romania, Ukraine, Bulgaria, Poland and Spain. This acquisition expanded our geographic presence in continental Europe.
•2018 acquisition of Stahlgruber GmbH (“Stahlgruber”("Stahlgruber"), a wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. This acquisition expanded our geographic presence in continental Europe and serves as an additional strategic hub for our European operations.
Further information regarding our recent acquisitions is included in Note 2, "Business Combinations"
Since 2017, we have divested certain businesses due to the consolidated financial statements in Part II, Item 8ongoing rationalization of this Annual Report on Form 10-K.our asset base by divesting certain non-core and/or lower margin businesses, and mandatory divestiture requirements due to certain acquisitions. Two of these divestitures have been reported as discontinued operations.
STRATEGY
Our mission is to be the leading global value-added sustainable distributor of vehicle parts and accessories by offering our customers the most comprehensive, available and cost-effective selection of part solutions while building strong partnerships with our employees and the communities in which we operate.
From 1998 to 2018, the Company focused on consolidating the alternative and specialty vehicle parts markets to develop scale across an extensive network of salvage and aftermarket facilities throughout North America and on building a pan-European aftermarket parts distributor in the large, fragmented European market. This focus created a leading distributor of aftermarket collision, salvage collision, and major mechanical parts in North America, a leading distributor of specialty automotive and RV parts and accessories in North America, and a leading distributor of aftermarket mechanical parts in Europe.
Beginning in 2019, we reduced our focus on growth through corporate development and increased our focus on driving higher levels of free cash flow, profitable organic growth, margin expansion and talent development.
In our Europe segment, we are implementing a multi-year business transformation by establishing a Pan-European organization and operating model. The purpose of this multi-year “1 LKQ Europe” program is to create one single operation by integrating the various acquisitions the Company has completed across the European continent since entering the market in 2011. 1 LKQ Europe will leverage the full potential of our leading European scale position as a single entity in areas such as procurement, product strategy, revenue optimization, digitization, and value-added services for our customers.
We have four primary strategic pillars to build economic value: growth throughgrowing our diversified product and service offerings; growth throughexpanding our geographic expansion; adaptationfootprint; adapting to evolving technology; and rationalization ofrationalizing our asset base to enhance margins and return on capital.base. We believe our supplyextensive distribution network, with a deep and broad inventory of quality alternative collision and mechanical repair products and specialty vehicle aftermarket products, high fulfillment rates, delivery reliability, and superior customer service, providesprovide us with a competitive advantage.advantages. To execute our strategy, we are focusedfocus on a number of key areas, including:
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• | Extensive distribution network. We have invested significant capital to develop a network of alternative and specialty vehicle parts facilities across our operating segments. Additionally, our ability to move inventory throughout our distribution networks increases the availability of our products and helps us to fill a relatively high percentage of our customers’ requests. In order to expand our distribution network, we will continue to seek to enter new markets and to improve penetration through both organic development and acquisitions. We will continue to seek opportunities to leverage the distribution network by delivering more parts through our existing network. We believe our North America segment has the largest distribution network of alternative vehicle parts and accessories for the automotive collision repair market in North America. In our Europe segment, we are implementing a similar strategy to our North America operations by establishing a Pan-European distribution network. We currently have operations in over 20 different European countries, which we believe represents the broadest and largest footprint in the aftermarket industry in Europe. On a global basis, we operate approximately 1,700 facilities as part of our distribution network.
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• | Broad product offering. The breadth and depth of our inventory across all of our operating segments reinforces our ability to provide a “one-stop” solution for our customers’ alternative vehicle replacement, maintenance, and specialty vehicle product needs.
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• | High fulfillment rates. We manage local inventory levels to improve delivery and maximize customer service. Improving local order fulfillment rates reduces transfer costs and delivery times, and improves customer satisfaction.
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• | Strong business relationships. We have developed business relationships with key constituents, including customers, automobile insurance companies, suppliers and other industry participants in North America, Europe, and Asia.
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• | Acquisitions. The primary objective of our acquisitions is to expand our presence to new or adjacent geographic markets and to expand into other product lines and businesses that may benefit from our operating strengths, in each case with the aim of increasing the size of our addressable market. After completing an acquisition, we focus on integrating the company with our existing business to provide additional value to the combined entity through cost savings and synergies, such as logistics cost synergies resulting from integration with our existing distribution network, administrative cost savings, shared procurement, and cross-selling opportunities.
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• | Technology driven business processes. We focus on technology development to support our competitive advantage. We have built advanced data analytics capabilities and data assets and believe that we can more cost effectively leverage our data to make better business decisions than our smaller competitors.
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• | Adaptation to evolving technology in the automotive industry. We are committed to monitoring and adapting our business to the technological changes in the automotive industry. We have a forward-looking strategy and innovation team that helps us assess the potential opportunities and risks associated with several areas including, but not limited to, e-commerce, accident avoidance systems, vehicle connectivity, autonomous vehicles, electric vehicles and ride-sharing trends.
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• | Rationalized asset base. We have a portfolio review process and are continually analyzing and executing initiatives to reduce our operating costs and drive efficiencies.
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•Leading distribution network. We have invested significant capital to develop an extensive network of alternative and specialty vehicle parts facilities across the geographies we serve in our operating segments. Our ability to move inventory throughout our distribution networks increases the availability of our products and allows us to fill a higher percentage of our customers’ requests. In order to expand our distribution network, we may seek to enter new markets through geographic expansion, organic development, or tuck-in acquisitions. We believe our Wholesale - North America segment has the largest distribution network of alternative vehicle parts and accessories for the vehicle collision repair market in North America. We currently have operations in over 20 different European countries, which we believe represents the broadest and largest footprint in the aftermarket industry in Europe. On a global basis, we operate approximately 1,450 facilities.
•Broad product and service offerings. The breadth and depth of our inventory across our operating segments reinforces our ability to provide a "one-stop" solution for our customers’ alternative vehicle replacement, maintenance, diagnostic services, and specialty vehicle product needs.
•High fulfillment rates. We manage our inventory to optimize stocking levels in each of our operating segments. Maintaining industry leading fill rates, coupled with best-in-class service levels, is critical to our customers' productivity and their focus on reducing cycle time for repairs.
•Strong business relationships. We have developed business relationships with key constituents, including customers, vehicle insurance companies, multiple-location vehicle repair operations, vendor partners and other industry participants in North America, Europe, and Asia. We monitor the start-up and venture capital landscape to develop business relationships and enhance our portfolio of potential offerings.
•Technology driven business processes. We focus on technology development to expand our competitive advantage. We have built data analytics capabilities and data assets and believe that we can more cost effectively leverage our data to make better business decisions than most of our competitors.
•Adaptation to evolving technology in the vehicle industry. We are committed to monitoring and adapting our business to the technological changes in the vehicle industry. We have a forward-looking strategy and innovation team that helps us monitor megatrends and assess the potential opportunities and risks associated with several areas including, but not limited to, electric vehicles, advanced driver assistance systems, vehicle connectivity, autonomous vehicles, e-commerce and ride-sharing trends. Leveraging our data and market position, we utilize artificial intelligence ("AI") to make more accurate purchase decisions, therefore allowing us to better control our inventory. We continue to look for and invest in opportunities to further leverage AI and neural networks for more effective procurement methods.
•Rationalized asset base. We have a portfolio review process and are continually analyzing and executing initiatives to reduce our operating costs and drive efficiencies, including brand rationalization, rightsizing efforts, and productivity initiatives with the underlying focus to drive higher levels of margins.
•Environmental, Social and Governance ("ESG"). We are focused on driving our ESG strategy and message to multiple stakeholders, both internally and externally. Our ESG strategy is focused on employee engagement, diversity, equity and inclusion, carbon footprint and recycling, supply chain and community support.
•Employees and communities. We focus on employees and communities through continuous improvement in our ESG initiatives. Our top priority is the health and safety of our employees, customers and communities in which we operate.
We will measure our progress toward achieving our strategic goals based on our performance with respect to the following key priorities: profitable growth, cash flow generation, European integration, and talent acquisition. We have implemented various improvement plans to enhance our operational efficiencies and actively monitor these and other important operating metrics.
WHOLESALE - NORTH AMERICA SEGMENT
Our Wholesale - North America segment, is composed of wholesale operations, which consists of aftermarket and salvage operations, and self service retail operations. During 2019, we acquired two diagnostic and repair services businesses.
Wholesale Operations
Inventory
Our wholesale operations in North America sellsells five product types (aftermarket, OEM recycled, OEM remanufactured, OEM refurbished and, to a lesser extent, new OEM parts) to professional collision and mechanical automobilevehicle repair businesses, which represents the source of the majority of the revenue generated by the segment.
repair businesses. As the profile and complexity of vehicles being repaired evolves, we have expanded and continue to expand our offerings to customers. In recent years, we have begun to offer on-site mobile and remote diagnostics services through our brand known as Elitek Vehicle Services. Additionally, we began offering proprietary hybrid battery reconditioning and installation services which create a more reliable hybrid battery while also extending the battery's useful life. We expect these areas, as well as, our overall product and service offerings to grow in the coming years as the number of technological components in vehicles increases.
Inventory
Our principal aftermarket product types consist of those most frequently damaged in collisions, including bumper covers, automotive body panels, lights and, prior to the divestiture of PGW Auto Glass ("PGW"), automotive glass products such as windshields. Platinum Plus is our exclusive product line offered under the Keystone brand of aftermarket products. We also developed a product line called "Value Line" for more value conscious, often self-pay, consumers. Certain of our products are certified by an independent organization, the Certified Automotive Parts Association (“CAPA”("CAPA"). CAPA is an association that evaluates the quality of aftermarket collision replacement products compared to OEM collision replacement products. We also developed a product line called "Value Line" for more value conscious, often self-pay, consumers. Our salvage products include both mechanical and collision parts, including engines; transmissions; door assemblies; sheet metal products such as trunk lids, fenders and hoods; lights; and bumper assemblies.
The aftermarket products we distribute are purchased from independent manufacturers and distributors located primarily in North America and Asia, principally Taiwan. In 2019,2022, approximately 38%46% of our aftermarket purchases were made from our top 4six vendors, with our largest vendor providing approximately 16%14% of our annual inventory purchases.purchases for the Wholesale - North America segment. We believe we are one of the largest customers of each of these suppliers. Outside of this group, no other supplier provided more than 5%4% of our supply of aftermarket products in 2019.2022. We purchased approximately 49%51% of our aftermarket products in 2019 directly from manufacturers in Taiwan and other Asian countries. Approximately 48% of our aftermarket products were purchased2022 from vendors located in the U.S.; however, we believe the majority of these products were manufactured in Taiwan, Mexico or other foreign countries. Approximately48% of our aftermarket products were purchased directly from manufacturers in Taiwan and other Asian countries.
Within our wholesale operations, we focus our procurement on products that are in the most demand, based on a number of factors such as historical sales records of vehicles by model and year, customer requests, and projections of future supply and demand trends. Because lead times may be 40 days or more on imported aftermarket products, sales volumes and in-stock inventory are important factors in the procurement process.
We procure recycled products for our wholesale operations by acquiring total loss vehicles, typically sold at regional salvage auctions, and then dismantling and inventorying the parts. The availability and pricing of the salvage vehicles we procure for our wholesale recycled products operations may be impacted by a variety of factors, including the production level of new vehicles and the percentage of damaged vehicles declared total losses. Our bidding specialists are equipped with a proprietary software application that allows them to compare the vehicles at salvage auctions against our current inventory levels, historical demand, and recent average selling prices to arrive at an estimated maximum bid. Additionally, we have embedded AI technology into our salvage procurement software to assist in the procurement decision making process, reducing the amount of labor and human error in the process.
Information Technology Systems
In our aftermarket operations, we use a third party enterprise management system and other third party software packages to leverage the centralized data and information that a single system provides, such as a data warehouse to conduct enhanced analytics and reporting, an integrated budgeting system, an electronic data interchange tool, and E-commerce tools to enhance our online business-to-business initiatives - OrderKeystone.com and Keyless.
Our wholesale recycled product locations in North America operate an internally-developed, proprietary enterprise management system called LKQX. We believe that the use of a single system across all of our wholesale recycled product operations helps facilitate the sales process; allows for continued implementation of standard operating procedures; and improves training efficiency, employee transferability, access to our national inventory database, management reporting and data storage. The system also supports an electronic exchange process for identifying and locating parts at other select recyclers and facilitates brokered sales to fill customer orders for items not in stock.
Scrap and Other Materials
Our salvage operations generate scrap metal and other materials that we sell to metals recyclers. Vehicles that have been dismantled for recycled products and "crush only" end-of-life vehicles acquired from other companies are typically crushed using equipment on site. In other cases, we will hire mobile crushing equipment to crush the vehicles before they are transported to shredders and scrap metal processors. Damaged and unusable wheel cores are melted in our aluminum furnace
and sold to consumers of aluminum ingot and sow for the production of various automotive products, including wheels. We also extract and sell the precious metals contained in certain of our recycled parts such as catalytic converters.
Customers
We sell our products to wholesale customers that include collision and mechanical repair shops and new and used car dealerships, as well as to retail customers. The majority of these customers tend to be individually-owned small businesses, although the number of independent and dealer-operated collision repair facilities has declined over the last decade, as regional or national multiple-locationmultiple shop operators have increased their geographic presence through consolidation.
Automobile insurance companies affect the demand for our collision products; while insurance companies do not pay for our products directly, they ultimately pay for the repair costs of insured vehicles in excess of any deductible amount. As a result, insurance companies often influence the types of products used in a repair. The use of our alternative products instead of new OEM products provides a direct benefit to insurance companies by lowering the cost of repairs, by often decreasing the
time required to return the repaired vehicle to the customer, and by providing a replacement product that is of high quality and comparable performance to the part replaced.
Our sales personnel are encouraged to promote LKQ to customers as a “one-stop shop”"one-stop shop" by offering comparable options from our other product lines if the desired part is not in stock. To support these efforts, we have provided our sales staff withhas access to both recycled and aftermarket sales systems to encourage cross selling.
To better serve our customers, we take a consolidated approach to the electronic sale of wholesale products in our Wholesale - North America segment. A full suite of e-commerce services is available to approved partners that helps us improve order accuracy, reduce return rate and better fit our customer workflow. Using these services in coordination with our partners, products can be searched, priced and ordered without leaving the customers' own operating systems.
Distribution
We have a distribution network of warehouses and cross dock facilities, which allows us to develop and maintain our service levels with local repair shops while providing industry leading fulfillment rates that are made possible by our nationwide presence. Our delivery fleet utilizes a third party software provider to optimize delivery routes and to track the progress of delivery vehicles throughout their runs. This third party software connects into each of our wholesale systems to allow a single interface for our management team to have a single delivery to our customer, regardless of the product line or operating system. Our local presence allows us to provide daily deliveries as required by our customers, using drivers who routinely deliver to the same customers. Our sales force and local delivery drivers develop and maintain critical personal relationships with the local repair shops that benefit from access to our wide selection of products, which we are able to offer as a result of our regional inventory network. We operate a delivery fleet of medium-sized trucks and smaller trucks and vans, which deliver multiple product types on the same delivery routes to help minimize distribution costs, and improve customer service.service and reduce environmental impacts.
Competition
We consider all suppliers of vehicle collision and mechanical products to be competitors, including aftermarket suppliers, recycling businesses, refurbishing operations, parts remanufacturers, OEMs and internet-based suppliers. We compete with alternative parts distributors on the basis of our nationwide distribution system, our product lines and inventory availability, customer service, our relationships with insurance companies, and to a lesser extent, price; we compete with OEMs primarily on the basis of price and, to a lesser extent, on service and product quality. We do not consider retail chains that focus on the do-it-yourself market to be our direct competitors since many of our wholesale product sales are influenced by insurance companies, who ultimately pay for the repair costs of insured vehicles in excess of any deductible amount, rather than the end user, and there is limited overlap in the products that we sell.
Information Technology Systems
In our aftermarket operations, we use a third party enterprise management system and other third party software packages for an electronic data interchange tool, and e-commerce tools to enhance our online business-to-business initiatives - OrderKeystone.com and Keyless.
Our wholesale recycled product locations in North America operate an internally-developed, proprietary enterprise management system called LKQX. We believe that the use of a single system across a majority of our wholesale recycled product operations helps facilitate the sales process; allows for continued implementation of standard operating procedures; and improves training efficiency, employee transferability, access to our national inventory database, management reporting and data storage. The system also supports an electronic exchange process for identifying and locating parts at other select recyclers and facilitates brokered sales to fill customer orders for items not in stock.
We also use other third party software packages for both businesses to leverage the centralized data and information that a single system provides, such as a data warehouse to conduct enhanced analytics and reporting, and an integrated budgeting system.
EUROPE SEGMENT
Our Europe segment operates in over 20 countries and was built on four key acquisitions: ECP (2011), Sator (2013), Rhiag (2016) and Stahlgruber (2018). Additionally, in 2014 we expanded our European segment to include wholesale recycling operations through our acquisition of a business with salvage and vehicle repair facilities in Sweden and Norway, and in 2016, we acquired an equity investment in MEKO AB ("Mekonomen"), the leading independent car parts distributor in the Nordic region of Europe. Mekonomen is independent of our existing European operations, but we have identified areas where the companies can work together in a mutually beneficial manner, primarily related to procurement and category management.
1 LKQ Europe
Our European strategy, facilitated through our 1 LKQ Europe program, is to leverage the strengths of acquired businesses, reduce procurement costs by consolidating and streamlining our product offerings, and combine into an integrated organization driving for functional excellence with the necessary technology linking our business processes with our customers and suppliers. As part of our 1 LKQ Europe program, we are integrating our European operations as we optimize purchasing, warehousing, systems, logistics and back-office functions, and align our private label products across the segment. We are reorganizing our non-customer-facing teams and support systems through various projects including the implementation of a common Enterprise Resource Planning ("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.
Inventory
Our inventory is primarily composed of mechanical aftermarket parts for the repair of vehicles 3 to 15 years old. Our top selling products include brake pads, discs and sensors, clutches, electrical products such as spark plugs and batteries, steering and suspension products, filters, and oil and automotive fluids. We currently have over 900,000 unique part numbers. Our goal is to reduce the complexity of our product portfolio, reduce the number of parts offered and reduce the number of suppliers. We have phased out or replaced more than 150 brands in recent years. We believe that more than 70% of our product portfolio existing at the start of the program in 2019 could be reviewed for possible reduction.
In 2022, our top supplier represented 8% of our aftermarket inventory purchases for our Europe segment. Only one other supplier comprised more than 5% of our purchases. Further, we purchased 92% of our products from companies in Europe, and 70%and 18% of our total inventory purchases were made in euros and pounds sterling, respectively in 2022. As part of our 1 LKQ Europe initiatives, we are expanding the distribution of our private label products. Our key strategic private label products are Optimal, ERA and MPM Oils.
In our Nordic operations, we purchase severely damaged or total loss vehicles from insurance companies, which are transferred to our dismantling facilities or sold to other third party dismantlers.
Customers
We primarily operate a two-step (i.e., direct sales to repair shop customers) distribution model in Europe, although certain businesses located in Italy, the Netherlands, Germany, Switzerland, and Hungary operate partially a three-step (i.e., sales to distributors who in turn sell to repair shop customers) distribution model. In our two-step operations, we sell the majority of our products to commercial customers primarily consisting of professional repairers, including both independent mechanical repair shops and collision repair shops. In our three-step operations, we sell products to wholesale distributors or jobbers. In addition to our sales to repair shops and wholesale distributors, we generate a portion of our revenue through sales to retail customers from e-commerce platforms and from point of sale transactions at the branch locations.
Distribution
Our European operations employ a distribution model in which inventory is stored at national or international distribution centers or regional hubs, with fast moving product stored at branch locations. The large distribution centers regularly restock the smaller branches and hubs and hold slower moving items, helping us to improve fulfillment rates. Product is moved through the distribution network on our trucks, vans or via common carrier. We have built a new central distribution center in the Netherlands, similar to our central distribution centers in Tamworth, England and Sulzbach-Rosenberg, Germany, that will allow us to consolidate multiple regional distribution centers. We believe that our distribution network is larger than those of any of our principal competitors in Europe.
Competition
We view all suppliers of replacement repair products as our competitors, including other alternative parts suppliers and OEMs and their dealer networks. We face significant competition in many markets where even smaller competitors can compete on price and service, and the OEMs compete via ties to brand loyalty of the consumer while also remaining competitive on price, service and availability. We believe we have been able to distinguish ourselves from other alternative parts suppliers primarily through our distribution network, efficient stock management systems and proprietary technology, which allows us to deliver our products quickly, as well as through our product lines and inventory availability, pricing, and service reliability.
Information Technology Systems
Our aftermarket operations in Europe use various information technology ("IT") systems. Our systems are complex and designed to perform a variety of tasks (depending on the market), including but not limited to customer orders, inventory management, warehouse and logistics, and financial reporting. Certain of our IT systems can interface with the respective IT systems of our repair shop customers, which enables our customers to identify and order the part required for the repair. As part of our 1 LKQ Europe strategy, we initiated a multi-year program to develop and implement a European wide ERP system, which has reduced and will continue to reduce the number of IT systems we operate.
SPECIALTY SEGMENT
Our Specialty segment was formed in 2014 with our acquisition of Keystone Specialty, a leading distributor and marketer of specialty vehicle aftermarket products and accessories in North America. Our Specialty operations reach most major markets in the U.S. and Canada and serve the following seven product segments: RV; truck and off-road; towing; speed and performance; wheels, tires and performance handling; marine; and miscellaneous accessories. In 2017, we acquired Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories. The acquisition of Warn expanded our presence in the specialty market and created viable points of entry into related markets. In October 2021, we acquired SeaWide Marine Distribution, Inc. ("SeaWide"), a leading nationwide wholesale distributor supplying electrical and electronic products for the marine market. The acquisition of SeaWide enhanced our emerging position in the marine market.
Inventory
The specialty vehicle aftermarket equipment and accessories we distribute and raw materials for products we manufacture are purchased from suppliers located primarily in the U.S., Canada, and China. Our top selling products are RV appliances and air conditioners, towing hitches, truck bed covers, vehicle protection products, marine electronics, cargo management products, and wheels, tires, and suspension products. Specialty aftermarket suppliers are typically small to medium-sized, independent businesses that focus on a narrow product or market niche. Due to the highly fragmented supplier base for specialty vehicle aftermarket products, we have limited supplier concentration. In 2022, approximately 17% of our specialty vehicle aftermarket purchases were made from our top three suppliers to this segment, with our largest supplier providing approximately 8% of our annual inventory purchases. No other suppliers comprised more than 4% of our purchases during 2022. With our 2017 acquisition of Warn, we have internal capabilities to manufacture and source aftermarket winches, hoists, and bumpers.
Customers
Overall, the specialty vehicle aftermarket parts and accessories market serves a fragmented customer base composed of RV, marine, and specialty automotive dealers, installers, jobbers, builders, parts chains, and mail-order businesses. Our customers are principally small, independent businesses. These customers depend on us to provide a broad range of products, rapid delivery, marketing support and technical assistance. In addition to traditional customers, we sell to several large parts and accessory online retailers. Our Specialty segment also operates retail stores in northeast Pennsylvania.
We promote our products to customers through marketing programs, which include: (i) catalogs, advertising, sponsorships and promotional activities, (ii) product level marketing and merchandising support, and (iii) online and digital marketing initiatives. We stage in-person and/or virtual trade shows across the U.S., which provide an opportunity to improve sales through the showcasing of new and innovative products from our vendors to our customers.
Online sales, which represent the majority of our sales, of our Specialty products take place primarily through our ekeystone.com, viantp.com, and SeaWideB2B.com sites and our mobile app. These sites provide customers (i) the ability to match products with the make and model of vehicle thus allowing the customer to order the correct part, (ii) product information (e.g., pictures, attributes) available for review and (iii) the convenience of searching inventory availability and ordering the product on the site. Additionally, the site can provide sales opportunities by suggesting other parts to purchase based on an inquiry submitted by the customer.
Distribution
Our Specialty segment operations employ a hub-and-spoke distribution model that enables us to transport products from our primary distribution centers to our non-inventory stocking cross docks, some of which are co-located with our Wholesale - North America operations and provide distribution points to key regional markets and synergies with our existing infrastructure. We believe this provides added value to our customers through a broader product offering and more efficient distribution process. We use our delivery routes to provide delivery and returns of our products directly to and from our customers in all 48 continental U.S. states and 9 Canadian provinces, and we ship globally to customers in other countries. Our delivery fleet utilizes a third party software provider to optimize delivery routes, and to track the progress of delivery vehicles.
Competition
Industry participants have a variety of supply choices. Vendors can deliver products to market via warehouse distributors and mail order catalog businesses, or directly to retailers and/or consumers. We view all distributors of specialty vehicle aftermarket equipment and accessories as our competitors. We believe we have been able to distinguish ourselves from other specialty vehicle aftermarket parts and equipment distributors primarily through our broad product selection, which encompasses both popular and hard-to-find products, our national distribution network, and our efficient inventory management systems, as well as through our service. We compete on the basis of product breadth and depth, rapid and dependable delivery, marketing initiatives, support services, and price.
Information Technology Systems
Most of our Specialty operations utilize an internally developed inventory management and order entry system that interfaces with third party software systems for accounting, transaction processing, inventory and warehouse management, data analytics, and reporting. By utilizing an internally developed system, real-time updates, improvements, and developments can be programmed to fit the business’s ongoing and changing needs.
SELF SERVICE SEGMENT
Our Self Service Operations
Our self servicesegment consists of retail operations, most of which operate under the name “LKQ Pick Your Part,” allowand allows consumers to come directly to the yard to pick parts off of salvage vehicles. In addition to revenue from the sale of parts, core, scrap steel and scrap,other metals, we charge a nominal admission fee to access the property.
Inventory
We acquire inventory for our self service retail product operations from a variety of sources, including but not limited to towing companies, vehicle auctions, the general public, municipality sales, insurance carriers, and charitable organizations. We procure salvage vehicles for our self service retail product operations that are generally older and priced lower than the salvage vehicles we purchase for our wholesale recycled product operations. Vehicles are delivered to our locations by the seller, or we arrange for transportation. Once on our property, minimal labor is required to process the vehicle other than removing the battery, fluids, refrigerants, catalytic converters and hazardous materials. The extracted fluids are stored in bulk and subsequently sold to recyclers. Vehicles are then placed in the yard for customers to remove parts. In our self service business, availability of a specific part will depend on which vehicles are currently at the site and to what extent parts may have been previously sold. We usually keep a vehicle at our facility for 30 to 120 days, depending on the capacity of the yard and size of the market, before it is crushed and sold to scrap metal processors.
Scrap and Other Materials
Our self service operations generate scrap metal, alloys and other materials that we sell to recyclers. Vehicles that we no longer make available to the public and "crush only" vehicles acquired from other companies, including OEMs, are typically crushed using equipment on site. Damaged and unusable wheel cores are melted in our aluminum furnace and sold to consumers of aluminum ingot and sow for the production of various automotive products, including wheels. We also extract and sell the precious metals contained in certain of our recycled parts such as catalytic converters.
Customers
The customers of our self service yards are frequently do-it-yourself mechanics, small independent repair shops servicing older vehicles, auto rebuilders, and resellers. The scrap from the vehicle hulks when not processed by us, is sold to metals recyclers, with whom we may also compete when procuring salvage vehicles for our operations.
Competition
There are competitors operating self service businesses in all of the markets in which we operate. In some markets, there are numerous competitors, often operating in close proximity to our operations. We try to differentiate our business by the quality of the inventory and the size and cleanliness of the property. We also differentiate our business from our competitors through our mobile app, which allows customers to receive daily push notifications when carsvehicles in which they are interested inhave identified an interest are placed into their favorite yards. In addition to allowing customers to see our available inventory, the mobile app also allows customers to input search parameters, such as theincluding for specific part they are searching for,parts, and the year, make, and model of the vehicle, to identify the population of carsvehicles that might be available from which to pull compatible parts from.parts. We do not consider retail chains that focus on the do-it-yourself market to be our direct competitors, as there is limited overlap in the products that we sell.
EUROPE SEGMENT
Our Europe segment was built on four key acquisitions: ECP (2011), Sator (2013), Rhiag (2016) and Stahlgruber (2018). Additionally, in 2014 we expanded our European segment to include wholesale recycling operations through our acquisition of a business with salvage and vehicle repair facilities in Sweden and Norway, and in 2016, we acquired an equity investment in Mekonomen AB ("Mekonomen"), the leading independent car parts distributor in the Nordic region of Europe. Mekonomen is independent of our existing European operations, but we have identified areas where the companies can work together in a mutually beneficial manner, primarily related to procurement. Our European strategy is to target platform acquisitions to cover broad markets initially, then integrate these businesses with our other operations and subsequently expand our footprint in these regions through new branch openings and smaller tuck-in acquisitions. Our acquisitions provide a platform to capitalize on the large and fragmented aftermarket mechanical replacement parts market in Europe, and allow for cost savings from the leveraging of our combined purchasing power given the significant overlap in suppliers and product mix. We have acquired many smaller businesses within the regions we operate, and we are integrating our European operations as we optimize purchasing, warehousing, systems, logistics and back-office functions, and align our private label brands across the segment.
In September 2019, we announced a multi-year program called "1 LKQ Europe," to further centralize and standardize certain key functions to improve the efficiencies within the Europe segment. Under the 1 LKQ Europe program, we will reorganize 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 the creation of a Europe headquarters office in Zug, Switzerland.
Inventory
Our inventory is primarily composed of mechanical aftermarket parts for the repair of vehicles 3 to 15 years old. Our top selling products include brake pads, discs and sensors, clutches, electrical products such as spark plugs and batteries, steering and suspension products, filters, and oil and automotive fluids. In addition to mechanical aftermarket parts, we also sell collision parts in our Europe segment, although these sales represent approximately 1% of total Europe segment revenue.
In 2019, our top two suppliers represented 12% of our aftermarket inventory purchases, with our top supplier representing approximately 7% of our purchases. No other suppliers comprised more than 5% of our purchases during 2019. In 2019, we purchased 94% of our products from companies in Europe. The remaining 6% of our 2019 purchases were sourced from vendors located primarily in China or Taiwan, some of which also supply collision parts for our Wholesale - North America operations. In 2019, 72% and 18% of our total inventory purchases were made in euros and pounds sterling, respectively.
In our Nordic operations, we purchase severely damaged or totaled vehicles from insurance companies, which are transferred to our dismantling facilities or sold to other third party dismantlers.
Information Technology Systems
Our aftermarket operations in Europe use various information technology (“IT”)
In our self service business, we operate two internally-developed, proprietary enterprise management systems. Our systems are complexThe point of sale system is used to record retail sales transactions and are designed to perform a variety of tasks (depending on the market), including: manage customer orders and inventory movement, optimize our warehouse and logistics, and financial reporting. Certain of our IT systems can interface with our repair shop customers' respective IT systems, which enables customers to identify and order the part requiredThe Carbuy system is used for the repair. As partpurchasing and inventorying of our 1 LKQ Europe strategyvehicles. We also use a module within the Carbuy system to create an integrated European company, we initiated a multi-year program to developrecord all scrap and
implement a European wide ERP system, which will reduce the number of IT systems we operate. A pilot for our ERP system was successfully deployed in the operating unit in Switzerland in the first quarter of 2020.
Customers
We primarily operate a two-step (i.e. direct nonferrous sales to repair shop customers) distribution model in Europe, although certain of our operations, such as Italy, the Netherlands, Germany, Switzerland, and Hungary, operate partially a three-step (i.e. sales to distributors who in turn sell to repair shop customers) distribution model. In our two-step operations, we sell the majority of our products to commercial customers primarily consisting of professional repairers, including both independent mechanical repair shops and collision repair shops. In our three-step operations, we sell products to wholesale distributors or jobbers. In addition to our sales to repair shops and wholesale distributors, we generate a portion of our revenue through sales to retail customers from e-commerce platforms and from counter sales at the branch locations.
Distribution
Our European operations employ a distribution model in which inventory is stored at national or international distribution centers or regional hubs, with fast moving product stored at branch locations. The large distribution centers regularly re-stock the smaller branches and hubs and hold slower moving items helping us to improve fulfillment rates. Product is moved through the distribution network on our trucks, vans or via common carrier.transactions.
Competition
We view all suppliers of replacement repair products as our competitors, including other alternative parts suppliers and OEMs and their dealer networks. We face significant competition in many markets where even smaller competitors can compete on price and service and the OEMs compete via ties to, and brand loyalty of, the consumer while also remaining competitive on price, service and availability. We believe we have been able to distinguish ourselves from other alternative parts suppliers primarily through our distribution network, efficient stock management systems and proprietary technology, which allows us to deliver our products quickly, as well as through our product lines and inventory availability, pricing, and service.
SPECIALTY SEGMENT
Our Specialty operating segment was formed in 2014 with our acquisition of Keystone Specialty, a leading distributor and marketer of specialty vehicle aftermarket products and accessories in North America. Our Specialty operations reach most major markets in the U.S. and Canada and serve the following six product segments: RV; truck and off-road; towing; speed and performance; wheels, tires and performance handling; and miscellaneous accessories. In 2017, we acquired Warn Industries, Inc. ("Warn"), a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories. The acquisition of Warn expanded our presence in the specialty market and created viable points of entry into related markets.
Inventory
The specialty vehicle aftermarket equipment and accessories we distribute and raw materials for products we manufacture are purchased from suppliers located primarily in the U.S., Canada, and China. Our top selling products are RV appliances & air conditioners, towing hitches, truck bed covers, vehicle protection products, cargo management products, and wheels, tires & suspension products. Specialty aftermarket suppliers are typically small to medium-sized, independent businesses that focus on a narrow product or market niche. Due to the highly fragmented supplier base for specialty vehicle aftermarket products, we have limited supplier concentration. In 2019, approximately 15% of our specialty vehicle aftermarket purchases were made from our top two suppliers, with our largest supplier providing approximately 10% of our annual inventory purchases. No other suppliers comprised more than 5% of our purchases during 2019. With our 2017 acquisition of Warn, we have internal manufacturing capabilities to source aftermarket winches, hoists, and bumpers.
Most of our Specialty operations utilize an internally developed inventory management and order entry system that interfaces with third party software systems for accounting, transaction processing, data analytics, and reporting.
Customers
Overall, the specialty vehicle aftermarket parts and accessories market serves a fragmented customer base composed of RV and specialty automotive dealers, installers, jobbers, builders, parts chains, and mail-order businesses. Our customers are principally small, independent businesses. These customers depend on us to provide a broad range of products, rapid delivery, marketing support and technical assistance. In addition to traditional customers, in recent years we have increased sales to several large parts and accessory online retailers. Our Specialty segment also operates retail stores in northeast Pennsylvania.
We promote our products to customers through marketing programs, which include: (i) catalogs, advertising, sponsorships and promotional activities, (ii) product level marketing and merchandising support, and (iii) online and digital
marketing initiatives. Our national footprint allows us to stage trade shows across the U.S., which provide an opportunity to improve sales through the showcasing of new and innovative products from our vendors to our customers.
Online sales of our Specialty products take place primarily through our ekeystone.com and viantp.com sites and mobile app. These sites provide customers (i) the ability to match products with the make and model of vehicle thus allowing the customer to order the correct part, (ii) product information (e.g. pictures, attributes) available for review and (iii) the convenience of searching inventory availability and ordering the product on the site. Additionally, the site can provide sales opportunities by suggesting other parts to purchase based on an inquiry submitted by the customer.
Distribution
Our Specialty segment operations employ a hub-and-spoke distribution model which enables us to transport products from our primary distribution centers to our non-inventory stocking cross docks, a majority of which are co-located with our North America wholesale operations and provide distribution points to key regional markets and synergies with our existing infrastructure. We believe this provides added value to our customers through a broader product offering and more efficient distribution process. We use our delivery routes to provide delivery and returns of our products directly to and from our customers in all 48 continental U.S. states and 9 Canadian provinces, and we ship globally to customers in other countries. Our delivery fleet utilizes a third party software provider to optimize delivery routes, and to track the progress of delivery vehicles throughout their runs.
Competition
Industry participants have a variety of supply choices. Vendors can deliver products to market via warehouse distributors and mail order catalog businesses, or directly to retailers and/or consumers. We view all suppliers of specialty vehicle aftermarket equipment and accessories as our competitors. We believe we have been able to distinguish ourselves from other specialty vehicle aftermarket parts and equipment suppliers primarily through our broad product selection, which encompasses both popular and hard-to-find products, our national distribution network, and efficient inventory management systems, as well as through our service. We compete on the basis of product breadth and depth, rapid and dependable delivery, marketing initiatives, support services, and price.
INTELLECTUAL PROPERTY
We own and have the right to use various intellectual property, including intellectual property acquired as a result of past acquisitions.acquisitions, such as intellectual property related to winches acquired in our acquisition of Warn. In addition to trade names, trademarks and patents, we also have technology-based intellectual property that has been both internally developed and obtained through license agreements and acquisitions. We do not believe that our business is materially dependent on any single item of intellectual property, or any single group of related intellectual property, owned or licensed, nor would the expiration of any particular item or related group of intellectual property, or the termination of any particular intellectual property license agreement, materially affect our business. See the risk factor "Intellectual property claims relating to aftermarket products could adversely affect our business." in Part I, Item 1A of this Annual Report on Form 10-K for further information regarding the risks related to intellectual property.
EMPLOYEES
HUMAN CAPITAL
Our people are our most valuable asset. The core values of development, excellence, leadership, integrity and trust, value-added, embracing change, resourceful, and sustainability establish the foundation of our culture and give our people the opportunity to thrive. Our key human capital management objectives are attracting, retaining, developing, and supporting the highest quality talent. Our human resources programs aim to accomplish three things: (i) acquire and develop talent to prepare them for critical roles within our Company, (ii) reward and support employees with competitive pay and benefit programs, and (iii) enhance our culture through efforts to make the workplace more engaging and inclusive.
Employees
As of December 31, 2019,2022, we employed approximately 51,00045,000 persons, of which approximately 21,00017,000 were employedbased in North America and approximately 30,00028,000 were employedbased outside of North America. Of our employees in North America, approximately 800 were represented by unions. Outside of North America, we have government-mandated collective bargaining agreements and union contracts in certain countries, particularly in Europe where many of our employees are represented by unions and/or works councils. We consider our employee relations to be good. We ask our employees to participate in an annual engagement
survey to better understand their needs to remain engaged. This helps us determine how we prioritize our human capital programs.
Health and Safety
We are committed to providing all our employees with a safe and secure work environment where no one is subject to unnecessary risk. As a key focus, we have implemented various programs and practices to prevent accidents and foster a safety culture. In response to the COVID-19 pandemic, we implemented new protocols to further support the health and safety of our employees and customers. Those protocols have remained in place to maintain a safe work environment. We also provide several avenues for employees to speak up, including anonymously, if they see something inconsistent with good safety practices.
Inclusion and Diversity
We value and promote inclusion and diversity in our workplace. Together, we create inclusive workplaces that represent the communities we serve. We recognize that diverse backgrounds, skills, and experiences drive new ideas, products, and services. We recruit, hire, promote and retain employees based on merit and demonstrated skills. We have a long-standing commitment to provide equal employment opportunities. It is our policy and practice to hire, train, promote and compensate employees, and administer all of our personnel policies without regard to race, color, ethnicity, national origin, ancestry, citizenship status, religion, religious creed, sex, gender, gender identity and expression, age, disability, protected medical condition, marital status, veteran or military status, sexual orientation, pregnancy, genetic information or any other characteristic protected by civil rights laws.
Commitment to Values and Ethics
At our Company, acting with integrity is not just expected but required. Our Code of Ethics guides our employees to make ethical decisions in all aspects of their work. It includes topics such as using company assets, bribery and corruption, conflicts of interest, discrimination, harassment, health and safety, privacy and data protection, and protecting confidential information. Our commitment to acting with a high level of integrity includes a global Speak Up program and policy that provides guidance for reporting complaints in the event of alleged violations of our Code, policies or law. Individuals have the option of submitting concerns anonymously. They are assured that we do not tolerate harassment or retaliation against persons that report improper behavior.
Compensation and Benefits
We strive to attract and retain our talented employees by providing market-competitive compensation and benefits. We engage an outside consulting firm to objectively evaluate our compensation program and benchmark it against industry peers and other similarly situated organizations. Our short and long-term incentive programs are aligned with our vision, and key business objectives and are intended to motivate strong performance. We offer benefits that support our employees’ physical, financial, and emotional well-being. We provide eligible employees medical, dental, and vision coverage, health savings and flexible spending accounts, paid time off, an employee assistance program, an employee assistance fund, voluntary short-term disability insurance, company-paid long-term disability insurance, company-paid term life insurance, a tuition reimbursement program, a scholarship program for the children of employees, a program to match charitable donations, paid parental leave, and retirement plan contributions. Our benefits vary by location and are designed to meet or exceed local laws and to be competitive in the marketplace.
Professional Development and Training
A key factor in employee retention is training and professional development. We have training programs across all levels of the Company to meet the needs of various roles, specialized skill sets, and departments. Development is part of our core values and key to employee retention. We believe in the importance of cultivating employee growth and have implemented several measures to ensure everyone is given an opportunity for development at all levels of the organization. Our training includes creating individual plans tailored toward leadership roles, legal and compliance topics, and general workplace safety. We are also committed to safeguarding personal information by employing advanced security software tools along with regular cybersecurity training sessions.
FACILITIES
As of December 31, 2019,2022, our operations included approximately 1,7001,450 facilities,most of which are leased. Of our total facilities, approximately 550425 facilities were located in the U.S. and approximately 1,1501,025 facilities were located in over 25 other countries. Many of our locations stock multiple product types or serve more than one function.
Our global headquarters are located at 500 West Madison Street, Suite 2800, Chicago, Illinois 60661.
Our North American headquarters, located in Nashville,Antioch, Tennessee, performs certain centralized functions for our Wholesale - North AmericanAmerica and Self Service operations, including accounting, procurement, and information systems support.
Our European headquarters are located in Zug, Switzerland. Our European operations are distributed throughout Europe with main offices in Tamworth, England; in Schiedam, and Amsterdam, the Netherlands; in Milan, Italy; in Prague, Czech Republic; and in Poing, Germany. In addition to these offices, we have two national distribution centers in Tamworth, England, totaling 1,000,000 and 500,0001,275,000 square feet, respectively, which house inventory to supply the hubs and branches of our U.K. and Republic of Ireland ("ROI") operations, and one international distribution center totaling 900,000 square feet in Sulzbach-Rosenberg, Germany which supplies Stahlgruber’sour operations in Germany, Austria, Italy, Sloveniathe Czech Republic and Croatia. UnderSwitzerland, two distribution centers in Prague, Czech Republic, totaling 527,000 square feet which support our operations in the 1 LKQCzech Republic and Eastern Europe, program, weand our operations in Italy are establishing a Europe headquarters officesupplied via 409,000 square feet of distribution capacity near Siziano, Italy. The shared service center in Zug, Switzerland.Katowice, Poland began operations in the second half of 2021, and the central distribution center in the Netherlands began operations in 2022.
Our Specialty operations maintain primary procurement, accounting and finance functions in Exeter, Pennsylvania.
Certain back-office support functions for our segments are performed in Bangalore,Bengaluru, India. Additionally, we operate an aftermarket parts warehouse in Taiwan to aggregate inventory for shipment to our locations in North America.America and manage supplier relationships and purchase orders.
REGULATION
Our operations and properties are subject to laws and regulations relating to the protection of the environment in the U.S. and the other countries in which we operate. See the risk factor “We are subject to environmental regulations and incur costs relating to environmental matters” in Part I, Item 1A of this Annual Report on Form 10-K for further information regarding the effects of environmental laws and regulations on us.
We may be affected by tariffs and other import laws and restrictions because we import into the U.S. a significant number of products for sale and distribution. See the risk factors “If significant tariffs or other restrictions are placed on products or materials we import or any related counter-measures are taken by countries to which we export products, our revenue and results of operations may be materially harmed” and “Intellectual property claims relating to aftermarket products could adversely affect our businessbusiness.” in Part 1,I, Item 1A of this Annual Report on Form 10-K for further information regarding importation risks.
Our business processes and operations are subject to laws and regulations relating to privacy and data protection. See the risk factor “The costs of complying with the requirements of laws pertaining to the privacy and security of personal information and the potential liability associated with the failure to comply with such laws could materially adversely affect our business and results of operationsoperations.” in Part 1,I, Item 1A of this Annual Report on Form 10-K for further information about privacy and data protection risks.
Some jurisdictions have enacted laws to restrict or prohibit the sale of alternative vehicle parts. See the risk factor “Existing or new laws and regulations, or changes to enforcement or interpretation of existing laws or regulations, may prohibit, restrict or burden the sale of aftermarket, recycled, refurbished or remanufactured productsproducts.” in Part 1,I, Item 1A of this Annual Report on Form 10-K for further information concerning regulatory restrictions on the sale of our products.
We have thousands of employees located in the U.S. and many other countries and are subject to labor and employment laws in numerous jurisdictions. See the risk factor “Our business may be adversely affected by union activities and labor and employment lawslaws.” in Part 1,I, Item 1A of this Annual Report on Form 10-K for further information regarding these labor and employment risks.
SEASONALITY
Our operating results are subject to quarterly variations based on a variety of factors, influenced primarily byincluding, but not limited to, seasonal changes in weather patterns. During the winter months,For our Wholesale - North America segment, we tend to havesee higher demand for our vehicle replacement products becausecollision related parts during periods of cold inclement weather as there are more weather related repairs. Our specialty vehicle operations typically generate greater revenue and earnings in the second quarter, when vehicle ownersFor our Specialty segment, we tend to install this equipment,see higher demand during periods of warmer weather due to an increase in leisure travel. Additionally, seasonality may affect our product mix. For example, collision related parts tend to have higher demand during periods of cold, inclement weather due to higher frequency of collisions and lower revenue and earnings indiagnostic services generally sees higher demand during periods of cold, inclement weather because that weather can affect the fourth quarter, when the numberperformance of RV trips tends to declineparts such as a result of the winter weather. Our aftermarket glass operations typically generate greater revenue and earnings in the second and third quarters, when the demand for automotive replacement glass increases after the winter weather.batteries.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS
Environmental
We
LKQ's business operations help protect our planet through our vehicle recycling and reuse programs helping to contribute to a healthy environment. For example, ourcircular economy. Our North American and European recycling operations harvest vehicle components for reuse in the repair of vehicles. Once the parts are harvested, the remaining valuable materials are removed and repurposed for use in the manufacturing of new basic materials such as steel, aluminum, plastic and rubber. Additionally, we extract fluids that we recycle or utilize in our own operations, such as gasfuel to run our own truck fleet.
Our recycling expertise and efforts are a key pillar of our mission statement of being a responsible steward of the environment and a true partner with the communities in which we operate. This stewardship has been embedded in our culture since the company’s foundingour inception in 1998. Our recycling efforts preserve natural resources, reduce the demand for scarce landfill space, and help decrease air and water pollution.pollution, the latter attributed due to the avoidance of new manufacturing that otherwise would be required for these items.
The table below highlights our North American recycling operation’s efforts in 2019 to minimize the environmental impact of total loss and end-of-life vehicles with effective and proper vehicle disposition, and lists the approximate number or amount of parts or other materials removed from such vehicles and sold or used by us in our operations (in thousands).
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| | 2019 Totals |
Number of vehicles procured | | 887 |
|
Catalytic converters | | 1,471 |
|
Tires | | 2,552 |
|
Batteries | | 630 |
|
Waste oil (in gallons) | | 2,588 |
|
Anti-freeze/Washer fluid (in gallons) | | 347 |
|
Fuel (in gallons) | | 4,173 |
|
Total number of individual parts sold | | 15,244 |
|
Social
We continuously strive to improve the effectbelieve diverse thinking and an inclusive work environment encourages human ingenuity and a culture of our operations, and the awareness of all ofintegrity where everyone feels they belong. LKQ puts our employees with respectfirst and they are the heart of LKQ. Refer to social issues. We seek diversitythe "Human Capital" section above for more information.
Part of LKQ’s mission is to build strong partnerships with our employees and do not discriminate in our employment with respectthe communities where we live and operate. LKQ continually seeks to race, color, ethnicity, national origin, ancestry, citizenship status, religion, sex, gender identitygrow effective, strategic partnerships and expression, age, disability, protected medical condition, marital status, veteran or military status, sexual orientation, pregnancy, genetic information, or any other characteristic protected by civil rights laws. We do not tolerate harassment or retaliation against persons that report improper behavior.
We have sharedto create awareness of these initiatives with our employees some of the benefits we received as part of the Tax Reform Act of 2017, including through a reduction of medical care premiums, an increase in paid time off, an increase in the Company’s matching amount under our retirement plan, a tuition reimbursement program, and a scholarship program for the children of our employees. In addition, we have established a fund to helpOur employees that experience catastrophic losses.
We also strive to improve the communities in which we operate. The employees at our facilities are encouraged to volunteer in local community activities, and we have established a charitable foundation to distribute funds to local and international causes.
Governance
We have madecontinue to make substantial progress in the area of corporate governance. For example, we have three female members on ourOur Board of Directors and we have added five new members to the Board since August 2018. After the departure from the Board by tworefreshment process has resulted in over half of our current directors atBoard being added since August 2018, and currently, 36% of our Annual MeetingBoard is comprised of Stockholders in May 2020,persons from underrepresented groups. Additionally, over 80% of our directors will beare independent. We believe that the skill sets of our newly constituted Board effectively address the areas of focus that are important for our short and long-term strategic objectives.objectives, including the continued focus on the integration of our European operations.
We have adopted “proxy access,” which permits an eligible stockholder to nominate and include in our proxy materials director nominees (subject to the terms set forth in our Bylaws). We also have majority voting for the election of our directors, requiring a director who fails to receive a majority vote to tender his or her resignation to the Board.
Our Board of Directors recently adopted a revised Code of Ethics in 2019 to help ensure that everyone at LKQ is clear on our mission, values and guiding ethical principles. The Code of Ethics covers a variety of topics, including the use of company assets, bribery and corruption, conflicts of interest, discrimination, harassment, health and safety, privacy and data protection, protecting confidential information, and reporting Code of Ethics violations. It is now available in over 20 languages through our employees, fair dealing withwebsite at www.lkqcorp.com. We also now operate one single anonymous global Speak Up line, available in every language in which we routinely conduct business.
More information on our customers, suppliersEnvironmental, Social and competitors, anti-bribery rules, conflictGovernance initiatives can be found in our 2021 Sustainability Report on our website at www.lkqcorp.com. The Sustainability Report is not incorporated by reference and should not be considered part of interest prohibitions, and protecting personal data.
ITEM 1A. RISK FACTORS
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The occurrence of any of the following risks or of unknown risks and uncertainties may adversely affect our business, operating results and financial condition.
Risks Relating to Our Business
Our operating results and financial condition have been and will likely continue to be adversely affected by the COVID-19 pandemic and could be adversely affected by other public health emergencies.
The COVID-19 pandemic has resulted and may continue to result in risks that could materially adversely affect our business, financial condition, results of operations, and/or cash flows.
Efforts to combat the virus have been complicated by viral variants and uneven access to, and acceptance and effectiveness of, vaccines globally. The pandemic resulted in governments and other authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter in place orders, and business closures. These measures have impacted and may continue to impact our workforce and operations and the operations of our customers and suppliers. These measures also resulted in a reduction in miles driven. As a result, we have experienced and may continue to experience unpredictable reductions in demand for our products. We have been permitted to operate in most of the jurisdictions we serve, including in jurisdictions that mandated the closure of certain businesses. However, there is no assurance that we will be permitted to continue operations under future government orders or other restrictions, and although certain restrictions related to the COVID-19 pandemic have eased, uncertainty continues to exist regarding such measures and potential future measures.
Continued uncertainties related to the magnitude, duration, and persistent effects of the COVID-19 pandemic may significantly adversely affect our business. These uncertainties include, among other things: the duration and impact of the resurgence in COVID-19 cases; the emergence, contagiousness, and threat of new and different strains of virus; the availability, acceptance, and effectiveness of vaccines; additional closures or other actions as mandated or otherwise made necessary by governmental authorities, including employee vaccine mandates; disruptions in the supply chain, including those caused by industry capacity constraints, material availability, and global logistics delays and constraints arising from, among other things, the transportation capacity of ocean shipping containers, and a prolonged delay in resumption of operations by one or more key suppliers, or the failure of any key supplier; an increasingly competitive labor market due to a sustained labor shortage or increased turnover caused by the COVID-19 pandemic; our ability to meet commitments to customers on a timely basis as a result of increased costs and supply and transportation challenges; increased logistics costs; additional operating costs due to continued remote working arrangements, adherence to social distancing guidelines, and other COVID-19 related challenges; increased risk of cyberattacks on network connections used in remote working arrangements; absence of employees due to illness; and the impact of the pandemic on our customers and suppliers. We have developed and implemented business continuity plans and health and safety protocols in an effort to mitigate the negative impacts we have experienced related to COVID-19 to our employees and our business. An inability to respond to the ever changing impacts of COVID-19 to our employees and business could negatively impact our financial results. In addition, even if the adverse effects of the COVID-19 pandemic subside, there is the possibility of the emergence of a different pandemic or health emergency with similar economic disruptions. These factors, and others that are currently unknown or considered immaterial, could materially and adversely affect the Company’s business, liquidity, results of operations, and financial position.
Our operating results and financial condition have been and could continue to be adversely affected by the economic, political and social conditions in North America, Europe, Taiwan and elsewhere, as well as the U.S.economic health of vehicle owners and elsewhere.numbers and types of vehicles sold.
Changes in economic, political and social conditions in the U.S.,North America, Europe, Taiwan and other countries in which we are located or do business could have a material effect on our company. Negative effects to our supply chain, costs of doing business, sales and distribution activity may occur due to factors such as war or threats of war, natural disasters, nuclear facility accidents, public health emergencies, utility interruptions, terrorism and terrorism.social unrest.
Our business is also affected by a number of other factors. For example, the number and types of new vehicles produced and sold by manufacturers affects our business. A decrease in the number of vehicles on the road may result in a decrease in repairs.
Our Additionally, our sales are also impacted by changes to the economic health of vehicle owners. The economic health of vehicle owners is affected by many factors, including, among others, general business conditions, interest rates, inflation, consumer debt levels, the availability of consumer credit, taxation, fuel prices, unemployment trends and other matters that influence
consumer confidence and spending. Many of these factors are outside of our control. If inflationary pressures or any of these other conditions worsen, our business, results of operations, financial condition and cash flows could be adversely affected.
In addition, economic conditions, including decreased access to credit, may result in financial difficulties leading to restructurings, bankruptcies, liquidations and other unfavorable events for our customers, suppliers, logistics and other service providers and financial institutions that are counterparties to our credit facilities and hedge transactions. These unfavorable events affecting our business partners could have an adverse effect on our business, results of operations, financial condition and cash flows.
We have a substantial business presence in Europe, including a significant presence in the U.K. and the Republic of Ireland (“ROI”). In June 2016, voters in theROI. The U.K. decided by referendum to withdraw’s withdrawal from the European Union (also known as Brexit). The precise timing and impacts of this action on our businesses in the U.K. and other parts of Europe are unknown at this time. Since the vote, we have seen fluctuations in exchange rates leading to cost pressures and unfavorable translation effects on our sterling denominated earnings. The U.K.’s withdrawal from the European Union became effective on January 31, 2020. The U.K. and the European Union nownegotiated a Trade and Cooperation Agreement ("TCA") to govern the new relationship, which became effective on January 1, 2021. Following the adoption of the TCA, duties have an 11-month transition periodincreased on some of the products we import into the U.K., and we have observed shipment delays, particularly with respect to negotiate a trade dealthe products we supply to our business in the ROI. While the long-term extent and come to terms on other issues such as security and law enforcement. Depending upon the outcomeimpact of these negotiations,issues remains unclear at this point, they could have adverse impacts on our business. Notwithstanding the TCA, there continues to be uncertainty regarding the effects of Brexit on our U.K. and European businesses, could be adversely affected as a result of furtherincluding with respect to tariffs or trade sanctions on goods moving between the jurisdictions, increased administrative burdens, fluctuations in exchange rates, disruptions toin access to markets by U.K. and ROI companies, interruptionsand disagreements about the interpretation of the movementTCA.
We also have a presence in the Ukraine and are monitoring the situation there carefully. Additionally, a number of goodsour suppliers are based in China and services between countries, a decrease of economic activity in Europe,Taiwan and so increasing strains and any political or social unrest.repercussions may have implications upon our supply chain.
We face intense competition from local, national, international, and internet-based vehicle products providers, and this competition could negatively affect our business.
The vehicle replacement products industry and vehicle accessory parts industry are highly competitive and are served by numerous suppliers of OEM, recycled, aftermarket, refurbished and remanufactured products. Within each of these categories of suppliers, there are local owner-operated companies, larger regional suppliers, national and international providers, and internet-based suppliers and distributors. Providers of vehicle replacement and accessory products that have traditionally sold only certain categories of such products may decide to expand their product offerings into other categories of vehicle products, which may further increase competition. Some of our current and potential competitors may have more operational expertise; greater financial, technical, manufacturing, distribution, and other resources; longer operating histories; lower cost structures; and better relationships in the insurance and vehicle repair industries or with consumers, than we do. Business transacted on online marketplaces has been increasing, which presents additional competitive pressures on us; in addition, facilitators of these online marketplaces control access to this channel and may prohibit us from participating for various reasons.participating.
In the U.S.North America and Europe, local companies have formed cooperative efforts in an attempt to more efficiently compete against us in all aspects of our business. As a result of these factors, our competitors may be able to provide products that we are unable to supply, provide their products at lower costs, or supply products to customers that we are unable to serve.
We believe that a majority of collision parts by dollar amount are supplied by OEMs, with the balance being supplied by distributors of alternative aftermarket, recycled, refurbished and remanufactured collision parts like us. The OEMs are therefore able to exert pricing pressure in the marketplace. We compete with the OEMs primarily on price and to a lesser extent on service and quality. Our operations worldwide are dependent upon clear laws and regulation regarding the manufacture of automotive parts in competition with OEM parts.
From time to time, the OEMs have implemented programsengaged in efforts seeking to increase theirOEM market share and to restrict consumers’ choice to use recycled or aftermarket parts to repair consumers’ vehicles. Examples of these efforts include blocking the use of vehicle telematics by the independent repair industry, demanding that suppliers provide certain parts exclusively to the OEMs, embedding software in certain vehicle parts that prevents them from being recycled and used to repair other vehicles, repair shop certification programs that, in some cases, require the collision repair shops to use only OEM parts, industry. For example, they have reduced pricesrefusing to sell certain OEM parts unless the buyer is an OEM-certified shop, obtaining patents and trademarks on specific productsvarious subcomponents of vehicles to matchprohibit the lower pricesuse of
an aftermarket part alternative, products and introduced otherprice matching and rebate programs that may disrupton certain aftermarket products. See the risk factor entitled “Intellectual property claims relating to aftermarket products could adversely affect our sales. The growth of these programs orbusiness.” for further information about the introduction of new ones could have a material adverse impact on our business.OEM patents and trademarks.
In addition,
With respect to telematics, vehicles are increasingly being equipped with systems that transmit data to the OEMs wirelessly regarding, among other items, accident incidents, maintenance requirements, location of the vehicle, identification of the closest dealership, and other statistics about the vehicle and its driving history. To the extent that this data is not shared with alternative suppliers, the OEMs will have an advantage with respect to such matters as contacting the vehicle driver, recommending repairs and maintenance, and directing the vehicle owner to an affiliated dealership.
The frequency and intensity of these OEM efforts has been increasing over time. The growth and effectiveness of these efforts or the introduction of new ones could have a material adverse effect on our business.
We rely upon our customers and insurance companies to promote the usage of alternative parts.
Our success depends, in part, on the acceptance and promotion of alternative parts usage by automotive insurance companies and vehicle repair facilities. There can be no assurance that current levels of alternative parts usage will be maintained or will increase in the future.
We rely on business relationships with insurance companies. These insurance companies encourage vehicle repair facilities to use products we provide. The business relationships include in some cases participation in aftermarket quality and service assurance programs that may result in a higher usage of our aftermarket products than would be the case without the programs. Our arrangements with these companies may be terminated by them at any time, including in connection with their own business concerns relating to the offering, availability, standards or operations of the aftermarket quality and service assurance programs. We rely on these relationships for sales to some collision repair shops, and a termination of these relationships may result in a loss of sales, which could adversely affect our results of operations.
In
As a result of an Illinois lawsuit decided in 1999 involving State Farm Mutual Automobile Insurance Company ("Avery v. State Farm"), a jury decided in October 1999 that State Farm breached certain insurance contracts with its policyholders by using non-OEM replacement productsand relating to repair damaged vehicles when use of such products did not restore the vehicle to its "pre-loss condition." The jury found that State Farm misled its customers by not disclosing the use of non-OEM replacement products andin the alleged inferiorityrepair of those products. Damages in excess of $1 billion were assessed against State Farm. In August 2005, the Illinois Supreme Court reversed the awards made by the lower courts and found, among other things, that the plaintiffs had failed to establish any breach of contract by State Farm. The plaintiffs filed a subsequent claim alleging that State Farm improperly influenced one of the justices on the Illinois Supreme Court. Prior to trial on the subsequent claim, the parties settled the case; as part of the settlement, State Farm paid the plaintiffs $250 million. As a result of this case,damaged vehicles, some insurance companies have reduced or eliminated their use of aftermarket products. Our financial results could be adversely affected if insurance companies modified or terminated the arrangements pursuant to which repair shops buy aftermarket or recycled products from us due to a fear of similar claims.
In addition, to the extent that the collision repair industry continues to consolidate, the buying power of collision repair shop customers may further increase, putting additional pressure on our financial returns.
We may not be able to successfully acquire new businesses or integrate acquisitions, and we may not be able to successfully divest certain businesses.
We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms, if we do not obtain required antitrust or other regulatory approvals, or for other reasons. Moreover, we may not be able to identify acquisition candidates at reasonable prices and/or be able to successfully integrate acquisitions.
If we buy a company or a division of a company, we may experience difficulty integrating that company's or division's personnel and operations, which could negatively affect our operating results. In addition:
the key personnel of the acquired company may decide not to work for us;
customers of the acquired company may decide not to purchase products from us;
suppliers of the acquired company may decide not to sell products to us;
we may experience business disruptions as a result of information technology systems conversions;
we may experience additional financial and accounting challenges and complexities in areas such as tax planning, treasury management, and financial reporting;
we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;
we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;
our existing business may be disrupted or receive insufficient management attention;
we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and
we may incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing stockholders.
For example, we have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business; this program will present a number of execution challenges.
In addition to acquisitions, we have divested, and will continue to divest, certain businesses that do not meet our performance standards. As a result of a divestment, we may not recover the carrying value of our investment in the divested business; in addition, such divestment transactions require significant management time and attention.
Intellectual property claims relating to aftermarket products could adversely affect our businessbusiness.
.
OEMs and others have attempted to use claims of intellectual property infringement against manufacturers and distributors of aftermarket products to restrict or eliminate the sale of aftermarket products that are the subject of the claims. OEMs have brought such claims in federal court and with the U.S. International Trade Commission. In some cases, we have entered into patent license agreements with OEMs that allow us to sell aftermarket parts that replicate the patented parts in exchange for a royalty and otherwise in accordance with the terms of the agreements.
To the extent OEMs and other manufacturers obtain design patents or trademarks and are successful in asserting claims of infringement of these patents or trademarks against us, we could be restricted or prohibited from selling certain aftermarket products, which could have an adverse effect on our business. In the event that our license agreements, or other similar license arrangements with OEMs or others, are terminated or we are unable to agree upon renewal terms, we may be subject to costs and uncertainties of litigation as well as restrictions on our ability to sell aftermarket parts that replicate parts covered by those design patents or trademarks. We have filed, and may file in the future, challenges to OEM patents, including patents owned by OEMs with which we have patent license agreements. We also may file challenges to OEM trademarks. To the extent OEMs are successful in defending their patents or trademarks, we could be restricted or prohibited from selling the corresponding aftermarket products, which could have an adverse effect on our business. Also, we will likely incur expenses investigating, pursuing and defending intellectual property claims.
U.S. Customs and Border Protection has taken the position that certain of our aftermarket parts infringe certain OEM trademarks and seized our aftermarket parts as we attempted to import them into the U.S. We incurhave incurred costs and expenses attempting to convinceconvincing Customs and Border Protection to release the seized goods and in litigation where we are seekingsought a determination of non-infringement. In the event Customs and Border Protection seizes our products again in the future, we aremay be unsuccessful in obtaining their release, and such goods may be subject to forfeiture and other penalties.penalties, and we would incur legal fees in contesting those seizures.
Aftermarket products certifying organizations may revoke the certification of parts that are the subject of the intellectual property disputes. Lack of certification may negatively impact us because many major insurance companies recommend or require the use of aftermarket products only if they have been certified by an independent certifying organization.
If the number of vehicles involved in accidents declines or the number of cars being repaired declines, or the mix of the types of vehicles in the overall vehicle population changes, our business could suffer.
Our business depends on vehicle accidents, mechanical failures and routine maintenance for both the demand for repairs using our products and the supply of recycled, remanufactured and refurbished parts. To the extent that a relatively higher percentage of damaged vehicles are declared total losses, there will be less demand for our products to repair such vehicles. In addition, our business is impacted by factors that influence the number and/or severity of accidents and mechanical failures including, but not limited to, the number of vehicles on the road, the number of miles driven, the ages of drivers, the occurrence and severity of certain weather conditions, the congestion of traffic, drivers distracted by electronic equipment, the use of alcohol or drugs by drivers, the usage rate and effectiveness of accident avoidance systems in new vehicles, the reliability of new OEM parts, and the condition of roadways. For example, an increase in the acceptance of ride-sharing could reduce the number of vehicles on the road. Additionally, an increase in fuel prices may cause the number of vehicles on the road, the number of miles driven, and the need for mechanical repairs and maintenance to decline, as motorists seek alternative transportation options. Mild weather conditions, particularly during winter months, tend to result in a decrease in vehicle accidents. Moreover, legislation banning the use of handheld cellular telephones or other electronic devices while driving could lead to a decline in accidents.
Systems designed to minimize accident frequency and severity are becoming more prevalent and more technologically sophisticated. To the extent OEMs install or are mandated by law to install accident avoidance systems in their vehicles, the number and severity of accidents could decrease, which could have a material adverse effect on our business.
The average number of new vehicles sold annually has fluctuated from year-to-year. Periods of decreased sales could result in a reduction in the number of vehicles on the road and consequently fewer vehicles involved in accidents or in need of mechanical repair or maintenance. Substantial further declines in automotive sales in the future could have a material adverse effect on our business, results of operations and/or financial condition. In addition, if vehicle population trends result in a disproportionately high number of older vehicles on the road, insurance companies may find it uneconomical to repair such vehicles or there could be less costly repairs. If vehicle population trends result in a disproportionately high number of newer vehicles on the road, the demand generally for mechanical repairs and maintenance would likely decline due to the newer, longer-lasting parts in the vehicle population and mechanical failures being covered by OEM warranties for the first years of a vehicle's life. Moreover, alternative collision and mechanical parts are less likely to be used on newer vehicles. Our Specialty segment depends on sales of pickup trucks, sport utility vehicles, crossover utility vehicles, high performance vehicles and recreational vehicles; any reduction in the number of such vehicles in operation will adversely affect demand for our Specialty products.
Electric vehicles do not have traditional engines, transmissions, and certain related parts. Engines and transmissions represent some of our largest revenue generating SKUs in North America, and parts for engines and transmissions represent a significant amount of the revenue of our European operations. Thus, an increase in electric vehicles as a percentage of vehicles sold willcould have a negative impact on our sales of engines, transmissions, and other related parts.
Fluctuations in the prices of metals and other commodities could adversely affect our financial results.
Our recycling operations generate scrap metal and precious metals (such as platinum, palladium, and rhodium) as well as other metals that we sell. After we dismantle a salvage vehicle for wholesale parts and after vehicles have been processed in our self service retail business, the remaining vehicle hulks are sold to scrap processors and other remaining metals are sold to processors and brokers of metals. In addition, we receive "crush only" vehicles or vehicles to be further processed from other companies, including OEMs, which we dismantle and which generate scrap metal and other metals.metals, in accordance with the guidelines of our agreements with the providing company. The prices of scrap and other metals have historically fluctuated, sometimes significantly, due to market factors. In addition, buyers may stop purchasing metals entirely due to excess supply. To the extent that the prices of metals decrease materially or buyers stop purchasing metals, our revenue from such sales will suffer and a write-down of our inventory value could be required. For example, in 2018 China imposed a ban on the importation of various types of solid waste allegedly in an effort to reduce environmental pollution. This ban includes certain metals that we sell and continues to have the effect of reducing the prices of such products.
The cost of our wholesale recycled and our self service retail inventory purchases will change as a result of fluctuating scrap metal and other metals prices. In a period of falling metal prices, there can be no assurance that our inventory purchasing cost will decrease the same amount or at the same rate as the scrap metal and other metals prices decline, and there may be a delay between the scrap metal and other metals price reductions and any inventory cost reductions. The prices of steel, aluminum, and plastics are components of the cost to manufacture products for our aftermarket business. If the prices of commodities rise and result in higher costs to us for products we sell, we may not be able to pass these higher costs on to our customers.
18
Existing or new laws and regulations, or changes to enforcement or interpretation of existing laws or regulations, may prohibit, restrict or burden the sale of aftermarket, recycled, refurbished or remanufactured products.
Most states have passed laws that prohibit or limit the use of aftermarket products in collision repair work. These laws include requirements relating to consumer disclosure, vehicle owner’s consent regarding the use of aftermarket products in the repair process, and the requirement to have aftermarket products certified by an independent testing organization. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a particular vehicle product, or in the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.
Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled products that we provide, such as airbags. In addition, laws relating to the regulation of parts affecting vehicle emissions, such as California’s Proposition 65, may impact the ability of our Specialty segment to sell certain accessory products. These and other jurisdictions could enact similar laws or could prohibit or severely restrict the sale of additional recycled products. The passage of legislation with prohibitions or restrictions that are more severe than current laws could have a material adverse impact on our business. Additionally, Congress could enact federal legislation restricting the use of aftermarket or recycled automotive products used in the course of vehicle repairs.
The Federal Trade Commission has issued guides that regulate the use of certain terms such as “rebuilt” or “remanufactured” in connection with the sale of automotive parts. Restrictions on the products we are able to sell and on the marketing of such products could decrease our revenue and have an adverse effect on our business and operations.
In 1992, Congress enacted the Anti-Car Theft Act to deter trafficking in stolen vehicles. The purpose of the law is to implement an electronic system to track and monitor vehicle identification numbers and major automotive parts. In January 2009, the U.S. Department of Justice implemented the portion of the system to track and monitor vehicle identification numbers. The portion of the system that would track and monitor major automotive parts would require various entities, including automotive parts recyclers like us, to inspect salvage vehicles for the purpose of collecting the part number for any "covered major part." The Department of Justice has not promulgated rules on this portion of the system, and therefore there has been no progress on the implementation of the system to track and monitor major automotive parts. However, if this system is fully implemented, the requirement to collect the information would place substantial burdens on vehicle recyclers, including us, that otherwise would not normally exist. It would place similar burdens on repair shops, which may discourage the use by such shops of recycled products. There is no pending initiative to implement the parts registration from a law enforcement point of view. However, there is a risk that a heightened legislative concern over safety of parts might precipitate an effort to push for the implementation of such rules.
An adverse change in our relationships with our suppliers, or a disruption to our supply of inventory, or the misconduct, performance failures or negligence of our third party vendors or service providers could increase our expenses, and impede our ability to serve our customers.customers, or expose us to liability.
Our Wholesale - North AmericanAmerica business is dependent on a relatively small number of suppliers of aftermarket products, a large portion of which are sourced from Taiwan. Our European business also acquires productproducts from Asian sources. We incur substantial freight costs to import parts from our suppliers, many of which are located in Asia. IfThe cost of freight and shipping containers rose in 2021 and 2022 relative to historical levels, and if the cost of freight rose,and shipping containers continue to rise, we might not be able to pass the cost increases on to our customers. Furthermore, although alternative suppliers exist for substantially all aftermarket products distributed by us, the loss of any one supplier could have a material adverse effect on us until alternative suppliers are located and have commenced manufacturing and providing the relevant products. In addition, we are subject to disruptions from work stoppages and other labor disputes at port facilities through which we import our inventory. We also face the risk that our suppliers could attempt to circumvent us and sell their product directly to our customers; consolidation of our suppliers could enhance their ability to distribute products through additional sales channels and thus decrease their reliance on wholesale distributors like us.
Moreover, our operations are subject to the customary risks of doing business abroad, including, among other things, natural disasters, transportation costs and delays, political instability, currency fluctuations and the imposition of tariffs, import and export controls and other non-tariff barriers (including changes in the allocation of quotas), as well as the uncertainty regarding future relations between China, Japan and Taiwan. For example, U.S. Customs and Border Protection have used claims of intellectual property infringement to seize certain of our aftermarket parts as we attempted to import them into the U.S.
Because a substantial volume of our sales involves products manufactured from sheet metal, we can be adversely impacted if sheet metal becomes unavailable or is only available at higher prices, which we may not be able to pass on to our customers. Additionally, as OEMs convert to raw materials other than steel, it may be more difficult or expensive to source aftermarket parts made with such materials, and it may be more difficult for repair shops to work with such materials in the repair process.
Most of our salvage and a portion of our self service inventory is obtained from vehicles offered at salvage auctions operated by several companies that own auction facilities in numerous locations across the U.S. We do not typically have contracts with the auction companies. According to industry analysts, a small number of companies control a large percentage of the salvage auction market in the U.S. If an auction company prohibited us from participating in its auctions, began competing with us, or significantly raised its fees, our business could be adversely affected through higher costs or the resulting potential inability to service our customers. Moreover, we face competition in the purchase of vehicles from direct competitors, rebuilders, exporters and other bidders. To the extent that the number of bidders increases, it may have the effect of increasing our cost of goods sold for wholesale recycled products. Some states regulate bidders to help ensure that salvage vehicles are purchased for legal purposes by qualified buyers. Auction companies have been actively seeking to reduce, circumvent or eliminate these regulations, which would further increase the number of bidders.
In addition, there is a limited supply of salvage vehicles in the U.S., and thus the costs to us of these vehicles could increase over time. In some states, when a vehicle is deemed a total loss, a salvage title is issued. Whether states issue salvage titles is important to the supply of inventory for the vehicle recycling industry because an increase in vehicles that qualify as salvage vehicles provides greater availability and typically lowers the price of such vehicles. Currently, these titling issues are a matter of state law. In 1992, the U.S. Congress commissioned an advisory committee to study problems relating to vehicle titling, registration, and salvage. Since then,National legislation has been introduced seeking to establish national uniform requirements in this area, including a uniform definition of a salvage vehicle.vehicle, has been introduced but not enacted. The vehicle recycling industry will generally favorfavors a uniform
definition, since it willwould avoid inconsistencies across state lines, and will generally favorfavors a definition that expands the number of damaged vehicles that qualify as salvage. However, certain interest groups, including repair shops and some insurance associations, may oppose this type of legislation. National legislation has not yet been enacted in this area, and thereThere can be no assurance that such legislation will be enacted in the future.
We also acquire inventory directly from insurance companies, OEMs, and others. To the extent that these suppliers decide to discontinue these arrangements, our business could be adversely affected through higher costs or the resulting potential inability to service our customers.
In Europe, we acquire products from a wide variety of suppliers. As vehicle technology changes, some parts will become more complex and the design or technology of those parts may be covered by patents or other rights that make it difficult for manufacturers to supply such aftermarket suppliers to produce for saleparts to companies such as ours. The complexity of the parts may include software or other technical aspects that make it difficult to identify what is wrong with the vehicle. More complex parts may be difficult to repair and may require expensive or difficult to obtain software updates, limiting our ability to compete with the OEMs.
Our annual
We rely on third parties to provide products and quarterlyservices that are integral to our operations. If we fail to adequately assess, monitor and regulate the performance may fluctuate.
Our revenue, cost of goods sold,our third party vendors and operating results have fluctuated on a quarterly and annual basis inservice providers, we could be subject to additional risk caused by the past and can be expected to continue to fluctuate in the future as a resultmisconduct, performance failures or negligence of a numberthese third parties. For example, these could include violations of, factors, many of which are beyondor noncompliance with, laws and/or regulations governing our control. Future factors that may affect our operating results include,business (including, but are not limited to, bribery, cybersecurity or privacy laws), which could lead to sanctions and/or fines from governmental agencies. Our arrangements with third party vendors and service providers may cause us financial and reputational harm if those listed inthird parties fail to satisfy their obligations to us, including their obligations to maintain and protect the Special Note on Forward-Looking Statements in this Annual Report on Form 10-K. Additionally,security and confidentiality of our information and data or the numberinformation and data relating to our customers. See the risk factor entitled “The costs of selling days can fluctuate each quarter causing volatility in revenuecomplying with the requirements of laws pertaining to the privacy and net income.Accordingly,security of personal information and the potential liability associated with the failure to comply with such laws could materially adversely affect our business and results of operations may not be indicative of future performance. These fluctuations in our operating results may cause our results to fall below our published financial guidance” for further information about the security and the expectations of public markets, which could cause our stock price or the valueconfidentiality of our debt instruments to decline.
Our key management personnel are important to successfully manageinformation and data. Further, noncompliance with contract terms by our business and achieve our objectives.
Our future success depends in large part upon the leadership and performance of our executive management team and key employees at the operating level. If we lose the services of onethird party vendors or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. If we lose the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, whichservice providers could harm our business. In addition, to the extent wage inflation occurs in jurisdictions in which we operate, we may not be able to retain key employees or we may experience increased costs.
We operate in foreign jurisdictions, which exposes us to foreign exchange and other risks.
We have operations in North America, Europe and Taiwan, and we may expand our operations in the countries in which we do business and into other countries. Our foreign operations expose us to additional risks associated with international business, which could have an adverse effect onliability to other third parties or our business, results of operations and/or financial condition, including import and export requirements and compliance with anti-corruption laws, such as the U.K. Bribery Act 2010 and the Foreign Corrupt Practices Act. We also incur costs in currencies other than our functional currencies in some of the countries in which we operate. We are thus subject to foreign exchange exposure to the extent that we operate in different currencies, as well as exposure to foreign tax and other foreign and domestic laws. In addition, certain countries in which we operate have a higher level of political instability and criminal activity than the U.S. that could affect our operations and the ability to maintain our supply of products.employees.
If we determine that our goodwill or other intangible assets have become impaired, we may incur significant charges to our pre-taxpretax income.
Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. In the future, our goodwill and intangible assets may increase as a result of acquisitions. Goodwill is reviewed at least annually for impairment. Impairment may result from, among other things, deterioration in the performance of acquired businesses, deterioration of expected future cash flows or performance, increases in our cost of capital, adverse market conditions, and adverse changes in applicable laws or regulations, including modifications that restrict the activities of the acquired business. As of December 31, 2019,2022, our total goodwill subject to future impairment testing was $4.4 billion.$4,319 million. For further discussion of our annual impairment test, see "Goodwill Impairment" in the Critical Accounting Policies and Estimates section of Part II, Item 7 and "Intangible Assets" in Note 3, "Summary of Significant Accounting Policies" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
Except for indefinite-lived intangibles, we amortize other intangible assets over the assigned useful lives, each of which is based upon the expected period to be benefited. We review indefinite-lived intangible assets for impairment annually or sooner if events or changes in circumstances indicate that the carrying value may not be recoverable. We review finite-lived intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. In the event conditions change that affect our ability to realize the underlying cash flows associated with our intangible assets, we may record an impairment charge. As of December 31, 20192022, the value of our other intangible assets, net of accumulated amortization, was $850$653 million.
Our business may be adversely affected by union activities and labor and employment laws.
Certain of our employees are represented by labor unions and other employee representative bodies and work under collective bargaining or similar agreements, which are subject to periodic renegotiation. From time to time, there have been efforts to organize additional portions of our workforce and those efforts can be expected to continue. In addition, legislators and government agencies could adopt new regulations, or interpret existing regulations in a manner, that could make it significantly easier for unionization efforts to be successful. Also, we may in the future be subject to strikes or work stoppages, union and works council campaigns, and other labor disruptions and disputes. Additional unionization efforts, new collective bargaining or similar agreements, and work stoppages could materially increase our costs and reduce revenue and could limit our flexibility in terms of work schedules, reductions in force and other operational matters.
We also are subject to laws and regulations that govern such matters as minimum wage, overtime and other working conditions. Some of these laws are technical in nature and could be subject to interpretation by government agenciesproduct liability claims and courts different thaninvolved in product recalls.
If our interpretations. Efforts to comply with existing laws, changes to such laws and newly-enacted laws may increase our labor costs and limit our flexibility. If we were found not to be in compliance with such laws,products cause injury or property damage, we could be subject to fines, penalties and liabilities toproduct liability claims. The successful assertion of this type of claim could have an adverse effect on our employeesbusiness, results of operations or government agencies.financial condition. In addition, effortswe may become involved in the recall of a product that is determined to better protect local markets from foreign workersbe defective. More generally, a recall involving alternative parts, even if we did not sell the recalled products, could adversely affect the perceived quality of alternative parts, leading to decreased usage of alternative parts. The expenses of a recall and decisions of countries to withdraw from treaties and joint economic areas may lead to increased restrictions on the free movement of people and labor and may limit our ability to place key personnel where they could best serve our needs.
We rely on information technology and communication systems in critical areas of our operations and a disruption relating to such technology could harm our business.
In the ordinary course of business, we rely upon information technology networks and systems, some of which are leased from third parties, to process, transmit and store electronic information and to manage and support a variety of business processes and activities. The secure operation of these information technology networks and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and business continuity plans, our information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by cyber criminals, breaches due to employee error or malfeasance, disruptions during the process of upgrading or replacing computer software or hardware, terminations of business relationships by third party service providers, power outages, computer viruses, telecommunication or utility failures, terrorist acts, natural disasters or other catastrophic events. The occurrence of any of these events could compromise our networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or loss of information could result in legal claims or proceedings, disruption to our operations and damage to our reputation, anyor the reputation of whichalternative parts generally, could adversely affect our business. In addition, as security threats continue to evolve, we will likely need to invest additional resources to protect the security of our systems.
In the event that we decide to switch providers or to implement upgrades or replacements to our own systems, we may be unsuccessful in the development of our own systems or we may underestimate the costs and expenses of switching providers or developing and implementing our own systems. Also, our revenue may be hampered during the period of implementinghave an alternative system, which period could extend longer than we anticipated. We are in the midst of a systems conversion project for our European businesses, which will be subject to all of these risks.
The costs of complying with the requirements of laws pertaining to the privacy and security of personal information and the potential liability associated with the failure to comply with such laws could materially adversely affectadverse effect on our business, and results of operations or financial condition.
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We collect personally identifiable information ("PII")have agreed to defend and other data as partindemnify in certain circumstances insurance companies and customers against claims and damages relating to product liability and product recalls. The existence of claims or damages for which we must defend and indemnify these parties could also negatively impact our business, processes and operations. The legislative and regulatory framework relatingresults of operations or financial condition.
We may not be able to privacy and data protection is rapidly evolving worldwide and is likely to remain uncertain for the foreseeable future. This data is subject to a variety of U.S. and international laws and regulations. Many foreign countries and governmental bodies, including the European Union, Canada and other jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII and other data obtained from their residentssuccessfully acquire new businesses or by businesses operating within their jurisdictions that are more restrictive than those in the U.S. Additionally, the European Union adopted the General Data Protection Regulation ("GDPR") that will impose more stringent data protection requirements for processors and controllers of personal data, including expanded disclosures about how PII is to be used, limitations on retention of PII, mandatory data breach notification requirements, and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The GDPR became effective in May 2018, and there can be no assurance that we have timely implemented all processes required for full compliance with the regulation. The GDPR provides severe penalties for noncompliance. In addition, stricter laws in this area are being enacted in certain states in the U.S. and in other countries, and more jurisdictions are likely to follow this trend.
Any inability, or perceived inability, to adequately address privacy and data protection issues, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations (including at newly-acquired companies) could result in additional cost and liability to us, result in governmental investigations and enforcement actions, give rise to civil litigation, result in damage to our reputation (including the loss of trust by our customers and employees), inhibit sales, and otherwise adversely affect our business. We also may be subject to these adverse effects if other parties with whom we do business, including lenders, suppliers, consultants and advisors, violate applicable laws or contractual obligations or suffer a security breach.
Business interruptions in our distribution centers or other facilities may affect our operations, the function of our computer systems, and/or the availability and distribution of merchandise, which may affect our business.
Weather, terrorist activities, war or other disasters, or the threat of any of them, may result in the closure of our distribution centers or other facilities or may adversely affect our ability to deliver inventory through our system on a timely basis. This may affect our ability to serve our customers, resulting in lost sales or a potential loss of customer loyalty. Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring into the U.S. or into the other countries in which we operate,integrate acquisitions, and we may not be able to successfully divest certain businesses.
We may not be able to successfully complete potential strategic acquisitions if we cannot reach agreement on acceptable terms, if we do not obtain required antitrust or other regulatory approvals, or for other reasons. Moreover, we may not be able to identify acquisition candidates at reasonable prices and/or be able to successfully integrate acquisitions.
If we buy a company or a division of a company, we may experience difficulty integrating that company's or division's personnel and operations, which could negatively affect our operating results. In addition:
•the key personnel of the acquired company may decide not to work for us;
•customers of the acquired company may decide not to purchase products from us;
•suppliers of the acquired company may decide not to sell products to us;
•we may experience business disruptions as a result of information technology systems conversions;
•we may experience additional financial and accounting challenges and complexities in areas such merchandiseas tax planning, treasury management, and financial reporting;
•we may be held liable for environmental, tax or other risks and liabilities as a result of our acquisitions, some of which we may not have discovered during our due diligence;
•we may intentionally assume the liabilities of the companies we acquire, which could result in material adverse effects on our business;
•our existing business may be disrupted or receive insufficient management attention;
•we may not be able to realize the cost savings or other financial benefits we anticipated, either in the amount or in the time frame that we expect; and
•we may incur debt or issue equity securities to pay for any future acquisition, the issuance of which could involve the imposition of restrictive covenants or be dilutive to our existing stockholders.
For example, we have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business; this program has presented and will continue to present a number of execution challenges. The COVID-19 pandemic has impacted certain 1 LKQ Europe initiatives, resulting in minor delays.
In addition to acquisitions, we have divested, and will continue to divest, certain businesses, either because they do not meet our performance standards or for other reasons. As a result of a divestment, we may not recover the carrying value of our investment in the divested business; in addition, such divestment transactions require significant management time and attention.
Risks Relating to Our Financial Structure
We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.
As of December 31, 2022, we had approximately $1,786 million aggregate principal amount of unsecured debt outstanding and approximately$1,295 million of availability under our credit agreement ($1,364 million of availability reduced by $69 million of amounts outstanding under letters of credit). In addition, we had approximately $803 million aggregate principal amount of unsecured debt outstanding comprised of €500 million ($535 million) aggregate principal amount of 3.875% senior notes due April 1, 2024 (the "Euro Notes (2024)"), and €250 million ($268 million) of 4.125% senior notes due 2028 (the "Euro Notes (2028)," and together with the Euro Notes (2024), the "senior notes"). Borrowings under the credit agreement mature in January 2024.
Our significant amount of debt and our debt service obligations could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position.
For example, our debt and our debt service obligations could:
•increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other sourcesgeneral corporate purposes;
•limit our flexibility in planning for, or reacting to, changes in our business and industry;
•place us at similar prices. Such a disruptiondisadvantage compared to competitors that may have proportionately less debt;
•limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in revenueour debt agreements; and
•increase our cost of borrowing.
In addition, if we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the ability to service such debt would increase.
Our senior notes do not impose any limitations on our ability to incur additional debt or protect against certain other types of transactions, and we may incur additional indebtedness under our credit agreement.
Although we are subject to our credit agreement for so long as it remains in effect, the indentures governing the senior notes do not restrict the future incurrence of unsecured indebtedness, guarantees or other obligations. The indentures contain certain limitations on our ability to incur liens on assets and engage in sale and leaseback transactions. However, these limitations are subject to important exceptions. In addition, the indentures do not contain many other restrictions, including certain restrictions contained in our credit agreement, including, without limitation, making investments, prepaying subordinated indebtedness or engaging in transactions with our affiliates.
Our credit agreement will permit, subject to specified conditions and limitations, the incurrence of a significant amount of additional indebtedness under the existing agreement. As of December 31, 2022, we would have been able to incur an additional $1,295 million of indebtedness under our credit agreement ($1,364 million of availability reduced by $69 million of amounts outstanding under letters of credit). If we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the need to service such debt would increase.
Our credit agreement imposes operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.
Our credit agreement imposes operating and financial restrictions on us. These restrictions may limit our ability, among other things, to:
•incur, assume or permit to exist additional indebtedness (including guarantees thereof) outside of our credit agreement;
•incur liens on assets;
•engage in transactions with affiliates;
•sell certain assets or merge or consolidate with or into other companies;
•guarantee indebtedness; and
•alter the business we conduct.
As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could potentiallyinclude more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. The failure to comply with any of these covenants would cause a default under the credit agreement. A default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may be on terms that are less attractive to us than our existing credit facilities or it may be on terms that are not acceptable to us.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to
consummate those dispositions or to obtain the proceeds that we hope to realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally, our credit agreement and the indentures that govern our senior notes limit the use of the proceeds from certain dispositions of our assets; as a result, our credit agreement and our senior notes may prevent us from using the proceeds from such dispositions to satisfy all of our debt service obligations.
Our future capital needs may require that we seek to refinance our debt or obtain additional debt or equity financing, events that could have a negative effect on our business.
We may need to raise additional funds in the future to, among other things, refinance existing debt, fund our existing operations, improve or expand our operations, respond to competitive pressures, or make acquisitions. From time to time, we may raise additional funds through public or private financing, strategic alliances, or other arrangements. Funds may not be available or available on terms acceptable to us as a result of different factors, including but not limited to turmoil in the credit markets that results in the tightening of credit conditions and current or future regulations applicable to the financial institutions from which we seek financing. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to higher borrowing costs and further limitations on our operations. If we refinance or restructure our debt, we may incur charges to write off the unamortized portion of deferred debt issuance costs from a previous financing, or we may incur charges related to hedge ineffectiveness from our interest rate swap obligations. There are restrictions in the indentures that govern the Euro Notes (2024) and Euro Notes (2028) on our ability to refinance such notes prior to January 1, 2024 and April 1, 2023, respectively. We could refinance the senior notes through open market purchases, subject to a limitation in our credit agreement on the amount of such purchases. If we fail to raise capital when needed, our business may be negatively affected.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly.
Borrowings under our credit agreement are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. Moreover, changes in market interest rates could affect the trading value of the senior notes.
Repayment of our indebtedness is dependent on cash flow generated by our subsidiaries.
We are a holding company and repayment of our indebtedness will be dependent upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are borrowers or guarantors of the indebtedness, our subsidiaries do not have any obligation to pay amounts due on the indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the senior notes. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and, under certain circumstances, distributions from our subsidiaries may be subject to taxes that reduce the amount of such distributions available to us. While the indentures governing the senior notes limit the ability of our subsidiaries to restrict the payment of dividends or to restrict other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive sufficient distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the senior notes.
A downgrade in our credit rating would impact our cost of capital.
Credit ratings have an important effect on our cost of capital. Credit rating agencies rate our debt securities on factors that include, among other items, our results of operations, business decisions that we make, their view of the general outlook for our industry, and financial condition. their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading, or downgrading the current rating or placing us on a watch list for possible future downgrading. We believe our current credit ratings enhance our ability to borrow funds at favorable rates. A downgrade in our current credit rating from a rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed funds under our credit facilities. A downgrade could also adversely affect our ability to issue debt securities in the future or incur other indebtedness upon favorable terms. If we are downgraded to a rating that is below investment grade, we may also become subject to additional covenants under our senior notes.
The amount and frequency of our share repurchases and dividend payments may fluctuate.
The amount, timing and execution of our share repurchase program may fluctuate based on our priorities for the use of cash for other purposes such as operational spending, capital spending, acquisitions or repayment of debt. Changes in cash flows, tax laws and our share price could also impact our share repurchase program and other capital activities. Additionally, decisions to return capital to shareholders, including through our repurchase program or the issuance of dividends on our common stock, remain subject to determination of our Board of Directors that any such activity is in the best interests of our shareholders and is in compliance with all applicable laws and contractual obligations.
Legal and Regulatory Risks
Existing or new laws and regulations, or changes to enforcement or interpretation of existing laws or regulations, may prohibit, restrict or burden the sale of aftermarket, recycled, refurbished or remanufactured products.
Many states have introduced or passed laws that limit the use of aftermarket products in collision repair. These laws include requirements relating to consumer disclosure, vehicle owner’s consent regarding the use of aftermarket products in the repair process, and the requirement to have aftermarket products certified by an independent testing organization. Additional legislation of this kind may be introduced in the future. If additional laws prohibiting or restricting the use of aftermarket products are passed, it could have an adverse impact on our aftermarket products business.
Certain organizations test the quality and safety of vehicle replacement products. If these organizations decide not to test a particular vehicle product, or in the event that such organizations decide that a particular vehicle product does not meet applicable quality or safety standards, we may decide to discontinue sales of such product or insurance companies may decide to discontinue authorization of repairs using such product. Such events could adversely affect our business.
Some jurisdictions have enacted laws prohibiting or severely restricting the sale of certain recycled products that we provide, such as airbags. In addition, laws relating to the regulation of parts affecting vehicle emissions, such as California’s Proposition 65, may impact the ability of our Specialty segment to sell certain accessory products. These and other jurisdictions could enact similar laws or could prohibit or severely restrict the sale of additional recycled products. The passage of legislation with prohibitions or restrictions that are more severe than current laws could have a material adverse effect on our business. Additionally, Congress could enact federal legislation restricting the use of aftermarket or recycled automotive products used in the course of vehicle repairs. In Europe, the Motor Vehicle Block Exemption Regulations (MVBER) regulate the competition rules on automotive spare parts. The 2010 MVBER are due to expire in May 2023. The current indications are that the 2010 MVBER will be extended for 5 years, with additional guidance to be provided by the European Commission in a supplementary guidance regarding new technology and software provided by OEMs. In July 2022, the European Commission published for consultation its proposal to extend the MVBER to May 31, 2028 and amend the supplementary guidelines.
The Federal Trade Commission has issued guides that regulate the use of certain terms such as “rebuilt” or “remanufactured” in connection with the sale of automotive parts. Restrictions on the products we are able to sell and on the marketing of such products could decrease our revenue and have an adverse effect on our business and operations.
We are subject to environmental regulations and incur costs relating to environmental mattersmatters.
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We are subject to various environmental protection and health and safety laws and regulations governing, among other things: the emission and discharge of hazardous materials into the ground, air, or water; exposure to hazardous materials; and the generation, handling, storage, use, treatment, identification, transportation, and disposal of industrial by-products, waste water, storm water, and mercury and other hazardous materials. We are also required to obtain environmental permits from governmental authorities for certain of our operations. If we violate or fail to obtain or comply with these laws, regulations, or permits, we could be fined or otherwise sanctioned by regulators or lose our operating permits. We could also become liable if employees or other parties are improperly exposed to hazardous materials. We have an environmental management process designed to facilitate and support our compliance with these requirements; we cannot assure you, however, that we will at all times be in complete compliance with such requirements.
We have made and will continue to make capital and other expenditures relating to environmental matters. Although we presently do not expect to incur any capital or other expenditures relating to environmental controls or other environmental matters in amounts that would be material to us, we may be required to make such expenditures in the future.
Under certain environmental laws, we could be held responsible for all of the costs relating to any contamination at, or migration to or from, our or our predecessors' past or present facilities and at independent waste disposal sites. These laws often impose liability even if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. Many of our facilities are located on or near properties with a history of industrial use that may have involved hazardous materials. As a result, some of our properties may be contaminated. Some environmental laws hold current or previous owners or operators of real property liable for the costs of cleaning up contamination. These environmental laws also impose liability on any person who disposes of, treats, or arranges for the disposal or treatment of hazardous substances, regardless of whether the affected site is owned or operated by such person, and at times can impose liability on companies deemed under law to be a successor to such person. Third parties may also make claims against owners or operators of properties, or successors to such owners or operators, for personal injuries and property damage associated with releases of hazardous or toxic substances.
Contamination resulting from vehicle recycling processes can include soil and ground water contamination from the release, storage, transportation, or disposal of gasoline, motor oil, antifreeze, transmission fluid, chlorofluorocarbons ("CFCs") from air conditioners, other hazardous materials, or metals such as aluminum, cadmium, chromium, lead, and mercury. Contamination from the refurbishment of chrome plated bumpers can occur from the release of the plating material. Contamination can migrate on-site or off-site, which can increase the risk, and the amount, of any potential liability.
When we identify a potential material environmental issue during our acquisition due diligence process, we analyze the risks, and, when appropriate, perform further environmental assessment to verify and quantify the extent of the potential contamination. Furthermore, where appropriate, we have established financial reserves for certain environmental matters. In the event we discover new information or if laws change, we may incur significant liabilities, which may exceed our reserves.
Environmental laws are complex, change frequently, and have tended to become more stringent over time. Our costs of complying with current and future environmental and health and safety laws, and our liabilities arising from past or future releases of, or exposure to, hazardous substances, may adversely affect our business, results of operations, or financial condition.
We may be adversely affected by legal, regulatory or market responses to global climate change.
Growing concern over climate change has led policy makers to consider the enactment of legislative and regulatory proposals that would impose mandatory requirements on greenhouse gas emissions. Such laws, if enacted, are likely to impact our business in a number of ways. For example, significant increases in fuel economy requirements, new federal or state restrictions on emissions of carbon dioxide or new federal or state incentive programs that may be imposed on vehicles and automobile fuels could adversely affect demand for vehicles, annual miles driven or the products we sell. We may not be able to accurately predict, prepare for and respond to new kinds of technological innovations with respect to electric vehicles and other technologies that minimize emissions. Compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, could require additional expenditures by us or our suppliers. Our inability to appropriately respond to such changes could adversely impact our business, financial condition, results of operations or cash flows.
Moreover, the perspectives of our customers, suppliers, stockholders, employees, community partners, regulatory agencies and other stakeholders regarding climate change are evolving. These stakeholders are increasingly requesting disclosures and actions relating to not only climate change but other environmental and social matters and corporate governance practices. The increase in costs to comply with such evolving expectations, including any rules or regulations resulting from these evolving expectations, as well as any risk of noncompliance, could adversely impact us.
Our amended and restated bylaws provide that the courts in the State of Delaware are the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated bylaws provide that the Court of Chancery of the State of Delaware (or if the Court of Chancery does not have jurisdiction, another court of the State of Delaware, or if no court of the State of Delaware has jurisdiction, the federal district court for the District of Delaware) shall be the exclusive forum for the following types of actions or proceedings:
•any derivative action or proceeding brought on our behalf;
•any action asserting a breach of fiduciary duty;
•any action asserting a claim against us arising under the Delaware General Corporation Law, our certificate of incorporation, or our bylaws;
•any action asserting a claim governed by the internal-affairs doctrine; and
•any action to interpret, apply, enforce or determine the validity of our certificate of incorporation or our bylaws.
The choice of forum provision in our bylaws does not apply to claims brought to enforce any duty or liability created by the Exchange Act or the Securities Act or any claim with respect to which the federal courts have exclusive jurisdiction.
Although we believe this provision benefits us by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers due to, among other possible factors, increased costs of such lawsuits and limitations on the ability to bring claims in a judicial forum that the plaintiffs may consider more favorable. Alternatively, if a court were to find the choice of forum provision contained in our bylaws to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and operating results.
Our effective tax rate could materially increase as a consequence of various factors, including U.S. and/or international tax legislation, applicable interpretations and administrative guidance, our mix of earnings by jurisdiction, and U.S. and foreign jurisdictional audits.
We are a U.S. based multinational company subject to product liability claimsincome taxes in the U.S. and involved in product recalls.
If customersa number of repair shops that purchase our productsforeign jurisdictions. Therefore, we are injured or suffer property damage, we could be subject to product liability claims bychanges in tax laws in each of these jurisdictions, and such customers. The successful assertion of this type of claimchanges could have ana material adverse effect on our business, resultseffective tax rate and cash flows.
On August 16, 2022, the U.S. enacted legislation commonly referred to as the Inflation Reduction Act (the "IRA"). The IRA contained a number of operations or financial condition. In addition, we may become involvednew provisions the most significant of which are a new Corporate Alternative Minimum Tax and a new Stock Repurchase Excise Tax. Additionally, many non-U.S. jurisdictions are implementing tax legislation based upon recommendations made by the Organization for Economic Co-operation and Development in connection with its Base Erosion and Profit Shifting study, as well as certain anti-tax-avoidance initiatives advanced by the recallEuropean Commission. The outcome of a product that is determined to be defective. More generally, a recall involving alternative parts, even if we did not sell the recalled products, could adversely affect the perceived quality of alternative parts, leading to decreased usage of alternative parts. The expenses of a recall and the damage to our reputation, or the reputation of alternative parts generally,these legislative developments could have ana material adverse effect on our business,effective tax rate and cash flows.
The tax rates applicable in the jurisdictions within which we operate vary widely. Therefore, our effective tax rate may be adversely affected by changes in the mix of our earnings by jurisdiction.
We are also subject to ongoing audits of our income tax returns in various jurisdictions both in the U.S. and internationally. While we believe that our tax positions will be sustained, the outcomes of such audits could result in the assessment of additional taxes, which could adversely impact our cash flows and financial results.
If significant tariffs or other restrictions are placed on products or materials we import or any related counter-measures are taken by countries to which we export products, our revenue and results of operations ormay be materially harmed.
The U.S. has imposed tariffs on certain materials imported into the U.S. from China and announced additional tariffs on other goods from China and other countries. Moreover, counter-measures have been taken by other countries in retaliation for the U.S.-imposed tariffs. The tariffs cover products and materials that we import, and the counter-measures may affect products we export. The effects currently are not material; however, depending on the breadth of products and materials ultimately affected by, and the duration of, the tariffs and countermeasures, our financial condition.results may be materially harmed. In addition, countries may impose other restrictions on the importation of products.
We have agreed to defend and indemnify in certain circumstances insurance companies and customers against claims and damages relating to product liability and product recalls. The existence of claims or damages for which we must defend and indemnify these parties could also negatively impact our business, results of operations or financial condition.
Governmental agencies may refuse to grant or renew our operating licenses and permits.
Our operating subsidiaries in our salvage, self-service,self service, and refurbishing operations must obtain licenses and permits from state and local governments to conduct their operations. When we develop or acquire a new facility, we must seek the approval of state and local units of government. Governmental agencies may resist the establishment of a vehicle recycling or refurbishing facility in their communities. There can be no assurance that future approvals or transfers will be granted. In addition, there can be no assurance that we will be able to maintain and renew the licenses and permits our operating subsidiaries currently hold.
Regulations
General Risk Factors
Our employees are important to successfully manage our business and achieve our objectives.
Our future success depends in large part upon the leadership and performance of our executive management team and key employees at the operating level. If we lose the services of one or more of our executive officers or key employees, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives. If we lose the services of any of our key employees at the operating or regional level, we may not be able to replace them with similarly qualified personnel, which could harm our business. In addition, we have experienced wage inflation in the jurisdictions in which we operate. An inability to respond to these inflationary pressures could impact our ability to retain key employees or we may experience increased costs due to difficulties related to conflict-free minerals may forcehiring and retaining employees.
We operate in foreign jurisdictions, which exposes us to incur additional expensesforeign exchange and otherwise adversely impact our businessother risks.
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In August 2012, as mandated by the Dodd-Frank Wall Street ReformWe have operations in North America, Europe and Consumer Protection Act, the SEC adopted final rules regarding disclosure of the use of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo or adjoining countries. These requirements impose significant burdens on U.S. public companies. Compliance with the rules requires substantial due diligence in an effort to determine whether products contain the conflict minerals. The results of such due diligence efforts must be disclosed on an annual basis in a filing with the SEC.
Our supply chain is complexTaiwan, and we may incur significant costsexpand our operations in the countries in which we do business and into other countries. Our foreign operations expose us to determine the source of any such minerals used in our products. We may also incur costsadditional risks associated with respect to potential changes to products, processes or sources of supply as a consequence of our diligence activities. Further, the implementation of these rules and their effect on customer, supplier and/or consumer behavior could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering products free of conflict minerals in some circumstances, we cannot be sure that we will be able to obtain necessary products from such suppliers in sufficient quantities or at competitive prices. We may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict-free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we implement. Accordingly, these rulesinternational business, which could have a materialan adverse effect on our business, results of operations and/or financial condition, including import and export requirements and compliance with anti-corruption laws, such as the U.K. Bribery Act 2010 and the Foreign Corrupt Practices Act. We also incur costs in currencies other than our functional currencies in some of the countries in which we operate. We are thus subject to foreign exchange exposure to the extent that we operate in different currencies, as well as exposure to foreign tax and other foreign and domestic laws. In addition, certain countries in which we operate have a higher level of political instability and criminal activity than the U.S. that could affect our operations and the ability to maintain our supply of products.
Our business may be adversely affected by union activities and labor and employment laws.
Certain of our employees are represented by labor unions and other employee representative bodies and work under collective bargaining or similar agreements, which are subject to periodic renegotiation. From time to time, there have been efforts to organize additional portions of our workforce and those efforts can be expected to continue. In addition, legislators and government agencies could adopt new regulations, or interpret existing regulations in a manner, that could make it significantly easier for unionization efforts to be successful. Also, we may in the future be subject to strikes or work stoppages, union and works council campaigns, and other labor disruptions and disputes. Additional unionization efforts, new collective bargaining or similar agreements, and work stoppages could materially increase our costs and reduce revenue and could limit our flexibility in terms of work schedules, reductions in force and other operational matters.
We also are subject to laws and regulations that govern such matters as minimum wage, overtime and other working conditions. Some of these laws are technical in nature and could be subject to interpretation by government agencies and courts different than our interpretations. Efforts to comply with existing laws, changes to such laws and newly-enacted laws may increase our labor costs and limit our flexibility. If we were found not to be in compliance with such laws, we could be subject to fines, penalties and liabilities to our employees or government agencies. In addition, efforts to better protect local markets from foreign workers and decisions of countries to withdraw from treaties and joint economic areas may lead to increased restrictions on the free movement of people and labor and may limit our ability to place key personnel where they could best serve our needs.
We rely on information technology and communication systems in critical areas of our operations and a disruption relating to such technology could harm our business.
In the ordinary course of business, we rely upon information technology networks and systems, some of which are provided by or leased from third parties, to process, transmit and store electronic information and to manage and support a variety of business processes and activities. The secure operation of these information technology networks and the processing and maintenance of this information is critical to our business operations and strategy. Despite security measures and business continuity plans, these information technology networks and infrastructure may be vulnerable to damage, disruptions or shutdowns due to attacks by cyber criminals, breaches due to employee error or malfeasance, disruptions during the process of upgrading or replacing computer software or hardware, terminations of business relationships by third party service providers, power outages, computer viruses, telecommunication or utility failures, terrorist acts, natural disasters or other catastrophic events. The occurrence of any of these events involving us or involving the third parties with whom we do business could compromise our or the third parties' networks, and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or loss of information could result in legal claims or proceedings, disruption to our
operations and damage to our reputation, any of which could adversely affect our business. In addition, as security threats continue to evolve, we will likely need to invest additional resources to protect the security of our systems.
In the event that we decide to switch providers or to implement upgrades or replacements to our own systems, we may be unsuccessful in the development of our own systems or we may underestimate the costs and expenses of switching providers or developing and implementing our own systems. Also, our revenue may be hampered during the period of implementing an alternative system, which period could extend longer than we anticipated. We are in the midst of a systems conversion project for our European businesses, which will be subject to all of these risks.
The costs of complying with the requirements of laws pertaining to the privacy and security of personal information and the potential liability associated with the failure to comply with such laws could materially adversely affect our business and results of operations.
We collect personally identifiable information ("PII") and other data as part of our business processes and operations. The legislative and regulatory framework relating to privacy and data protection is rapidly evolving worldwide and is likely to remain uncertain for the foreseeable future. This data is subject to a variety of U.S. and international laws and regulations. Many foreign countries and governmental bodies, including the European Union, Canada, U.K., Switzerland and other jurisdictions where we conduct business, have laws and regulations concerning the collection and use of PII and other data obtained from their residents or by businesses operating within their jurisdictions that are more restrictive than those in the U.S. Additionally, the European Union adopted the General Data Protection Regulation ("GDPR") that imposes more stringent data protection requirements for processors and controllers of personal data, including expanded disclosures about how PII is to be used, limitations on retention of PII, mandatory data breach notification requirements, possible restrictions on cross border transfers of PII and higher standards for data controllers to demonstrate that they have obtained valid consent for certain data processing activities. The GDPR provides severe penalties for noncompliance. In addition, stricter laws in this area are being enacted in certain states in the U.S. and in other countries, and more jurisdictions are likely to follow this trend.
Any inability, or perceived inability, to adequately address privacy and data protection issues, even if unfounded, or comply with applicable laws, regulations, policies, industry standards, contractual obligations or other legal obligations (including at newly-acquired companies) could result in additional cost and liability to us, result in governmental investigations and enforcement actions, give rise to civil litigation, result in damage to our reputation (including the loss of trust by our customers and employees), inhibit sales, and otherwise adversely affect our business. We also may be subject to these adverse effects if other parties with whom we do business, including lenders, suppliers, consultants and advisors, violate applicable laws or contractual obligations or suffer a security breach.
Business interruptions in our distribution centers or other facilities may affect our operations, the function of our computer systems, and/or the availability and distribution of merchandise, which may affect our business.
Weather, terrorist activities, war or other disasters, or the threat of any of them, may result in the breakdown of our distribution center systems, closure of our distribution centers or other facilities or may adversely affect our ability to deliver inventory through our system on a timely basis. This may affect our ability to serve our customers, resulting in lost sales or a potential loss of customer loyalty. Some of our merchandise is imported from other countries and these goods could become difficult or impossible to bring into the U.S. or into the other countries in which we operate, and we may not be able to obtain such merchandise from other sources at similar prices. Such a disruption in revenue could potentially have a negative impact on our results of operations and financial condition.
If we experience problems with our fleet of trucks and other vehicles, our business could be harmed.
We use a fleet of trucks and other vehicles to deliver the majority of the products we sell. We are subject to the risks associated with providing delivery services, including inclement weather, disruptions in the transportation infrastructure, governmental regulation, availability and price of fuel, liabilities arising from accidents to the extent we are not covered by insurance, and insurance premium increases.increases, and ability to hire drivers. In addition, our failure to deliver products in a timely and accurate manner could harm our reputation and brand, which could have a material adverse effect on our business.
We may lose the right to operate at key locations.
We lease most of the properties at which we conduct our businesses. At the end of a lease term, we must negotiate a renewal, exercise a purchase option (to the extent we have that right), or find a new location. There can be no assurance that we will be able to negotiate renewals on terms acceptable to us or that we will find a suitable alternative location, especially with respect to our salvage operations (which have characteristics that are often not attractive to landlords, local governments, or neighbors). In such cases, we may lose the right to operate at key locations.
Our effective tax rate could materially increase as a consequence of various factors, including interpretations and administrative guidance in regard to the Tax Act (defined below), U.S. and/or international tax legislation, mix of earnings by jurisdiction, and U.S. and foreign jurisdictional audits.
We are a U.S. based multinational company subject to income taxes in the U.S. and a number of foreign jurisdictions. Therefore, we are subject to changes in tax laws in each of these jurisdictions and such changes could have a material adverse effect on our effective tax rate and cash flows.
On December 22, 2017, the U.S. enacted legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). Among other things, the Tax Act reduced the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Additionally, beginning in 2018, the Tax Act imposed a regime of taxation on foreign subsidiary earnings (Global Intangible Low-Taxed Income, “GILTI”) and on certain related party payments (Base Erosion Anti-abuse Tax, “BEAT”). Other important changes potentially material to our operations included the full expensing of certain assets placed into service after September 27, 2017, the repeal of the domestic manufacturing deduction, and additional limitations on the deductibility of executive compensation. Finally, as part of the transition of U.S. international taxation from a worldwide tax system to a territorial tax system, the Tax Act imposed a one-time transition tax on the deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.
Many non-U.S. jurisdictions are implementing tax legislation based upon recommendations made by the Organization for Economic Co-operation and Development in connection with its Base Erosion and Profit Shifting study, as well as certain anti-tax-avoidance initiatives advanced by the European Commission. The outcome of these legislative developments could have a material adverse effect on our effective tax rate and cash flows.
The tax rates applicable in the jurisdictions within which we operate vary widely. Therefore, our effective tax rate may be adversely affected by changes in the mix of our earnings by jurisdiction.
We are also subject to ongoing audits of our income tax returns in various jurisdictions both in the U.S. and internationally. While we believe that our tax positions will be sustained, the outcomes of such audits could result in the assessment of additional taxes, which could adversely impact our cash flows and financial results.
If significant tariffs or other restrictions are placed on products or materials we import or any related counter-measures are taken by countries to which we export products, our revenue and results of operations may be materially harmed.
The current U.S. administration has imposed tariffs on certain materials imported into the U.S. from China and announced additional tariffs on other goods from China and other countries. Moreover, counter-measures have been taken by other countries in retaliation for the U.S.-imposed tariffs. The tariffs cover products and materials that we import, and the counter-measures may affect products we export. The effects currently are not material; however, depending on the breadth of products and materials ultimately affected by, and the duration of, the tariffs and countermeasures, our financial results may be materially harmed. In addition, countries may impose other restrictions on the importation of products. For example, in 2018 China imposed a ban on the importation of various types of solid waste allegedly in an effort to reduce environmental pollution. This ban includes certain scrap metals that we sell and continues to have the effect of reducing the prices of such products.
Activist investors could cause us to incur substantial costs, divert management’s attention, and have an adverse effect on our business.
We have in the past received, and we may in the future be subject to, proposals by activist investors urging us to take certain corporate actions. Activist investor activities could cause our business to be adversely affected because responding to proxy contests and other demands by activist investors can be costly and time-consuming, disrupt our operations, and divert the attention of management and our employees. For example, we have retained, and may in the future be required to retain, the services of various professionals to advise us on activist investor matters, including legal, financial and communications advisors, the costs of which may negatively impact our future financial results. Campaigns by activist investors to effect changes at publicly-traded companies are sometimes led by investors seeking to increase short term investor value through actions such as financial restructuring, increased debt, special dividends, stock repurchases, or sales of assets or the entire company. Perceived uncertainties as to our future direction, strategy or leadership that arise as a consequence of activist investor initiatives may result in the loss of potential business opportunities, harm our ability to attract new investors, employees and business partners, and cause our stock price to experience periods of volatility or stagnation.
Risks Relating to Our Common Stock and Financial Structure
The market price of our common stock may be volatile and could expose us to securities class action litigation.
The stock market and the price of our common stock may be subject to wide fluctuations based upon general economic and market conditions. The market price for our common stock may also be affected by our ability to meet analysts’ expectations. Failure to meet such expectations, even slightly, could have an adverse effect on the market price of our common stock. In addition, stock market volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to the operating performance of these companies. Downturns in the stock market may cause the price of our common stock to decline. Additionally, the market price for our common stock has been in the past, and in the future may be, adversely affected by allegations made or reports issued by short sellers, analysts, activists or others regarding our business model, our management or our financial accounting.
Following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such companies. If similar litigation were instituted against us, it could result in substantial costs and a diversion of our management’s attention and resources, which could have an adverse effect on our business.
Delaware law, our charter documents and our loan documents may impede or discourage a takeover, which could affect the price of our stock.
The anti-takeover provisions of our certificate of incorporation and bylaws, our loan documents and Delaware law could, together or separately, impose various impediments to the ability of a third party to acquire control of us, even if a change in control would be beneficial to our existing stockholders. Our certificate of incorporation and bylaws have provisions that could discourage potential takeover attempts and make attempts by stockholders to change management more difficult. Our credit agreement provides that a change of control is an event of default. Our incorporation under Delaware law and these provisions could also impede an acquisition, takeover, or other business combination involving us or discourage a potential acquirer from making a tender offer for our common stock, which, under certain circumstances, could reduce the price of our common stock.
Future sales of our common stock or other securities may depress our stock price.
We and our stockholders may sell shares of common stock or other equity, debt or instruments that constitute an element of our debt and equity (collectively, "securities") in the future. We may also issue shares of common stock under our equity incentive plan or in connection with future acquisitions. We cannot predict the size of future issuances of securities or the effect, if any, that future issuances and sales of shares of our common stock or other securities will have on the price of our common stock. Sales of substantial amounts of common stock (including shares issued in connection with an acquisition), the issuance of additional debt securities, or the perception that such sales or issuances could occur, may cause the price of our common stock to fall.
We cannot guarantee that our stock repurchase program will be fully implemented.
In October 2018, our Board of Directors approved a stock repurchase program totaling $500 million. In October 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock, bringing the authorized total to $1.0 billion. We are not obligated to repurchase a specified number or dollar value of shares, and our repurchase program may be suspended or terminated at any time.
We have a substantial amount of indebtedness, which could have a material adverse effect on our financial condition and our ability to obtain financing in the future and to react to changes in our business.
As of December 31, 2019, we had approximately $1.6 billion aggregate principal amount of secured debt outstanding and approximately $1.8 billion of availability under our credit agreement ($1.9 billion of availability reduced by $69 million of amounts outstanding under letters of credit). In addition, we had approximately $2.3 billion aggregate principal amount of unsecured debt outstanding comprising $600 million aggregate principal amount of 4.75% senior notes due May 15, 2023 (the "U.S. Notes (2023)"), €500 million ($561 million) aggregate principal amount of 3.875% senior notes due April 1, 2024 (the "Euro Notes (2024)"), and €1.0 billion ($1.1 billion) aggregate principal amount consisting of €750 million of 3.625% senior notes due 2026 (the "Euro Notes (2026)") and €250 million of 4.125% senior notes due 2028 (the "Euro Notes (2028)," together with the 2026 notes, the "Euro Notes (2026/28)," and together with the U.S. Notes (2023), Euro Notes (2024), and Euro Notes (2026), the "senior notes"). Borrowings under the credit agreement mature in January 2024. On January 10, 2020, we redeemed the U.S. Notes (2023) at a redemption price equal to 101.583% of the principal amount of the U.S. Notes (2023) plus accrued and unpaid interest.
Our significant amount of debt and our debt service obligations could limit our ability to satisfy our obligations, limit our ability to operate our business and impair our competitive position.
For example, our debt and our debt service obligations could:
increase our vulnerability to adverse economic and general industry conditions, including interest rate fluctuations, because a portion of our borrowings are and will continue to be at variable rates of interest;
require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, which would reduce the availability of our cash flow from operations to fund working capital, capital expenditures or other general corporate purposes;
limit our flexibility in planning for, or reacting to, changes in our business and industry;
place us at a disadvantage compared to competitors that may have proportionately less debt;
limit our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants in our debt agreements; and
increase our cost of borrowing.
In addition, if we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the ability to service such debt would increase.
Our senior notes do not impose any limitations on our ability to incur additional debt or protect against certain other types of transactions.
Although we are subject to our credit agreement for so long as it remains in effect, the indentures governing the senior notes do not restrict the future incurrence of unsecured indebtedness, guarantees or other obligations. The indentures contain certain limitations on our ability to incur liens on assets and engage in sale and leaseback transactions. However, these limitations are subject to important exceptions. In addition, the indentures do not contain many other restrictions, including certain restrictions contained in our credit agreement, including, without limitation, making investments, prepaying subordinated indebtedness or engaging in transactions with our affiliates.
Our credit agreement will permit, subject to specified conditions and limitations, the incurrence of a significant amount of additional indebtedness. As of December 31, 2019, we would have been able to incur an additional $1.8 billion of indebtedness under our credit agreement ($1.9 billion of availability reduced by $69 million of amounts outstanding under letters of credit). If we or our subsidiaries incur additional debt, the risks associated with our substantial leverage and the need to service such debt would increase.
Our credit agreement imposes significant operating and financial restrictions on us and our subsidiaries, which may prevent us from capitalizing on business opportunities.
Our credit agreement imposes significant operating and financial restrictions on us. These restrictions limit our ability, among other things, to:
incur, assume or permit to exist additional indebtedness (including guarantees thereof);
pay dividends or certain other distributions on our capital stock or repurchase our capital stock or prepay subordinated indebtedness;
incur liens on assets;
make certain investments or other restricted payments;
engage in transactions with affiliates;
sell certain assets or merge or consolidate with or into other companies;
guarantee indebtedness; and
alter the business we conduct.
As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. The failure to comply with any of these covenants would cause a default under the credit agreement. A default, if not waived, could result in acceleration of our debt, in which case the debt would become immediately due and payable. If this occurs, we may not be able to repay our debt or borrow sufficient funds to refinance it. Even if new financing were available, it may be on terms that are less attractive to us than our existing credit facilities or it may be on terms that are not acceptable to us.
We may not be able to generate sufficient cash to service all of our indebtedness, and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If our operating results and available cash are insufficient to meet our debt service obligations, we could face substantial liquidity problems and might
be required to dispose of material assets or operations to meet our debt service and other obligations. We may not be able to consummate those dispositions or to obtain the proceeds that we hope to realize from them, and these proceeds may not be adequate to meet any debt service obligations then due. Any future refinancing of our indebtedness could be at higher interest rates and may require us to comply with more onerous covenants which could further restrict our business operations. Additionally, our credit agreement and the indentures that govern our senior notes limit the use of the proceeds from certain dispositions of our assets; as a result, our credit agreement and our senior notes may prevent us from using the proceeds from such dispositions to satisfy all of our debt service obligations.
Our future capital needs may require that we seek to refinance our debt or obtain additional debt or equity financing, events that could have a negative effect on our business.
We may need to raise additional funds in the future to, among other things, refinance existing debt, fund our existing operations, improve or expand our operations, respond to competitive pressures, or make acquisitions. From time to time, we may raise additional funds through public or private financing, strategic alliances, or other arrangements. Funds may not be available or available on terms acceptable to us as a result of different factors, including but not limited to turmoil in the credit markets that results in the tightening of credit conditions and current or future regulations applicable to the financial institutions from whom we seek financing. If adequate funds are not available on acceptable terms, we may be unable to meet our business or strategic objectives or compete effectively. If we raise additional funds by issuing equity securities, stockholders may experience dilution of their ownership interests, and the newly issued securities may have rights superior to those of our common stock. If we raise additional funds by issuing debt, we may be subject to higher borrowing costs and further limitations on our operations. If we refinance or restructure our debt, we may incur charges to write off the unamortized portion of deferred debt issuance costs from a previous financing, or we may incur charges related to hedge ineffectiveness from our interest rate swap obligations. There are restrictions in the indenture that governs the Euro Notes (2024), Euro Notes (2026) and Euro Notes (2028) on our ability to refinance such notes prior to January 1, 2024, April 1, 2021, and April 1, 2023, respectively. If we fail to raise capital when needed, our business may be negatively affected.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly and could affect the value of our senior notes.
Certain borrowings under our credit agreement and the borrowing under our accounts receivable securitization facility are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, would correspondingly decrease. Moreover, changes in market interest rates could affect the trading value of the senior notes. Certain of our variable rate debt, including our revolving credit facility, currently uses the London Interbank Offered Rate ("LIBOR") as a benchmark for establishing the interest rate. LIBOR is the subject of recent proposals for reform. These reforms and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. The consequences of these developments with respect to LIBOR cannot be entirely predicted but could result in an increase in the cost of our variable rate debt. Assuming all revolving loans were fully drawn and no interest rate swaps were in place, each one percentage point change in interest rates would result in a $36 million change in annual cash interest expense under our credit agreement and our accounts receivable securitization facility.
Repayment of our indebtedness, including our senior notes, is dependent on cash flow generated by our subsidiaries.
We are a holding company and repayment of our senior notes will be dependent upon cash flow generated by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Unless they are borrowers or guarantors of the indebtedness, our subsidiaries do not have any obligation to pay amounts due on the indebtedness or to make funds available for that purpose. Our subsidiaries may not be able to, or be permitted to, make distributions to enable us to make payments in respect of our indebtedness, including the senior notes. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and, under certain circumstances, distributions from our subsidiaries may be subject to taxes that reduce the amount of such distributions available to us. While the indentures governing the senior notes limit the ability of our subsidiaries to restrict the payment of dividends or to restrict other intercompany payments to us, these limitations are subject to certain qualifications and exceptions. In the event that we do not receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness, including the senior notes.
A downgrade in our credit rating would impact our cost of capital and could impact the market value of our senior notes.
Credit ratings have an important effect on our cost of capital. Credit rating agencies rate our debt securities on factors that include, among other items, our results of operations, business decisions that we make, their view of the general outlook for our industry, and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading, or downgrading the current rating or placing us on a watch list for possible future downgrading. We believe our current credit ratings enhance our ability to borrow funds at favorable rates. A downgrade in our current credit rating from a rating agency could adversely affect our cost of capital by causing us to pay a higher interest rate on borrowed
funds under our credit facilities. A downgrade could also adversely affect the market price and/or liquidity of our senior notes, preventing a holder from selling the senior notes at a favorable price, as well as adversely affecting our ability to issue new notes in the future or incur other indebtedness upon favorable terms.
The right to receive payments on the senior notes is effectively junior to those lenders who have a security interest in our assets.
Our obligations under our senior notes and our guarantors’ obligations under their guarantees of the senior notes are unsecured, but our and each co-borrower’s obligations under our credit agreement and each guarantor’s obligations under their respective guarantees of the credit agreement are secured by a security interest in substantially all of our domestic tangible and intangible assets, including the stock of most of our wholly-owned United States subsidiaries and the stock of certain of our non-United States subsidiaries. If we are declared bankrupt or insolvent, or if we default under our credit agreement, the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. If we were unable to repay such indebtedness, the lenders could foreclose on the pledged assets to the exclusion of holders of our senior notes, even if an event of default exists under the applicable indenture governing the senior notes. Furthermore, if the lenders foreclose and sell the pledged equity interests in any subsidiary guarantor under our senior notes, then that guarantor will be released from its guarantee of the senior notes automatically and immediately upon such sale. In any such event, because the senior notes are not secured by any of our assets or the equity interests in subsidiary guarantors, it is possible that there would be no assets remaining from which claims by holders of the senior notes could be satisfied or, if any assets remained, they might be insufficient to satisfy claims fully. As of December 31, 2019, we had approximately $1.6 billion aggregate principal amount of secured debt outstanding and approximately $1.8 billion of availability under our credit agreement ($1.9 billion of availability reduced by $69 million of amounts outstanding under letters of credit).
United States federal and state statutes allow courts, under specific circumstances, to void the senior notesand the guarantees, subordinate claims in respect of the senior notes and the guarantees, and require holders of the senior notes to return payments received from us or the guarantors.
Our direct and indirect domestic subsidiaries that are obligors under the credit agreement guarantee the obligations under our senior notes. In addition, certain subsidiaries of the issuer of the Euro Notes (2024) guarantee the obligations under the Euro Notes (2024). The issuance of our senior notes and the issuance of the guarantees by the guarantors may be subject to review under state and federal laws if a bankruptcy, liquidation or reorganization case or a lawsuit, including in circumstances in which bankruptcy is not involved, were commenced at some future date by, or on behalf of, our unpaid creditors or the unpaid creditors of a guarantor. Under the federal bankruptcy laws of the United States and comparable provisions of state fraudulent transfer laws, a court may avoid or otherwise decline to enforce the senior notes, or a guarantor’s guarantee, or may subordinate the senior notes, or such guarantee, to our or the applicable guarantor’s existing and future indebtedness. While the relevant laws may vary from jurisdiction to jurisdiction, a court might do so if it found that when indebtedness under the senior notes was issued, or when the applicable guarantor entered into its guarantee, or, in some jurisdictions, when payments became due under the senior notes, or such guarantee, the issuer or the applicable guarantor received less than reasonably equivalent value or fair consideration and:
was insolvent or rendered insolvent by reason of such incurrence;
was engaged in a business or transaction for which its remaining assets constituted unreasonably small capital; or
intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they mature.
A court would likely find that we or a guarantor did not receive reasonably equivalent value or fair consideration for the senior notes or such guarantee if we or such guarantor did not substantially benefit directly or indirectly from the issuance of the senior notes. Thus, if the guarantees were legally challenged, any guarantee could be subject to the claim that, since the guarantee was incurred for our benefit, and only indirectly for the benefit of the guarantor, the obligations of the applicable guarantor were incurred for less than reasonably equivalent value or fair consideration. If a court were to void the issuance of the senior notes or any guarantee, a holder of the senior notes would no longer have any claim against us or the applicable guarantor. In the event of a finding that a fraudulent transfer or conveyance occurred, a holder of the senior notes may not receive any repayment on the senior notes. Further, the avoidance of the senior notes could result in an event of default with respect to our and our subsidiaries’ other debt, which could result in acceleration of that debt. The measures of insolvency for purposes of these fraudulent transfer laws vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, an issuer or a guarantor, as applicable, would be considered insolvent if:
the sum of its debts, including contingent liabilities, was greater than the fair value of its assets;
the present fair saleable value of its assets was less than the amount that would be required to pay its probable liability on its existing debts, including contingent liabilities, as they become absolute and mature; or
it could not pay its debts as they become due.
A court might also void the senior notes, or a guarantee, without regard to the above factors, if the court found that the senior notes were incurred or issued or the applicable guarantor entered into its guarantee with actual intent to hinder, delay or defraud its creditors. We cannot give any assurance as to what standard a court would apply in determining whether we or the guarantors were solvent at the relevant time or that a court would agree with our conclusions in this regard, or, regardless of the standard that a court uses, that it would not determine that we or a guarantor were indeed insolvent on that date; that any payments to the holders of the senior notes (including under the guarantees) did not constitute preferences, fraudulent transfers or conveyances on other grounds; or that the issuance of the senior notes and the guarantees would not be subordinated to our or any guarantor’s other debt. In addition, any payment by us or a guarantor pursuant to the senior notes, or its guarantee, could be avoided and required to be returned to us or such guarantor or to a fund for the benefit of our or such guarantor’s creditors, and accordingly the court might direct holders of the senior notes to repay any amounts already received from us or such guarantor. Among other things, under U.S. bankruptcy law, any payment by us pursuant to the senior notes or by a guarantor under a guarantee made at a time we or such guarantor were found to be insolvent could be voided and required to be returned to us or such guarantor or to a fund for the benefit of our or such guarantor’s creditors if such payment is made to an insider within a one-year period prior to a bankruptcy filing or within 90 days for any outside party and such payment would give such insider or outsider party more than such party would have received in a distribution under the Bankruptcy Code in a hypothetical Chapter 7 case. Although each guarantee contains a “savings clause” intended to limit the subsidiary guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its subsidiary guarantee to be a fraudulent transfer, this provision may not be effective as a legal matter to protect any subsidiary guarantees from being avoided under fraudulent transfer law. In that regard, in Official Committee of Unsecured Creditors ofTOUSA, Inc. v Citicorp North America, Inc., the United States Bankruptcy Court in the Southern District of Florida held that a savings clause similar to the savings clause included in our indentures was unenforceable. As a result, the subsidiary guarantees were found to be fraudulent conveyances. The United States Court of Appeals for the Eleventh Circuit subsequently affirmed the liability findings of the Bankruptcy Court without ruling directly on the enforceability of savings clauses generally. If the decision of the bankruptcy court in TOUSA were followed by other courts, the risk that the guarantees would be deemed fraudulent conveyances would be significantly increased.
To the extent a court avoids the senior notes or any of the guarantees as fraudulent transfers or holds the senior notes or any of the guarantees unenforceable for any other reason, the holders of the senior notes would cease to have any direct claim against us or the applicable guarantor. If a court were to take this action, our or the applicable guarantor’s assets would be applied first to satisfy our or the applicable guarantor’s other liabilities, if any, and might not be applied to the payment of the senior notes. Sufficient funds to repay the senior notes may not be available from other sources, including the remaining guarantors, if any. In addition, the Euro Notes (2024) and the related guarantees may be subject to avoidance under the laws of foreign jurisdictions, including Italy and Czech Republic, to the extent that we, the issuer of the Euro Notes (2024), or any of the guarantors (as applicable) were to be the subject of an insolvency or related proceeding in such jurisdiction(s).
Not all of our subsidiaries have guaranteed our credit agreement or our senior notes, and the assets of our non-guarantor subsidiaries may not be available to make payments on such obligations.
Not all of our subsidiaries have guaranteed the credit agreement, our U.S. Notes (2023), Euro Notes (2024), Euro Notes (2026), and Euro Notes (2028). In the event that any non-guarantor subsidiary becomes insolvent, liquidates, reorganizes, dissolves or otherwise winds up, holders of its indebtedness and its trade creditors generally will be entitled to payment on their claims from the assets of that subsidiary before any of those assets are made available to the lenders under the credit agreement or the holders of the senior notes. Consequently, claims in respect of the credit agreement and the senior notes are structurally subordinated to all of the liabilities of our subsidiaries that are not guarantors of such instruments, including trade payables, and any claims of third party holders of preferred equity interests, if any, in our non-guarantor subsidiaries. For the year ended December 31, 2019, our subsidiaries that are not borrowers under or do not guarantee the credit agreement and our subsidiaries that do not guarantee the U.S. Notes (2023) represented approximately 51% and 30% of our total revenue and operating income, respectively. In addition, these non-guarantor subsidiaries represented approximately 54% and 55% of our total assets and total liabilities, respectively, as of December 31, 2019 (excluding, in each case, intercompany amounts). As of the same date, our subsidiaries that do not guarantee the credit agreement or the U.S. Notes (2023) had approximately $2.5 billion of outstanding indebtedness (which includes $662 million of borrowings under our revolving credit facilities by foreign subsidiaries that are borrowers under the revolving credit facilities but that do not guarantee the U.S. Notes (2023)). The group of subsidiaries that does not guarantee the Euro Notes (2024) is similar to the group that does not guarantee the U.S. Notes (2023), Euro Notes (2026) and Euro Notes (2028), except that, in addition to the issuer of the Euro Notes (2024), there are four subsidiaries in the group that do not guarantee the U.S. Notes (2023), Euro Notes (2026) and Euro Notes (2028) that guarantee the Euro Notes (2024).
We may not be able to repurchase the senior notes upon a change of control or pursuant to an asset sale offer.
Upon a change of control, as defined in the indentures governing the senior notes, the holders of the senior notes will have the right to require us to offer to purchase all of the senior notes then outstanding at a price equal to 101% of their
principal amount plus accrued and unpaid interest. Such a change of control would also be an event of default under our credit agreement. In order to obtain sufficient funds to pay amounts due under the credit agreement and the purchase price of the outstanding senior notes, we expect that we would have to refinance our indebtedness. We cannot assure you that we would be able to refinance our indebtedness on reasonable terms, if at all. Our failure to offer to purchase all outstanding senior notes or to purchase all validly tendered senior notes would be an event of default under the indenture. Such an event of default may cause the acceleration of our other debt. Our other debt also may contain restrictions or repayment requirements with respect to specified events or transactions that constitute a change of control under the indenture.
The definition of change of control in the indentures governing the senior notes includes a phrase relating to the sale of “all or substantially all” of our assets. There is no precise established definition of the phrase “substantially all” under applicable law. Accordingly, the ability of a holder of senior notes to require us to repurchase its senior notes as a result of a sale of less than all our assets to another person may be uncertain.
In addition, in certain circumstances as specified in the indentures governing the senior notes, we will be required to commence an asset sale offer, as defined in the indentures governing the senior notes, pursuant to which we will be obligated to purchase certain senior notes at a price equal to 100% of their principal amount plus accrued and unpaid interest with the proceeds we receive from certain asset sales. Our other debt may contain restrictions that would limit or prohibit us from completing any such asset sale offer. In particular, our credit agreement contains provisions that require us, upon the sale of certain assets, to apply all of the proceeds from such asset sale to the prepayment of amounts due under the credit agreement. The mandatory prepayment obligations under the credit agreement will be effectively senior to our obligations to make an asset sale offer with respect to the senior notes under the terms of the indentures governing the senior notes. Our failure to purchase any such senior notes when required under the indentures would be an event of default under the indentures.
Key terms of the senior notes will be suspended if the notes achieve investment grade ratings and no default or event of default has occurred and is continuing.
Many of the covenants in the indentures governing the senior notes will be suspended if the senior notes are rated investment grade by Standard & Poor’s and Moody’s provided at such time no default or event of default has occurred and is continuing, including those covenants that restrict, among other things, our ability to pay dividends, incur liens and to enter into certain other transactions. There can be no assurance that the senior notes will ever be rated investment grade. However, suspension of these covenants would allow us to engage in certain transactions that would not be permitted while these covenants were in force (although provisions under our other debt, like the credit agreement, may continue to restrict us from engaging in these transactions), and the effects of any such transactions will be permitted to remain in place even if the senior notes are subsequently downgraded below investment grade.
The liquidity and market value of the senior notes may change due to a variety of factors.
The liquidity of any trading market in the senior notes, and the market price quoted for the senior notes, may be adversely affected by changes in the overall market for these types of securities, changes in interest rates, changes in our ratings, and changes in our financial performance or prospects or in the prospects for companies in our industries generally.
We rely on an accounts receivable securitization program for a portion of our liquidity.
We have an arrangement whereby we sell an interest in a portion of our accounts receivable to a special purpose vehicle and receive funding through the commercial paper market. This arrangement expires in November 2021. In the event that the market for commercial paper were to close or otherwise become constrained, our cost of credit relative to this program could rise, or credit could be unavailable altogether.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties are described in Item 1 of this Annual Report on Form 10-K, and such description is incorporated by reference into this Item 2. Our properties are sufficient to meet our present needs, and we do not anticipate any difficulty in securing additional space to conduct operations or additional office space, as needed, on terms acceptable to us.
ITEM 3. LEGAL PROCEEDINGS
On May 10, 2018, our Specialty segment received a NoticeWith respect to the July 7, 2022 penalty demand from Region 4 of Violation from the U.S. Environmental Protection Agency ("EPA") allegingdiscussed in our report on Form 10-Q for the quarter ended June 30, 2022, we reached a settlement to pay a penalty in the amount of $465,000 in connection with alleged violations of federal stormwater regulations. EPA issued Consent Agreements and Final Orders ("CAFOs") for each facility on February 6, 2023 to document and implement these agreements. The CAFOs require LKQ to pay the penalty by March 8, 2023.
On August 18, 2022, we received a Notice of Violation from Region 10 of the EPA regarding alleged violations of federal stormwater regulations at facilities in Idaho, Oregon, and Washington to which we timely responded. We have not received any response from the EPA. We do not currently anticipate that certain performance-related partsany expense or liability that we sold between January 1, 2015 and October 15, 2017may incur as a result of these matters in the future will be material to the Company’s business or financial condition.
violated the provisions of the Clean Air Act that prohibit the sale of parts that could alter or defeat the emission control system of a vehicle. We are in negotiations with the EPA to resolve this matter, which may involve the payment of a civil penalty. Any penalty that is likely to be imposed is not expected to have material effect on our financial position, results of operations or cash flows.
In addition, we are from time to time subject to various claims and lawsuits incidental to our business. In the opinion of management, currently outstanding claims and suitslawsuits will not, individually or in the aggregate, have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQThe Nasdaq Global Select Market ("NASDAQ") under the symbol "LKQ." At December 31, 2019,2022, there were 1617 record holders of our common stock.
We have not paid any cash dividends on our common stock. We intend to continue to retain our earnings to finance our growth, repurchase stock through our stock repurchase program, and
A summary of the dividend activity for general corporate purposes. We do not anticipate paying any cash dividends on our common stock infor the foreseeable future. In addition,year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| 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 |
| $0.25 | | July 26, 2022 | | August 11, 2022 | | September 1, 2022 |
| $0.275 | | October 25, 2022 | | November 17, 2022 | | December 1, 2022 |
On February 21, 2023, our senior secured credit agreement and our senior notes indentures contain, and future financing agreements may contain, limitationsBoard of Directors declared a quarterly cash dividend of $0.275 per share of common stock, payable on March 30, 2023, to stockholders of record at the close of business on March 16, 2023. The payment of cashany future dividends or other distributionswill be at the discretion of assets. Delaware law also imposes restrictions on dividend payments. Based on limitations in effect under our senior secured credit agreement and senior notes indentures, the maximum amountBoard of dividends we could pay as of December 31, 2019 was approximately $1.9 billion. The limit on the payment of dividends is calculated using historical financial informationDirectors and will change from period to period.depend upon our results of operations, financial condition, business prospects, capital requirements, contractual restrictions, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors that our Board of Directors deems relevant.
Stock Performance Graph and Cumulative Total Return
The following graph compares the percentage change in the cumulative total returns on our common stock, the Standard & Poor's 500 Stock Index ("S&P 500 Index")Index and the followinga group of peer companies (the "Peer Group"): Copart, Inc.; O'Reilly Automotive, Inc.; Genuine Parts Company; and Fastenal Co., for the period beginning on December 31, 20142017 and ending on December 31, 20192022 (which was the last day of our 20192022 fiscal year). The stock price performance in the graph is not necessarily indicative of future stock price performance. The graph assumes that the value of an investment in each of the Company's common stock, the S&P 500 Index and the Peer Group was $100 onDecember 31, 20142017 and that all dividends, where applicable, were reinvested.
Comparison of Cumulative Return
Among LKQ Corporation, the S&P 500 Index and the Peer Group
| | | | 12/31/2014 | | 12/31/2015 | | 12/31/2016 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
| LKQ Corporation | $ | 100 |
| | $ | 105 |
| | $ | 109 |
| | $ | 145 |
| | $ | 84 |
| | $ | 127 |
| LKQ Corporation | | $ | 100 | | | $ | 58 | | | $ | 88 | | | $ | 87 | | | $ | 148 | | | $ | 135 | |
| S&P 500 Index | $ | 100 |
| | $ | 101 |
| | $ | 114 |
| | $ | 138 |
| | $ | 132 |
| | $ | 174 |
| S&P 500 Index | | $ | 100 | | | $ | 96 | | | $ | 126 | | | $ | 149 | | | $ | 192 | | | $ | 157 | |
| Peer Group | $ | 100 |
| | $ | 113 |
| | $ | 128 |
| | $ | 123 |
| | $ | 158 |
| | $ | 208 |
| |
| Dow Jones U.S. Auto Parts Index | | Dow Jones U.S. Auto Parts Index | | $ | 100 | | | $ | 68 | | | $ | 86 | | | $ | 99 | | | $ | 119 | | | $ | 86 | |
| Old Peer Group | | Old Peer Group | | $ | 100 | | | $ | 130 | | | $ | 167 | | | $ | 179 | | | $ | 267 | | | $ | 306 | |
The companies included in the Old Peer Group are the following: Copart, Inc.; O'Reilly Automotive, Inc.; Genuine Parts Company; and Fastenal Co. The New Peer Group is comprised of companies within the Dow Jones U.S. Auto Parts Index. The change in peer group was made to be consistent with the peer group that the Company will use for the pay-versus-performance disclosures in the definitive Proxy Statement to be filed on or about March 20, 2023.
This stock performance information is "furnished" and shall not be deemed to be "soliciting material" or subject to Rule 14A, shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, and shall not be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and irrespective of any general
incorporation by reference language in any such filing, except to the extent that it specifically incorporates the information by reference.
Issuer Purchases of Equity Securities
On October 25, 2018, our
Our Board of Directors has authorized a stock repurchase program under which we were authorizedare able to purchase up to $500 million of our common stock from time to time through October 25, 2021.time. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases.
On October 25, 2019,May 10, 2022, our Board of Directors authorized ana $500 million increase to our existing stock repurchase program under which the Company may purchase up to $2,500 million. On October 25, 2022, our Board of Directors authorized an additional $500$1,000 million ofincrease to our commonexisting stock from timerepurchase program, raising the aggregate program authorization to time$3,500 million, and extended the duration through October 25, 2022; this extended date also applies to the original repurchase program. With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases.2025.
During the year ended December 31, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. There were no
The following table summarizes our stock repurchases duringfor the three months ended December 31, 2019. As of December 31, 2019, there was a total of $648 million of remaining capacity under our repurchase program.2022 (in millions, except per share data):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program |
| October 1, 2022 - October 31, 2022 | | 2.7 | | | $ | 50.48 | | | 2.7 | | | $ | 1,125 | |
| November 1, 2022 - November 30, 2022 | | — | | | $ | — | | | — | | | $ | 1,125 | |
| December 1, 2022 - December 31, 2022 | | 0.3 | | | $ | 53.36 | | | 0.3 | | | $ | 1,111 | |
| Total | | 3.0 | | | | | 3.0 | | | |
Securities Authorized for Issuance Under Equity Compensation Plans
Information about our common stock that may be issued under our equity compensation plans as of December 31, 20192022 included in Part III, Item 12 of this Annual Report on Form 10-K is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7 of this Annual Report on Form 10-K and our consolidated financial statements and related notes included in Item 8 of this Annual Report on Form 10-K.
[RESERVED]
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (1) | | (2) | | (3) | | (4) | | (5) |
| Statements of Income Data: | | | | | | | | | |
| Revenue | $ | 12,506,109 |
| | $ | 11,876,674 |
| | $ | 9,736,909 |
| | $ | 8,584,031 |
| | $ | 7,192,633 |
|
| Cost of goods sold | 7,654,315 |
| | 7,301,817 |
| | 5,937,286 |
| | 5,232,328 |
| | 4,359,104 |
|
| Gross margin | 4,851,794 |
| | 4,574,857 |
|
| 3,799,623 |
|
| 3,351,703 |
| | 2,833,529 |
|
Operating income (6) (7) | 896,643 |
| | 882,241 |
| | 844,998 |
| | 763,398 |
| | 704,627 |
|
| Other expense (income): | | | | | | | | | |
| Interest expense | 138,504 |
| | 146,377 |
| | 101,640 |
| | 88,263 |
| | 57,860 |
|
| (Gain) loss on debt extinguishment | (128 | ) | | 1,350 |
| | 456 |
| | 26,650 |
| | — |
|
| Interest income and other income, net | (32,755 | ) | | (8,917 | ) | | (23,725 | ) | | (28,796 | ) | | (2,263 | ) |
| Income from continuing operations before provision for income taxes | 791,022 |
| | 743,431 |
| | 766,627 |
| | 677,281 |
| | 649,030 |
|
| Provision for income taxes | 215,330 |
| | 191,395 |
| | 235,560 |
| | 220,566 |
| | 219,703 |
|
Equity in (losses) earnings of unconsolidated subsidiaries (8) | (32,277 | ) | | (64,471 | ) | | 5,907 |
| | (592 | ) | | (6,104 | ) |
| Income from continuing operations | 543,415 |
| | 487,565 |
| | 536,974 |
| | 456,123 |
| | 423,223 |
|
| Net income (loss) from discontinued operations | 1,619 |
| | (4,397 | ) | | (6,746 | ) | | 7,852 |
| | — |
|
| Net income | 545,034 |
| | 483,168 |
| | 530,228 |
| | 463,975 |
| | 423,223 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 2,800 |
| | 3,050 |
| | (3,516 | ) | | — |
| | — |
|
| Less: net income attributable to discontinued noncontrolling interest | 974 |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 541,260 |
| | $ | 480,118 |
| | $ | 533,744 |
| | $ | 463,975 |
| | $ | 423,223 |
|
Basic earnings per share: (9) | | | | | | | | | |
| Income from continuing operations | $ | 1.75 |
| | $ | 1.55 |
| | $ | 1.74 |
| | $ | 1.49 |
| | $ | 1.39 |
|
| Net income (loss) from discontinued operations | 0.01 |
| | (0.01 | ) | | (0.02 | ) | | 0.03 |
| | — |
|
| Net income | 1.76 |
| | 1.54 |
| | 1.72 |
| | 1.51 |
| | 1.39 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 0.01 |
| | 0.01 |
| | (0.01 | ) | | — |
| | — |
|
| Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 1.75 |
| | $ | 1.53 |
| | $ | 1.73 |
| | $ | 1.51 |
| | $ | 1.39 |
|
Diluted earnings per share: (9) | | | | | | | | | |
| Income from continuing operations | $ | 1.75 |
| | $ | 1.54 |
| | $ | 1.73 |
| | $ | 1.47 |
| | $ | 1.38 |
|
| Net income (loss) from discontinued operations | 0.01 |
| | (0.01 | ) | | (0.02 | ) | | 0.03 |
| | — |
|
| Net income | 1.75 |
| | 1.53 |
| | 1.71 |
| | 1.50 |
| | 1.38 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 0.01 |
| | 0.01 |
| | (0.01 | ) | | — |
| | — |
|
| Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 1.74 |
| | $ | 1.52 |
| | $ | 1.72 |
| | $ | 1.50 |
| | $ | 1.38 |
|
| Weighted average shares outstanding-basic | 310,155 |
| | 314,428 |
| | 308,607 |
| | 306,897 |
| | 304,722 |
|
| Weighted average shares outstanding-diluted | 310,969 |
| | 315,849 |
| | 310,649 |
| | 309,784 |
| | 307,496 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| (in thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| | (1) | | (2) | | (3) | | (4) | | (5) |
| Other Financial Data: | | | | | | | | | |
| Net cash provided by operating activities | $ | 1,064,033 |
| | $ | 710,739 |
| | $ | 518,900 |
| | $ | 635,014 |
| | $ | 544,282 |
|
| Net cash used in investing activities | (264,853 | ) | | (1,458,939 | ) | | (384,595 | ) | | (1,709,928 | ) | | (329,993 | ) |
| Net cash (used in) provided by financing activities | (600,669 | ) | | 882,995 |
| | (112,567 | ) | | 1,225,737 |
| | (238,537 | ) |
| Capital expenditures | (265,730 | ) | | (250,027 | ) | | (179,090 | ) | | (207,074 | ) | | (170,490 | ) |
| Cash paid for acquisitions, net of cash and restricted cash acquired | (27,296 | ) | | (1,214,995 | ) | | (513,088 | ) | | (1,349,339 | ) | | (160,517 | ) |
| Depreciation and amortization | 314,406 |
| | 294,077 |
| | 230,203 |
| | 206,086 |
| | 128,192 |
|
| Balance Sheet Data: | | | | | | | | | |
Total assets (10) | $ | 12,779,956 |
| | $ | 11,393,402 |
| | $ | 9,366,872 |
| | $ | 8,303,199 |
| | $ | 5,647,837 |
|
Working capital (11) | 2,491,505 |
| | 2,830,601 |
| | 2,499,410 |
| | 2,045,273 |
| | 1,588,742 |
|
| Long-term obligations, including current portion | 4,041,756 |
| | 4,310,500 |
| | 3,403,980 |
| | 3,341,771 |
| | 1,584,702 |
|
| Total Company stockholders' equity | 5,008,876 |
| | 4,782,298 |
| | 4,198,169 |
| | 3,442,949 |
| | 3,114,682 |
|
(1) Includes the results of operations of seven businesses from their respective acquisition dates in 2019.
| |
(2) | Includes the results of operations of Stahlgruber, from its acquisition effective May 30, 2018, and 13 other businesses from their respective acquisition dates in 2018. |
| |
(3) | Includes the results of operations of 26 businesses from their respective acquisition dates in 2017. |
| |
(4) | Includes the results of operations of: (i) Rhiag, from its acquisition effective March 18, 2016; (ii) the aftermarket automotive glass distribution business of Pittsburgh Glass Works LLC ("PGW autoglass"), from its acquisition effective April 21, 2016; and (iii) 13 other businesses from their respective acquisition dates in 2016. |
| |
(5) | Includes the results of operations of 18 businesses from their respective acquisition dates in 2015. |
| |
(6) | Reflects $47 million of impairment charges on net assets held for sale for the year ended December 31, 2019. See "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
| |
(7) | Reflects a $33 million goodwill impairment charge on the Aviation reporting unit for the year ended December 31, 2018. See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
| |
(8) | Reflects impairment charges in 2019 and 2018 of $40 million and $71 million, respectively, related to the Mekonomen equity investment. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
| |
(9) | The sum of the individual earnings per share amounts may not equal the total due to rounding. |
| |
(10) | Refer to "Recent Accounting Pronouncements–Adoption of New Lease Standard" in Note 4, "Summary of Significant Accounting Policies," for the increase in total assets compared to December 31, 2018 as a result of the adoption of the new lease standard. |
| |
(11) | Working capital amounts represent current assets less current liabilities, excluding assets and liabilities of discontinued operations. |
| |
ITEM 7. | ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The following discussion of our financial condition and results of operations should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. Unless otherwise indicated or the context otherwise requires, as used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the terms "we," "us," "the Company," "our," "LKQ" and similar terms refer to LKQ Corporation and its subsidiaries.
Overview
We are a global distributor of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty vehicle aftermarket products and accessories to improve the performance, functionality and appearance of vehicles.
Buyers of vehicle replacement products have the option to purchase from primarily five sources: new products produced by OEMs; new products produced by companies other than the OEMs, which are referred to as aftermarket products; recycled products obtained from salvage and total loss vehicles; recycled products that have been refurbished; and recycled products that have been remanufactured. We distribute a variety of products to collision and mechanical repair shops, including aftermarket collision and mechanical products; recycled collision and mechanical products; refurbished collision products such as wheels, bumper covers and lights; and remanufactured engines and transmissions. Collectively, we refer to the four sources that are not new OEM products as alternative parts.
We are a leading provider of alternative vehicle collision replacement products and alternative vehicle mechanical replacement products, with our sales, processing, and distribution facilities reaching most major markets in the United States and Canada. We are also a leading provider of alternative vehicle replacement and maintenance products in Germany, the United Kingdom, Germany,U.K., the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland,Austria, Slovakia, Austria,Poland, and various other European countries. In addition to our wholesale operations, we operate self service retail facilities across the U.S. that sell recycled automotive products from end-of-life-vehicles. We are also a leading distributor of specialty vehicle aftermarket equipment and accessories reaching most major markets in the U.S. and Canada.
We are organized into four operating segments: Wholesale –- North America; Europe; SpecialtySpecialty; and Self Service. We aggregate ourService, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale –- North America and Self Service operating segments into onesegment results were separated from the previous reportable segment, North America, resulting in three reportable segments:and each of Wholesale - North America Europe and Specialty.Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change.
Our operating results have fluctuated on a quarterly and annual basis in the past and can be expected to continue to fluctuate in the future as a result of a number of factors, some of which are beyond our control. Please refer to the factors referred to in Forward-Looking Statements and Risk Factors above. Due to these factors and others, which may be unknown to us at this time, our operating results in future periods can be expected to fluctuate. Accordingly, our historical results of operations may not be indicative of future performance.
Acquisitions and Investments
Since our inception in 1998, we have pursued a growth strategy through both organic growth and acquisitions. Through 2018, our acquisition strategy was focused on consolidation to build scale in fragmented markets across North America and Europe. We have pursued acquisitions that we believe will help drive profitability, cash flow and stockholder value. We targettargeted companies that arewere market leaders, will expandexpanded our geographic presence and will enhanceenhanced our ability to provide a wide array of vehicle products to our customers through our distribution network.
During 2019, In the last few years, we completed sevenhave shifted our focus from larger transactions to acquisitions for a total consideration of $63 million, including three wholesalethat target high synergies and/or add critical capabilities. Additionally, we have made investments in various businesses and one self service business in North America, and three wholesale businesses in Europe.
On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia with further sales to Switzerland. This acquisition expanded LKQ's geographic presence in continental Europe and serves as an additionaladvance our strategic hub for our European operations. In addition, this acquisition should allow for continued improvement in procurement, logistics and infrastructure optimization.
On July 3, 2017, we acquired four parts distribution businesses in Belgium. These companies were acquired with the objective of transforming the existing three-step distribution model in Belgium to a two-step distribution model to align with our Netherlands operations.
On November 1, 2017, we acquired the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories. This acquisition expanded LKQ's presence in the specialty market and created viable points of entry into related markets.
On April 21, 2016, we acquired PGW, a leading global distributor and manufacturer of automotive glass products. PGW’s business comprised aftermarket automotive replacement glass distribution services and automotive glass manufacturing. On March 1, 2017, we sold the automotive glass manufacturing component of PGW. Unless otherwise noted, the discussion related to PGW throughout Part II, Item 7 of this Annual Report on Form 10-K refers to the aftermarket glass distribution operations of PGW, PGW autoglass, which is included within continuing operations. See Note 3, "Discontinued Operations" in Item 8 of this Annual Report on Form 10-K for further information related to our discontinued operations. The acquisition of PGW autoglass expanded our addressable market in North America and provided distribution synergies with our existing network.
In October 2016, we acquired substantially all of the business assets of Andrew Page Limited ("Andrew Page"), a distributor of aftermarket automotive parts in the United Kingdom. The U.K. Competition and Markets Authority ("CMA") concluded its review of this acquisition on October 31, 2017 and required us to divest less than 10% of the acquired locations. We divested the required locations during 2018.
In addition to the significant acquisitions mentioned above, duringobjectives. During the years ended December 31, 2019, 2018,2022, 2021, and 2017,2020, we acquired various smallerimmaterial businesses across our Wholesale - North America, Europe, and Specialty segments.
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen AB ("Mekonomen"), the leading independent car parts and service chain in the Nordic region of Europe, offering a wide range of quality products including spare parts and accessories for cars, and workshop services for consumers and businesses. We acquired additional shares in the fourth quarter of 2018, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee.
See Note 2, "Business Combinations" and "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our acquisitions and investments.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. Our parts revenue is generated from the sale of vehicle products, including replacement parts, components and systems used in the repair and maintenance of vehicles, and specialty products and accessories used to improve the performance, functionality and appearance of vehicles. Our service revenue is generated primarily from the sale of service-type warranties, fees for admission to our self service yards, and diagnostic and repair services, and processing fees related to the secure disposal of vehicles.services. During the year ended December 31, 2019,2022, parts and services revenue represented approximately 95%
93% of our consolidated revenue. Revenue from other sources includes scrap and other metals (including precious metals - platinum, palladium and rhodium - contained in recycled parts such as catalytic converters) sales, bulk sales to mechanical manufacturers (including cores), and sales of aluminum ingots and sows from our furnace operations. Other revenue will vary from period to period based on fluctuations in commodity prices and the volume of materials sold. See Note 5,13, "Revenue Recognition" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information related to our sources of revenue.
Critical Accounting Policies and Estimates
The discussion and analysispreparation of our financial condition and results of operations are based upon our consolidated financial statements, which have been preparedthe Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires usmanagement to make use of certain estimates assumptions and judgmentsassumptions that affect the reported amounts of assets, liabilities, revenuerevenues and expenses, andas well as related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, assumptions,liabilities in the Consolidated Financial Statements and judgments, including those related to revenue recognition, inventory valuation, business combinations and goodwill impairment.accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results ofHistorically, we have not made significant changes to the methods for determining these estimates form the basis foras our judgments about the carrying values of assets and liabilities and our recognition of revenue. Actualactual results may differ from these estimates.
Revenue Recognition
For information regarding our critical accounting policies related to revenue, refer to Note 5, "Revenue Recognition," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.
Inventory Accounting
For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand differshave not differed materially from our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.
For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts; for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs. Our salvage inventory cost is established based upon the price we pay for a vehicle, including auction, towing and storage fees, as well as expenditures for buying and dismantling vehicles. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based
on a part's days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured inventory cost is based upon the price paid for cores, and also includes expenses incurred for freight, direct manufacturing costs and overhead related to our remanufacturing operations. The cost of manufactured product inventory is established using the first-in first-out method.
Lease Accounting
On January 1, 2019, we adopted Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards Codification Topic 842 ("ASC 842").estimates. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application with no restatement of comparative periods. The most significant impact was the recognition of lease assets and liabilities for operating leases. Refer to “Recent Accounting Pronouncements–Adoption of New Lease Standard” in Note 4, "Summary of Significant Accounting Policies” and Note 13, "Leases” to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information regarding the adoption of the new lease standard and our critical accounting policies related to leases.
Business Combinations
We record our acquisitions using the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and liabilities assumed based upon their respective fair values. We utilize management estimates and, in some instances, independent third party valuation firms to assist in determining the fair values of assets acquired, liabilities assumed and contingent consideration granted. There are inherent assumptions and estimates used in developing the future cash flows and fair values of tangible and intangible assets, such as projecting revenues and profits, discount rates, income tax rates, royalty rates, customer attrition rates and other various valuation assumptions. We use various valuation methods to value property, plant and equipment. When valuing real property, we typically use the sales comparison approach for land and the income approach for buildings and building improvements. When valuing personal property, we typically use either the income or cost approach. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges.
Goodwill and Indefinite-Lived Intangibles Impairment
We are required to test our goodwill and indefinite-lived intangible assets for impairment at least annually. When testing goodwill for impairment, we are required to evaluate events and circumstances that may affect the performance of the reporting unit and the extent to which the events and circumstances may impact the future cash flows of the reporting unit to determine whether the fair value of the assets exceeds the carrying value. Developing the estimated future cash flows and fair value of the reporting unit requires management's judgment in projecting revenues and profits, allocation of shared corporate costs, tax rates, capital expenditures, working capital requirements, discount rates and market multiples. Many of the factors used in assessing fair value are outside the control of management, anddo not believe it is reasonably likely that the estimates and related assumptions and estimates canwill change in future periods. If these assumptions or estimates changematerially in the future, we may be required to record impairment charges for these assets. In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of,foreseeable future; however, actual results could differ from those estimates under different assumptions, judgments or otherwise exiting businesses, which could result in an impairment of goodwill.conditions.
We perform goodwill impairment tests annually in the fourth quarter and between annual tests whenever events indicate that an impairment may exist. During 2019, we did not identify any events or changes in circumstances that would more likely than not reduce the fair value of our reporting units below their carrying amounts. Therefore, we did not perform any impairment tests other than our annual test in the fourth quarter as of October 31, 2019.
Our goodwill impairment assessment is performed by reporting unit. A reporting unit is an operating segment, or a business one level below an operating segment (the "component" level), for which discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. For the purpose of aggregating our components into reporting units, we review the long-term performance of Segment EBITDA. Additionally, we review qualitative factors such as type or class of customers, nature of products, distribution methods, inventory procurement methods, level of integration, and interdependency of processes across components. Our assessment of the aggregation includes both qualitative and quantitative factors and is based on the facts and circumstances specific to the components.
We have four operating segments: Wholesale – North America, Europe, Specialty and Self Service. Each of these operating segments consists of multiple components that have discrete financial information available that is reviewed by
segment management on a regular basis. We have evaluated these components and concluded that the components that compose the Wholesale – North America, Europe, Specialty, and Self Service operating segments are economically similar and thus were aggregated into four separate reporting units for our 2019 annual goodwill impairment test.
Our goodwill would be considered impaired if the carrying value of a reporting unit exceeded its estimated fair value. The fair valueCritical accounting estimates are established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. We believe that using two methods to determine fair value limits the chances of an unrepresentative valuation. Discount rates, growth rates and cash flow projections are the assumptionsthose that are most sensitiveimportant to the portrayal of our financial condition and susceptibleresults of operations, and which require us to changemake our most difficult and subjective judgments, often as they requirea result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting estimates addressed below. For additional information related to significant management judgment. Impairment may result from, among other things, deteriorationaccounting policies used in the performancepreparation of acquired businesses, increases in our costConsolidated Financial Statements, see Note 3, "Summary of capital, adverse market conditions,Significant Accounting Policies" to the accompanying Consolidated Financial Statements.
Goodwill Impairment
Description
Goodwill is obtained through business acquisitions and adverse changes in applicable laws or regulations, including modifications that restrictrecorded at the activities of the acquired business. To assess the reasonableness of theestimated fair value estimates, we compareat the sumdate of the reporting units’ fair values to the Company’s market capitalization and calculate an implied control premium, whichacquisition. Goodwill is then evaluated against recent market transactions in our industry. If we were required to recognize goodwill impairments, we would report those impairment losses as part of our operating results.
We determined no impairments existed when we performed our annual goodwill impairment testing in 2019 on all four reporting units as each of those reporting units had a fair value estimate that exceeded the carrying value by at least 25%. As of December 31, 2019, we had a total of $4.4 billion in goodwill subject to future impairment tests.
Based on our annual goodwill impairment test in the fourth quarter of 2018, we determined the carrying value of our Aviation reporting unit exceeded the fair value estimate by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill in our Aviation reporting unit. The impairment charge was due to a decrease in the fair value estimate from the prior year fair value estimate, primarily driven by a significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing market conditions for the airplane platforms that the business services, which lowered our projected gross margin and related future cash flows. We reported the impairment charge in Impairment of net assets held for sale and goodwill on the Consolidated Statements of Income for the year ended December 31, 2018. We sold the Aviation business in the third quarter of 2019.
We review indefinite-lived intangible assetsnot amortized but instead tested for impairment annually or sooner if events or changes in circumstances indicate that an impairment may exist. In performing this test, we compare the carrying value mayof the asset to its fair value. To derive the fair value for our reporting units which carry goodwill, we consider the use of various valuation techniques, with the primary technique being an income approach via a discounted cash flow method and another being a market approach via a guideline public company method. If the carrying value of these assets exceeds the estimated fair value, the asset is considered impaired and an impairment charge is recognized. In performing the test for impairment of goodwill, goodwill is allocated to the reporting units expected to benefit from the business combination.
Judgments and Uncertainties
Determining whether impairment indicators exist and estimating fair values as part of impairment testing require significant judgment. Estimating the fair values of our reporting units which have goodwill requires the use of significant unobservable inputs, or Level 3 inputs, as defined by the fair value hierarchy. As part of applying the discounted cash flow method and guideline public company method, we use significant assumptions which include sales growth, operating margins, discount rates, perpetual growth rates and valuation multiples which consider our budgets, business plans, economic projections and marketplace data.
Sensitivity of Estimate to Change
The balance of our goodwill was $4,319 million and $4,540 million as of December 31, 2022 and December 31, 2021, respectively. We have not be recoverable. We performedmade material changes in the accounting methodology used to evaluate impairment of goodwill during the last three years. The assumptions used to assess impairment consider historical trends, macroeconomic conditions, and projections consistent with the Company’s operating strategy. Changes in these estimates can have a significant impact on the assessment of fair value which could result in material impairment losses. During fiscal year 2022, we elected to perform a quantitative impairment test for our goodwill. No impairment charges were recorded as a result of the testing as the fair value of each goodwill reporting unit exceeded the calculated carrying value. A 10% decline in projected cash flows or a 10% increase in the fourth quarter as of October 31,2019, using the relief-from-royalty methoddiscount rate would not have resulted in an impairment to value the Warn trademark, which is our only indefinite-lived intangible; wgoodwill.
e determined no impairment existed as the trademark had a fair value estimate which exceeded the carrying value.
Recently Issued Accounting Pronouncements
See "Recent Accounting Pronouncements" in Note 4,3, "Summary of Significant Accounting Policies" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to new accounting standards.
Financial Information by Geographic Area
See Note 16,24, "Segment and Geographic Information"Information" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our revenue and long-lived assets by geographic region.
1 LKQ Europe Program
We have undertaken the 1 LKQ Europe program to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under this multi-year program, we have recognized to date and expect to continue to recognize the following:
•Restructuring expenses — Non-recurring costs resulting directly from the implementation of the 1 LKQ Europe program from which the business will derive no ongoing benefit. See Note 6, “Restructuring14, "Restructuring and AcquisitionTransaction Related Expenses” to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further details.
•Transformation expenses — Period costs incurred to execute the 1 LKQ Europe program that are expected to contribute to ongoing benefits to the business (e.g., non-capitalizable implementation costs related to a common ERP system). These expenses are recorded in Selling, general and administrative expenses.
•Transformation capital expenditures — Capitalizable costs for long-lived assets, such as software and facilities, that directly relate to the execution of the 1 LKQ Europe program.
Costs related to the 1 LKQ Europe program incurred to date are reflected in Selling, general and administrative expenses, Restructuring and transaction related expenses and Purchases of property, plant and equipment in our consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this
Annual Report on Form 10-K.10-K.
We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2025. During the year ended December 31, 2022, we incurred $34 million in costs across all three categories noted above. We expect that future costs of the program, reflecting all three categories noted above, will range between $100$50 million to $80 million in 2023 through the projected program completion date in 2025. In the future, we may also identify additional initiatives and $125 millionprojects under the 1 LKQ Europe program that may result in additional expenditures, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. We expect the period from 2020 through 2021 with an additional $80 million to $100 million betweentransformation and restructuring expenses will be entirely funded by trade working capital initiatives across our Europe segment.
Ukraine/Russia Conflict
The Russian invasion of Ukraine and resulting global governmental response have impacted our business in 2022, and are expected to continue to impact our business in 2023. Governmental sanctions imposed on Russia have restricted our ability to sell to and collect from customers based in Russia and Belarus, and Russian military activity in Ukrainian territory has temporarily changed the projected completionway in which we operate in Ukraine. Many of our branches in Ukraine have remained open, although operating at less than full capacity, during the conflict, while others have closed temporarily. As military operations shifted to the eastern part of the country, we were able to increase capacity in branches in the central and western territory, including our central warehouse in Kyiv. We expect to continue operating in this manner unless conditions change. We currently do not expect the conflict to have a material impact on our ongoing results of operations or cash flows. Our operations in Ukraine represent approximately less than 1% of both our total annual revenue and total annual operating profit for fiscal year 2022 and comprised approximately $60 million of total assets as of December 31, 2022. In addition, LKQ revenue from customers in Russia and Belarus represented less than 0.3% of our total revenue in 2021. As future developments in the conflict are difficult to predict and outside of our control, it is possible that the estimates underlying our financials may change significantly in future periods.
COVID-19 Impact on our Operations
COVID-19 impacted our operations beginning in February 2020. For additional information on the effects, refer to the discussion in our segment results of operations in Item 7 of this Annual Report on Form 10-K.
Key Performance Indicators
We believe that organic revenue growth, Segment EBITDA and free cash flow are key performance indicators for our business. Segment EBITDA is our key measure of segment profit or loss reviewed by our chief operating decision maker. Free cash flow is a financial measure that is not prepared in accordance with U.S. generally accepted accounting principles (“non-GAAP”).
•Organic revenue growth - We define organic revenue growth as total revenue growth from continuing operations excluding the effects of acquisitions and divestitures (i.e., revenue generated from the date of acquisition to the projectfirst anniversary of that acquisition, net of reduced revenue due to the disposal of businesses) and foreign currency movements (i.e., impact of translating revenue at different exchange rates). Organic revenue growth includes incremental sales from both existing and new (i.e., opened within the last twelve months) locations and is derived from expanding business with existing customers, securing new customers and offering additional products and services. We believe that organic revenue growth is a key performance indicator as this statistic measures our ability to serve and grow our customer base successfully.
•Segment EBITDA - See Note 24, "Segment and Geographic Information" to the Consolidated Financial Statements in 2024.Part II, Item 8 of this Annual Report on Form 10-K for a description of the calculation of Segment EBITDA. We believe that Segment EBITDA provides useful information to evaluate our segment profitability by focusing on the indicators of ongoing operational results.
•Free Cash Flow - We calculate free cash flow as net cash provided by operating activities, less purchases of property, plant and equipment. Free cash flow provides insight into our liquidity and provides useful information to management and investors concerning cash flow available to meet future debt service obligations and working capital requirements, make strategic acquisitions, repurchase stock, and pay dividends.
These three key performance indicators are used as targets in determining incentive compensation at various levels of the organization, including senior management. By using these performance measures, we attempt to motivate a balanced approach to the business that rewards growth, profitability and cash flow generation in a manner that enhances our long-term prospects.
Results of Operations—Consolidated
The following table sets forth statements of income data as a percentage of total revenue for the periods indicated:
| | | | Year Ended December 31, | | Year Ended December 31, | |
| | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 | |
| Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | Revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | |
| Cost of goods sold | 61.2 | % | | 61.5 | % | | 61.0 | % | Cost of goods sold | 59.2 | % | | 59.3 | % | | 60.5 | % | |
| | Gross margin | 38.8 | % | | 38.5 | % | | 39.0 | % | Gross margin | 40.8 | % | | 40.7 | % | | 39.5 | % | |
| Selling, general and administrative expenses | 28.6 | % | | 28.2 | % | | 27.9 | % | Selling, general and administrative expenses | 27.7 | % | | 27.3 | % | | 28.1 | % | |
| Restructuring and acquisition related expenses | 0.3 | % | | 0.3 | % | | 0.2 | % | |
| Impairment of net assets held for sale and goodwill | 0.4 | % | | 0.3 | % | | — | % | |
| Restructuring and transaction related expenses | | Restructuring and transaction related expenses | 0.2 | % | | 0.2 | % | | 0.6 | % | |
| (Gain) on disposal of businesses and impairment of net assets held for sale | | (Gain) on disposal of businesses and impairment of net assets held for sale | (1.2) | % | | — | % | | — | % | |
| Depreciation and amortization | 2.3 | % | | 2.3 | % | | 2.3 | % | Depreciation and amortization | 1.8 | % | | 2.0 | % | | 2.3 | % | |
| Operating income | 7.2 | % | | 7.4 | % | | 8.7 | % | Operating income | 12.4 | % | | 11.3 | % | | 8.5 | % | |
| Other expense, net | 0.8 | % | | 1.2 | % | | 0.8 | % | |
| Total other expense, net | | Total other expense, net | 0.5 | % | | 0.6 | % | | 0.9 | % | |
| Income from continuing operations before provision for income taxes | 6.3 | % | | 6.3 | % | | 7.9 | % | Income from continuing operations before provision for income taxes | 11.9 | % | | 10.7 | % | | 7.6 | % | |
| Provision for income taxes | 1.7 | % | | 1.6 | % | | 2.4 | % | Provision for income taxes | 3.0 | % | | 2.5 | % | | 2.1 | % | |
| Equity in (losses) earnings of unconsolidated subsidiaries | (0.3 | )% | | (0.5 | )% | | 0.1 | % | |
| Equity in earnings of unconsolidated subsidiaries | | Equity in earnings of unconsolidated subsidiaries | 0.1 | % | | 0.2 | % | | — | % | |
| Income from continuing operations | 4.3 | % | | 4.1 | % | | 5.5 | % | Income from continuing operations | 8.9 | % | | 8.3 | % | | 5.5 | % | |
| Net income (loss) from discontinued operations | 0.0 | % | | (0.0 | )% | | (0.1 | )% | |
| Net income from discontinued operations | | Net income from discontinued operations | — | % | | — | % | | — | % | |
| Net income | 4.4 | % | | 4.1 | % | | 5.4 | % | Net income | 9.0 | % | | 8.3 | % | | 5.5 | % | |
| Less: net income (loss) attributable to continuing noncontrolling interest | 0.0 | % | | 0.0 | % | | (0.0 | )% | |
| Less: net income attributable to discontinued noncontrolling interest | 0.0 | % | | — | % | | — | % | |
| Less: net income attributable to continuing noncontrolling interest | | Less: net income attributable to continuing noncontrolling interest | — | % | | — | % | | — | % | |
| Net income attributable to LKQ stockholders | 4.3 | % | | 4.0 | % | | 5.5 | % | Net income attributable to LKQ stockholders | 9.0 | % | | 8.3 | % | | 5.5 | % | |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
| |
Note: In the table above, the sum of the individual percentages may not equal the total due to rounding.
Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021
Revenue
Revenue.
The following table summarizes the changes in revenue by category (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| 2022 | | 2021 | | Organic | | Acquisition and Divestiture | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 11,933 | | | $ | 12,141 | | | 5.0 | % | | (1.2) | % | | (5.5) | % | | (1.7) | % |
| Other revenue | 861 | | | 948 | | | (7.5) | % | | (1.3) | % | | (0.4) | % | | (9.2) | % |
| Total revenue | $ | 12,794 | | | $ | 13,089 | | | 4.1 | % | | (1.2) | % | | (5.1) | % | | (2.3) | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| | 2019 | | 2018 | | Organic | | Acquisition | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 11,877,846 |
| | $ | 11,233,407 |
| | 0.3 | % | | 7.6 | % | | (2.2 | )% | | 5.7 | % |
| Other revenue | 628,263 |
| | 643,267 |
| | (3.3 | )% | | 1.2 | % | | (0.2 | )% | | (2.3 | )% |
| Total revenue | $ | 12,506,109 |
| | $ | 11,876,674 |
| | 0.1 | % | | 7.3 | % | | (2.1 | )% | | 5.3 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
The growthdecline in parts and services revenue of 5.7%1.7% represented increasesdecreases in segment revenue of 11.8%5.3% in Europe (drivenand 4.1% in Specialty, partially offset by the Stahlgruber acquisitionincreases of 9.8% in May 2018)Self Service and 0.9%4.2% in Wholesale - North AmericaAmerica. This overall decrease was driven by a 5.5% decrease due to fluctuations in foreign exchange rates and a decrease1.2% net reduction from divestitures. This was partially offset by organic parts and services revenue growth of 0.9% in Specialty.5.0%, which included a 0.2% negative effect from one fewer selling day for the year ended December 31, 2022, and overall per day organic growth of 5.2%. The decrease in other revenue of 2.3%9.2% was primarily driven by a $21decrease in organic revenue of $71 million, organic decrease, largely attributable to a $78 million decrease in our Self Service segment, partially offset by an $8 million increase in our Wholesale - North America segment. Refer to the discussion of our segment results of operations for factors contributing to the changechanges in revenue by segment duringfor the year ended December 31, 20192022 compared to the year ended December 31, 2018.2021.
Cost of Goods Sold
.
Cost of goods sold decreased to 61.2%59.2% of revenue infor the year ended December 31, 20192022 from 61.5%59.3% of revenue infor the year ended December 31, 2018. Our2021. Cost of goods sold reflects a decrease of 0.2% related to improved gross margin in our Wholesale - North America segment generatedand 0.2% attributable to mix as a 0.6% improvement in gross margin, which wasgreater portion of sales are coming from Wholesale - North America, partially offset by (i) a 0.2% increase in cost of goods sold attributable to mix and (ii) an increase of 0.2% primarily due to inventory write-downs in0.4% from our EuropeSelf Service segment. The mix impact is a result of our Stahlgruber acquisition, as the lower margin Europe segment makes up a larger percentage of the consolidated results and has a dilutive effect on the gross
margin percentage. We recorded a $21 million reduction of inventory primarily due to our Europe segment related to U.K. branch consolidation and brand rationalization initiated as part of our restructuring program. See Note 6, "Restructuring and Acquisition Related Expenses" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring plans. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 20192022 compared to the year ended December 31, 2018.2021.
Selling, General and Administrative Expenses. Expenses
Our selling, general and administrative ("SG&A") expenses as a percentage of revenue increased to 28.6% in27.7% for the year ended December 31, 20192022 from 28.2% in27.3% for the year ended December 31, 2018,2021. The SG&A expense increase primarily as a resultreflects impacts of 0.3%0.2% related to each of our Self Service and 0.2% increases from our North America and Europe segments, respectively.Specialty segments. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the year ended December 31, 20192022 compared to the year ended December 31, 2018.2021.
Restructuring and AcquisitionTransaction Related Expenses
.
The following table summarizes restructuring and acquisitiontransaction related expenses for the periods indicated (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | | Change |
| Restructuring expenses | $ | 15 | | (1) | $ | 17 | | (2) | $ | (2) | |
| Transaction related expenses | 5 | | (3) | 3 | | (3) | 2 | |
| Restructuring and transaction related expenses | $ | 20 | | | $ | 20 | | | $ | — | |
|
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2019 | | 2018 | | Change |
| Restructuring expenses | $ | 34,832 |
| (1) | $ | 14,313 |
| (2) | $ | 20,519 |
|
| Acquisition related expenses | 2,147 |
| (3) | 18,115 |
| (4) | (15,968 | ) |
| Total restructuring and acquisition related expenses | $ | 36,979 |
| | $ | 32,428 |
| | $ | 4,551 |
|
| |
(1) | Restructuring expenses for the year ended December 31, 2019 primarily consisted of (i) $20 million related to our 2019 global restructuring program, and (ii) $14 million related to integration costs from acquisitions. |
| |
(2) | Restructuring expenses for the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew Page and $3 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees. |
| |
(3) | Acquisition related expenses for the year ended December 31, 2019 included costs related to completed and pending acquisitions. |
| |
(4) | Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber. The remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018. |
(2) Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $11 million related to our global restructuring plans and (ii) $6 million related to our 1 LKQ Europe plan.
(3) Transaction related expenses for the years ended December 31, 2022 and 2021 primarily related to external costs such as legal, accounting and advisory fees for completed and potential transactions.
See Note 6,14, "Restructuring and AcquisitionTransaction Related Expenses" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring and acquisition integration plans.
(Gain) on Disposal of Businesses and Impairment of Net Assets Held for Sale and Goodwill.
We recorded a $47 million impairment charge on net assets held for sale forDuring the year ended December 31, 2019. The impairment charge was primarily attributable to our North America segment. We2022, we recorded a $33$159 million goodwill impairment charge onpretax gain from divestitures including $155 million ($127 million after tax) from the Aviation reporting unitsale of PGW and $4 million from the sale of a business within our Self Service segment. See"Other Divestitures (Not Classified in our North America segment in the fourth quarter of 2018. See "Net Assets Held for Sale" and "Intangible Assets"Discontinued Operations)" in Note 4, "Summary of Significant Accounting Policies"2, "Discontinued Operations and Divestitures" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges.our gain on disposal of businesses.
Depreciation and Amortization
.
The following table summarizes depreciation and amortization for the periods indicated (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| 2022 | | 2021 | | Change | |
| Depreciation | $ | 142 | | | $ | 156 | | | $ | (14) | | (1) |
| Amortization | 95 | | | 104 | | | (9) | | (2) |
| Depreciation and amortization | $ | 237 | | | $ | 260 | | | $ | (23) | | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | | |
| | 2019 | | 2018 | | Change | |
| Depreciation | $ | 150,649 |
| | $ | 137,632 |
| | $ | 13,017 |
| (1) |
| Amortization | 140,121 |
| | 136,581 |
| | 3,540 |
| (2) |
| Total depreciation and amortization | $ | 290,770 |
| | $ | 274,213 |
| | $ | 16,557 |
| |
| |
(1) | Depreciation expense included an incremental $6 million in our Europe segment, principally due(1)The decrease in depreciation expense included $7 million from foreign currency translation primarily related to (i) a $7 million increase in depreciation expense from our acquisition of Stahlgruber, and (ii) several individually immaterial factors that increased depreciation expense by $2 million in the aggregate, partially offset by (iii) a decrease in the euro and pound sterling rates for the year ended December 31, 2022 compared to the prior year period and $5 million related to divestiture of businesses (primarily PGW) with the remaining decrease of $3 million related to the impact of foreign currency translation, primarily due to decreases in the euro and pound sterling exchange rates during the year ended December 31, 2019 compared to the prior year period. Depreciation expense |
also included an incremental $6 million in our North America segment, primarily due to capital expendituresindividually immaterial factors.
(2)The decrease in amortization expense primarily reflected (i) a $8 million decrease from foreign exchange translation, primarily related to new warehouse openingsa decrease in the euro exchange rate, (ii) a decrease of $4 million primarily related to the customer relationship intangible assets recorded upon our acquisition of Stahlgruber as the accelerated amortization of the customer relationship intangible assets resulted in lower amortization expense for the year ended December 31, 2022 compared to the prior year period, and upgrades(iii) other individually insignificant decreases which in the aggregate had a $2 million impact, partially offset by (iv) a $5 million increase related to our existing information technology infrastructure.software amortization.
| |
(2) | The increase in amortization expense primarily reflected (i) an incremental $16 million from our acquisition of Stahlgruber, partially offset by (ii) a decrease of $6 million related to the impact of foreign currency translation, principally due to a decrease in the euro exchange rate during the year ended December 31, 2019 compared to the prior year period, and (iii) a decrease of $6 million related to our 2016 acquisition of Rhiag, which had lower amortization expense during the year ended December 31, 2019 compared to the prior year period as a result of accelerated amortization on a customer relationship intangible asset. |
Total Other Expense, Net.Net
The following table summarizes the components of the change inTotal other expense, net for the periods indicated (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| 2022 | | 2021 | | Change | |
| Interest expense | $ | 78 | | | $ | 72 | | | $ | 6 | | (1) |
| Loss on debt extinguishment | — | | | 24 | | | (24) | | (2) |
| Interest income and other income, net | (15) | | | (21) | | | 6 | | (3) |
| Total other expense, net | $ | 63 | | | $ | 75 | | | $ | (12) | | |
|
| | | | | |
| Other expense, net for the year ended December 31, 2018 | $ | 138,810 |
| |
| Decrease due to: | | |
| Interest expense | (7,873 | ) | (1) |
| (Gain) loss on debt extinguishment | (1,478 | ) | |
| Interest income and other income, net | (23,838 | ) | (2) |
| Net decrease | (33,189 | ) | |
| Other expense, net for the year ended December 31, 2019 | $ | 105,621 |
| |
| |
(1) | The decrease in interest expense is primarily related to (i) a $9 million decrease from lower interest rates on borrowings under our senior secured credit agreement compared to the prior year period, and (ii) a $4 million decrease from foreign currency translation, primarily related to a decrease in the euro exchange rate during the year ended December 31, 2019 compared to the prior year period, partially offset by (iii) a $5 million increase resulting from higher outstanding debt during the year ended December 31, 2019 compared to the prior year period (including the borrowings in 2018 under our Euro Notes (2026/28) for the Stahlgruber acquisition). |
| |
(2) | The increase in interest income and other income, net primarily consisted of (i) a $12 million non-recurring gain related to resolution of an acquisition related matter in the fourth quarter of 2019, (ii) a $5 million fair value loss recorded during 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in Mekonomen; see Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information, (iii) $3 million of proceeds received in the first quarter of 2019 related to an insurance settlement in our North America segment, (iv) a $2 million non-recurring impairment loss recorded during the second quarter of 2018 related to our Andrew Page operation, and (v) several individually immaterial factors that increased interest and other income by $2 million in the aggregate. |
(2)The $24 million decrease in Loss on debt extinguishment is due to the charge recorded in April 2021 related to the redemption of the Euro Notes (2026).
(3)The decrease in Interest income and other income, net is primarily comprised of (i) a decrease related to a $16 million change in our fair value adjustments for equity investments not accounted for under the equity method and (ii) a decrease related to a $4 million change in foreign currency gains and losses, partially offset by (iii) a $5 million increase in interest income and (iv) other individually insignificant increases which in the aggregate had a $9 million favorable impact.
Provision for Income Taxes
. Our effective income tax rate for the year ended December 31, 20192022 was 27.2%25.3%, compared to 25.7% for the prior year. The increase was primarily attributable to the impact of a favorable discrete item of $10 million23.6% for the year ended December 31, 2018, reflecting an adjustment to the Tax Act transition tax. We did not have a similar benefit in 2019, thus creating an increase of 1.4% on the annual tax rate.2021. The increase was also partially attributable to the impact of a favorable discrete item of approximately $5 millionbase rate for the year ended December 31, 2018, for excess tax benefits from stock-based payments; there were $3 million of excess tax benefits from stock-based payments for2022 increased when compared to the year ended December 31, 2019 for2021 due to shifts in the geographic distribution of pretax income in the current year and an unfavorable year over year impact of 0.3%0.6% related to non-deductible expenses. Additionally, the change in valuation allowances was a 0.4% unfavorable effect on the rate compared to a 0.8% benefit in 2021 primarily from the reversal of valuation allowances on certain interest deduction carryforwards in Europe. The discrete effect of the PGW divestiture favorably adjusted the base rate in 2022 by 0.9%. See Note 15,23, "Income Taxes" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
Equity in (Losses) Earnings of Unconsolidated Subsidiaries.Subsidiaries
Equity in (losses) earnings of unconsolidated subsidiaries for the year ended December 31, 20192022 decreased by $12 million primarily related to a decline in year over year results reported by Mekonomen, which is our largest equity method investment, and the negative year over year effect resulting from the divestiture of a Self Service investment in Mekonomen. During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment chargessecond quarter of $40 million and $71 million, respectively, related to our investment in Mekonomen. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges. Excluding the impairment charges, we recorded equity in earnings of $9 million and $7 million related to our investment in Mekonomen for the years ended December 31, 2019 and 2018, respectively.2022.
Foreign Currency Impact.Impact
We translate our statements of income at the average exchange rates in effect for the period. Relative to the rates used duringfor the year ended December 31, 2018,2021, the Czech koruna, euro, pound sterling, Czech koruna, and Canadian dollar rates used to translate the 20192022 statements of income decreased by 5%10.9%, 5%10.1%, 4%6.9%, and 2%3.6%, respectively. The negative translation effect of the change in foreign currencies against the U.S. dollar combined with the negative impact of realized and
unrealized currency gains and losses for the year ended December 31, 20192022 resulted in a $0.03$0.14 negative effect on diluted earnings per share relative to the prior year period.
Net Income (Loss) from Discontinued Operations. We recorded net income of $2 million and a net loss of $4 million from discontinued operations during the years ended December 31, 2019 and 2018, respectively. See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.39
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest. Net (loss) income attributable to continuing noncontrolling interest for the year ended December 31, 2019 was comparable to the prior year period, due to (i) a $2 million decrease in our North America segment, as we allocated a loss of $1 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2019, which was offset by (ii) a $2 million increase related to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition. Net income attributable to discontinued noncontrolling interest was $1 million for the year ended December 31, 2019 and related to the Stahlgruber Czech Republic wholesale business. See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on this business.
Year Ended December 31, 20182021 Compared to Year Ended December 31, 20172020
Revenue
Revenue.
The following table summarizes the changes in revenue by category (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| 2021 | | 2020 | | Organic | | Acquisition and Divestiture | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 12,141 | | | $ | 10,964 | | | 7.9 | % | | 0.3 | % | | 2.5 | % | | 10.7 | % |
| Other revenue | 948 | | | 665 | | | 42.3 | % | | — | % | | 0.2 | % | | 42.5 | % |
| Total revenue | $ | 13,089 | | | $ | 11,629 | | | 9.8 | % | | 0.3 | % | | 2.4 | % | | 12.6 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| | 2018 | | 2017 | | Organic | | Acquisition | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 11,233,407 |
| | $ | 9,208,634 |
| | 4.4 | % | | 16.0 | % | | 1.5 | % | | 22.0 | % |
| Other revenue | 643,267 |
| | 528,275 |
| | 20.4 | % | | 1.4 | % | | 0.0 | % | | 21.8 | % |
| Total revenue | $ | 11,876,674 |
| | $ | 9,736,909 |
| | 5.3 | % | | 15.3 | % | | 1.4 | % | | 22.0 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
The changegrowth in parts and servicesservices revenue of 22.0%10.7% represented increases in segment revenue of 6.5% 23.8% in Specialty, 10.3% in Europe, 6.6% in Wholesale - North America 43.4%and 1.7% in Europe and 13.2% in Specialty.Self Service. Organic growth in parts and servicesservices revenue ongrowth was 7.9%, which included a 0.4% negative effect from one fewer selling day for the year ended December 31, 2021, resulting in per day basis was 4.1% as there was one additional selling day in 2018 compared to 2017.organic growth of 8.3%. The increase in other revenue of 21.8% 42.5% was primarily driven by a $108$281 million organicorganic increase, largely attributable to our Self Service and Wholesale - North America segment.segments. Refer to the discussion of our segment results of operations for factors contributing to the changechanges in revenue by segment duringfor the year ended December 31, 20182021 compared to the year ended December 31, 2017.2020.
Cost of Goods Sold
. Cost of goods sold increased to 61.5%decreased to 59.3% of revenue infor the year ended December 31, 20182021 from 61.0%60.5% of revenue infor the year ended December 31, 2017. Cost2020. The cost of goods sold increased 0.4%decrease reflects impacts of 0.7% and 0.3% as a result of0.6% in our Europe and Wholesale - North America segments, respectively.respectively, partially offset by a 0.2% increase in our Self Service segment. Refer to the discussion of our segment results of operations for factors contributing to the changes in cost of goods sold as a percentage of revenue by segment for the year ended December 31, 20182021 compared to the year ended December 31, 2017.2020.
Selling, General and Administrative Expenses. Expenses
Our SG&A expenses as a percentage of revenue increased to 28.2% indecreased to 27.3% for the year ended December 31, 2021 from 28.1% for the year ended December 31, 2018 from 27.9%2020. The SG&A expense decrease reflects impacts of 0.4% in the year ended December 31, 2017, primarily aseach of our Europe and Self Service segments and 0.2% attributable to mix. The mix impact was a result of the increased revenues in our Specialty segment, as the lower SG&A expense percentage for the Specialty segment made up a 0.2% increase from our North America segment.larger percentage of the consolidated results, which had a favorable effect on SG&A expense as a percentage of revenue. Refer to the discussion of our segment results of operations for factors contributing to the changes in SG&A expenses as a percentage of revenue by segment for the year ended December 31, 20182021 compared to the year endedDecember 31, 2017.2020.
Restructuring and AcquisitionTransaction Related Expenses
.
The following table summarizes restructuring and acquisitiontransaction related expenses for the periods indicated (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | | Change |
| Restructuring expenses | $ | 17 | | (1) | $ | 58 | | (2) | $ | (41) | |
| Transaction related expenses | 3 | | (3) | 8 | | (4) | (5) | |
| Restructuring and transaction related expenses | $ | 20 | | | $ | 66 | | | $ | (46) | |
(1)Restructuring expenses for the year ended December 31, 2021 primarily consisted of (i) $11 million related to our global restructuring plans and (ii) $6 million related to our 1 LKQ Europe plan.
(2) Restructuring expenses for the year ended December 31, 2020 primarily consisted of (i) $49 million related to our global restructuring plans and (ii) $9 million related to our acquisition integration plans.
(3) Transaction related expenses for the year ended December 31, 2021 primarily relate to professional fees related to completed and potential transactions.
|
| | | | | | | | | | | |
| | Year Ended December 31, | | |
| | 2018 | | 2017 | | Change |
| Restructuring expenses | $ | 14,313 |
| (1) | $ | 5,012 |
| (2) | $ | 9,301 |
|
| Acquisition related expenses | 18,115 |
| (3) | 14,660 |
| (4) | 3,455 |
|
| Total restructuring and acquisition related expenses | $ | 32,428 |
| | $ | 19,672 |
| | $ | 12,756 |
|
| |
(1) | Restructuring expenses for the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew Page and $3 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees. |
(4) Transaction related expenses for the year ended December 31, 2020 primarily consisted of an $8 million adjustment for the resolution of a purchase price matter related to the Stahlgruber transaction for an amount above our prior estimate.
| |
(2) | Restructuring expenses for the year ended December 31, 2017 included $2 million, $2 million, and $1 million related to the integration of acquired businesses in our North America, Specialty, and Europe segments, respectively. These integration activities included the closure of duplicate facilities and termination of employees. |
| |
(3) | Acquisition related expenses for the year ended December 31, 2018 primarily consisted of $16 million of costs for our acquisition of Stahlgruber. The remaining costs related to other completed acquisitions and acquisitions that were pending as of December 31, 2018. |
| |
(4) | Acquisition related expenses for the year ended December 31, 2017 included $5 million of costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the CMA review. The remaining acquisition related costs for the year ended December 31, 2017 consisted of external costs for completed acquisitions; pending acquisitions as of December 31, 2017, including $4 million related to Stahlgruber; and potential acquisitions that were terminated. |
See Note 6,14, "Restructuring and AcquisitionTransaction Related Expenses" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our restructuring and integration plans.
(Gain) on Disposal of Businesses and Impairment of Net Assets Held for Sale and Goodwill.
We recorded a $33 million goodwill impairment charge on the Aviation reporting unit in the fourth quarter of 2018. See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information.
Depreciation and Amortization. The following table summarizes depreciation and amortization for the periods indicated (in thousands):
|
| | | | | | | | | | | | |
| | Year Ended December 31, | | | |
| | 2018 | | 2017 | | Change | |
| Depreciation | $ | 137,632 |
| | $ | 117,859 |
| | $ | 19,773 |
| (1) |
| Amortization | 136,581 |
| | 101,687 |
| | 34,894 |
| (2) |
| Total depreciation and amortization | $ | 274,213 |
| | $ | 219,546 |
| | $ | 54,667 |
| |
| |
(1) | The increase in depreciation expense primarily reflected an increase of $17 million in our Europe segment, composed of (i) $10 million of incremental depreciation expense from our acquisition of Stahlgruber, (ii) a $3 million increase due to a measurement period adjustment recorded in the year ended December 31, 2017 related to our valuation procedures for our acquisition of Rhiag that reduced depreciation expense, and (iii) $3 million of incremental depreciation expense from our acquisitions of aftermarket parts distribution businesses in Belgium and Poland in the third quarter of 2017. Depreciation expense also increased by $2 million related to the impact of foreign currency translation, primarily due to increases in the pound sterling, euro, and Czech koruna exchange rates during 2018 compared to the prior year. |
| |
(2) | The increase in amortization expense primarily reflected (i) an increase of $37 million from our acquisition of Stahlgruber, and (ii) an increase of $4 million from our acquisition of Warn, partially offset by (iii) a $7 million decrease due to our 2016 acquisitions of Rhiag and PGW, which had higher amortization expense in 2017 compared to 2018 as a result of accelerated amortization on the customer relationship intangible assets. |
Other Expense, Net. The following table summarizes the components of the year-over-year increase in other expense, net (in thousands):
|
| | | | | |
| Other expense, net for the year ended December 31, 2017 | $ | 78,371 |
| |
| Increase due to: | | |
| Interest expense | 44,737 |
| (1) |
| Loss on debt extinguishment | 894 |
| |
| Gains on bargain purchases | 1,452 |
| (2) |
| Interest income and other income, net | 13,356 |
| (3) |
| Net increase | 60,439 |
| |
| Other expense, net for the year ended December 31, 2018 | $ | 138,810 |
| |
| |
(1) | Additional interest primarily related to (i) a $38 million increase resulting from higher outstanding debt during 2018 compared to the prior year (including the borrowings under our Euro Notes (2026/28)), (ii) a $5 million increase from higher interest rates on borrowings under our senior secured credit agreement compared to the prior year, and (iii) a $2 |
million increase from foreign currency translation, primarily related to an increase in the euro exchange rate duringFor the year ended December 31, 20182021, we recorded immaterial impairment charges on net assets held for sale, compared to the year ended December 31, 2017.
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(2) | Over the past three years, we have completed several European acquisitions that resulted in gains on bargain purchase. In 2018, newly recorded gains and adjustments related to preliminary gains decreased relative to the prior year amount. |
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(3) | The increase in interest income and other income, net primarily consisted of (i) a $6 million increase in foreign currency losses, (ii) a $5 million fair value loss recorded during 2018 related to a preferential rights issue to subscribe for new shares at a discounted share price for our equity method investment in Mekonomen; see Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information, and (iii) a non-recurring $4 million gain recorded in 2017 due to a decrease in the fair value of contingent consideration liabilities. |
Provision$3 million of net impairment charges on net assets held for Income Taxes. Our effective income tax rate was 25.7%sale for the year ended December 31, 2018, compared to 30.7% for the year ended December 31, 2017. The following table summarizes the components of our provision for income taxes for the periods indicated (in thousands):
|
| | | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | |
| Base provision for income taxes | $ | 202,511 |
| | $ | 266,403 |
| (1) |
| Excess tax benefits from stock-based payments | (4,859 | ) | | (8,000 | ) | (2) |
| U.S. tax reform deferred tax rate adjustment | — |
| | (72,988 | ) | (3) |
| U.S. tax reform transition tax on foreign earnings | (9,581 | ) | | 50,800 |
| (4) |
| Other discrete items | 3,324 |
| | (655 | ) | |
| Provision for income taxes | $ | 191,395 |
| | $ | 235,560 |
| |
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(1) | Excluding the impact of discrete items, prior to the enactment of the Tax Act our recurring annual effective tax rate was approximately 35%. Largely due to the reduction in the U.S. federal tax rate to 21%, we estimated the rate to be approximately 27%. |
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(2) | Represents a discrete item for excess tax benefits received upon the exercise of stock options or vesting of RSUs. |
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(3) | The 2017 amount represented the provisional estimate of the revaluation of deferred tax assets and liabilities as a result of the Tax Act which reduced the U.S. federal corporate tax rate. There were no adjustments to the revaluation recorded in 2018; the accounting for this item is complete. |
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(4) | The 2017 amount represented the provisional estimate of the one-time transition tax on the mandatory deemed repatriation of cumulative foreign earnings as of December 31, 2017 as a result of the Tax Act. In 2018, we recognized a $10 million favorable adjustment to the Tax Act transition tax provisional estimate; the accounting for this item is complete. |
For further discussion of the Tax Act, see Note 15, "Income Taxes," included in Part II, Item 8 of this Annual Report on Form 10-K.
Equity in (Losses) Earnings of Unconsolidated Subsidiaries. Equity in (losses) earnings of unconsolidated subsidiaries for the years ended December 31, 2018 and 20172020 primarily relatedattributable to our investmentEurope segment. See "Net Assets Held for Sale" in Mekonomen. During the year ended December 31, 2018, we recorded $71 million in other-than-temporary impairments related to our investment in Mekonomen. See Note 4,3, "Summary of Significant Accounting Policies" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the net loss on disposals and impairment charges.
Depreciation and Amortization
The impairment charges are excludedfollowing table summarizes depreciation and amortization for the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | |
| Year Ended December 31, | | | |
| 2021 | | 2020 | | Change | |
| Depreciation | $ | 156 | | | $ | 153 | | | $ | 3 | | (1) |
| Amortization | 104 | | | 119 | | | (15) | | (2) |
| Depreciation and amortization | $ | 260 | | | $ | 272 | | | $ | (12) | | |
(1)The increase in depreciation expense primarily reflected (i) $3 million from foreign currency translation primarily related to an increase in the euro and pound sterling exchange rates.
(2)The decrease in amortization expense primarily reflected (i) a decrease of $16 million related to the customer relationship intangible assets recorded upon our calculationacquisition of Segment EBITDA.Stahlgruber as the accelerated amortization of the customer relationship intangible assets resulted in lower amortization expense for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $3 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate for the year ended December 31, 2021 compared to the prior year period.
Total Other Expense, Net
The following table summarizes the components of the change in Total other expense, net (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| 2021 | | 2020 | | Change | |
| Interest expense | $ | 72 | | | $ | 104 | | | $ | (32) | | (1) |
| Loss on debt extinguishment | 24 | | | 13 | | | 11 | | (2) |
| Interest income and other income, net | (21) | | | (16) | | | (5) | | (3) |
| Total other expense, net | $ | 75 | | | $ | 101 | | | $ | (26) | | |
(1)The lower interest expense is primarily related to (i) a $32 million decrease resulting from lower outstanding debt and lower interest rates for the year ended December 31, 2021 compared to the prior year period, partially offset by (ii) a $2 million increase from foreign currency translation, primarily related to an increase in the euro exchange rate.
(2)The $11 million increase in Loss on debt extinguishment is due to a $24 million charge recorded in April 2021 related to the redemption of the Euro Notes (2026) compared to a $13 million charge related to the redemption of the U.S. Notes (2023) in January 2020. Refer to "Euro Notes (2026/2028)" and "U.S. Notes (2023)" inNote 18, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the redemption of the Euro Notes (2026) and U.S. Notes (2023).
(3)The increase in Interest income and other income, net primarily related to (i) $11 million of fair value adjustments in 2021 for appreciation in our equity investments not accounted for under the equity method, (ii) $6 million in pension settlement losses in the prior year related to our primary defined benefit plan in the U.S. (the "U.S. Plan"), (iii) several individually immaterial factors that had a favorable impact of $1 million in the aggregate, partially offset by (iv) an $8 million reduction in proceeds related to insurance settlements compared to the prior year and (v) a $5 million reduction due to a decrease in non-operating income from a North American contract.
Provision for Income Taxes
Our effective income tax rate for the year ended December 31, 2021 was 23.6%, compared to 28.2% for the comparable prior year period. The 2021 base rate decreased due to higher pretax income in our international operations in the current year. Additionally, the lower annual effective tax rate for 2021 included a 0.8% rate benefit primarily from the reversal of valuation allowances on certain interest deduction carryforwards in Europe because of improved profitability and lower interest expense. The prior year rate was increased by 1.7% due to valuation allowances on the tax benefit of net operating loss and interest deduction carryforwards in certain jurisdictions where realization was uncertain. See Note 16, "Segment and Geographic Information"23, "Income Taxes" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for our reconciliationfurther information.
Equity in Earnings of Net Income to Segment EBITDA. Excluding the impairment charges, we recorded equityUnconsolidated Subsidiaries
Equity in earnings of $7 million during each ofunconsolidated subsidiaries for the yearsyear ended December 31, 2018 and 20172021 increased by $18 million related to improved year over year results reported by Mekonomen, which is our largest equity method investment, and a Self Service investment, which generated income in Mekonomen.2021 after posting losses in 2020.
Foreign Currency Impact.Impact
We translate our statements of income at the average exchange rates in effect for the period. Relative to the ratesrate used duringfor the year ended December 31, 2017, the2020, pound sterling, Canadian dollar, Czech koruna euro, and pound sterlingeuro rates used to translate the 20182021 statements of income increased by 7%7.1%, 5%6.9%, 6.7% and 4%3.6%, respectively. The positive translation effect of the change in foreign currencies against the U.S. dollar andcombined with the positive impact of realized and unrealized currency gains and losses for the year ended December 31, 20182021 resulted in a $0.02 $0.03 positive effect on diluted earnings per share from continuing operations relative to the prior year.
Net Income (Loss) from Discontinued Operations. We recorded net losses from discontinued operations of $4 million and $7 million during the years ended December 31, 2018 and 2017, respectively. Discontinued operations represents the automotive glass manufacturing business of PGW, which we sold on March 1, 2017. See Note 3, "Discontinued Operations" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.year period.
Net (Loss) Income Attributable to Continuing and Discontinued Noncontrolling Interest.
Net (loss) income attributable to continuing noncontrolling interest for the year ended December 31, 2018 increased $72021 decreased $1 million from 2017 duecompared to (i) a $5 million increase in our North America segment, as we allocated a loss of $4 million to the noncontrolling interest of an immaterial subsidiary during the year ended December 31, 2017, and (ii) a $2 million increase related to the noncontrolling interest of subsidiaries acquired in connection with the Stahlgruber acquisition.2020.
Results of Operations—Segment Reporting
We have four operatingreportable segments: Wholesale –- North America, Europe, Specialty and Self Service. Our Wholesale – North America and Self Service operating segments are aggregated into one reportable segment, North America, because they possess similar economic characteristics and have common products and services, customers, and methods of distribution. Therefore, we present three reportable segments: North America, Europe and Specialty.
We have presented the growth of our revenue and profitability in our operations on both an as reported and a constant currency basis. The constant currency presentation, which is a non-GAAP measure, excludes the impact of fluctuations in foreign currency exchange rates. We believe providing constant currency information provides valuable supplemental information regarding our growth and profitability, consistent with how we evaluate our performance, as this statistic removes the translation impact of exchange rate fluctuations, which are outside of our control and do not reflect our operational performance. Constant currency revenue and Segment EBITDA results are calculated by translating prior year revenue and Segment EBITDA in local currency using the current year's currency conversion rate. This non-GAAP financial measure has important limitations as an analytical tool and should not be considered in isolation or as a substitute for an analysis of our results as reported under US GAAP. Our use of this term may vary from the use of similarly-titled measures by other issuers due to potential inconsistencies in the method of calculation and differences due to items subject to interpretation. In addition, not all companies that report revenue or profitability on a constant currency basis calculate such measures in the same manner as we do, and accordingly, our calculations are not necessarily comparable to similarly-named measures of other companies and may not be appropriate measures for performance relative to other companies.
The following table presents our financial performance, including third party revenue, total revenue and Segment EBITDA, by reportable segment for the periods indicated (in thousands)millions):
| | | | Year Ended December 31, | | Year Ended December 31, | |
| | 2019 | | % of Total Segment Revenue | | 2018 | | % of Total Segment Revenue | | 2017 | | % of Total Segment Revenue | | | 2022 | | % of Total Segment Revenue | | 2021 | | % of Total Segment Revenue | | 2020 | | % of Total Segment Revenue | |
| Third Party Revenue | | | | | | | | | | | | Third Party Revenue | | | | | | | | | | | | | |
| North America | $ | 5,208,589 |
| | | | $ | 5,181,964 |
| | | | $ | 4,798,901 |
| | | |
| Wholesale - North America | | Wholesale - North America | | $ | 4,556 | | | $ | 4,376 | | | $ | 4,039 | | | |
| Europe | 5,838,124 |
| | | | 5,221,754 |
| | | | 3,636,811 |
| | | Europe | | 5,735 | | | 6,062 | | | 5,492 | | | |
| Specialty | 1,459,396 |
| | | | 1,472,956 |
| | | | 1,301,197 |
| | | Specialty | | 1,788 | | | 1,864 | | | 1,505 | | | |
| Self Service | | Self Service | | 715 | | | 787 | | | 593 | | | |
| Total third party revenue | $ | 12,506,109 |
| | | | $ | 11,876,674 |
| | | | $ | 9,736,909 |
| | | Total third party revenue | | $ | 12,794 | | | $ | 13,089 | | | $ | 11,629 | | | |
| Total Revenue | | | | | | | | | | | | Total Revenue | | | | | | | | |
| North America | $ | 5,209,294 |
| | | | $ | 5,182,609 |
| | | | $ | 4,799,651 |
| | | |
| Wholesale - North America | | Wholesale - North America | | $ | 4,556 | | | $ | 4,379 | | | $ | 4,040 | | | |
| Europe | 5,838,124 |
| | | | 5,221,754 |
| | | | 3,636,811 |
| | | Europe | | 5,735 | | | 6,062 | | | 5,492 | | | |
| Specialty | 1,464,042 |
| | | | 1,477,680 |
| | | | 1,305,516 |
| | | Specialty | | 1,791 | | | 1,867 | | | 1,509 | | | |
| Self Service | | Self Service | | 715 | | | 787 | | | 593 | | | |
| Eliminations | (5,351 | ) | | | | (5,369 | ) | | | | (5,069 | ) | | | Eliminations | | (3) | | | (6) | | | (5) | | | |
| Total revenue | $ | 12,506,109 |
| | | | $ | 11,876,674 |
| | | | $ | 9,736,909 |
| | | Total revenue | | $ | 12,794 | | | $ | 13,089 | | | $ | 11,629 | | | |
| Segment EBITDA | | | | | | | | | | | | Segment EBITDA | | | | | | | | |
| North America | $ | 712,957 |
| | 13.7 | % | | $ | 660,153 |
| | 12.7 | % | | $ | 655,275 |
| | 13.7 | % | |
| Wholesale - North America | | Wholesale - North America | | $ | 852 | | | 18.7 | % | | $ | 769 | | | 17.6 | % | | $ | 665 | | | 16.5 | % | |
| Europe | 454,220 |
| | 7.8 | % | | 422,721 |
| | 8.1 | % | | 319,156 |
| | 8.8 | % | Europe | | 585 | | | 10.2 | % | | 618 | | | 10.2 | % | | 428 | | | 7.8 | % | |
| Specialty | 161,184 |
| | 11.0 | % | | 168,525 |
| | 11.4 | % | | 142,159 |
| | 10.9 | % | Specialty | | 199 | | | 11.1 | % | | 223 | | | 12.0 | % | | 163 | | | 10.8 | % | |
| Self Service | | Self Service | | 83 | | | 11.7 | % | | 175 | | | 22.3 | % | | 113 | | | 19.1 | % | |
| Note: In the table above, the percentages of total segment revenue may not recalculate due to rounding. | | Note: In the table above, the percentages of total segment revenue may not recalculate due to rounding. | |
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is our Chief Executive Officer, is Segment EBITDA. 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 EBITDA excluding restructuring and acquisitiontransaction related expenses (which includes restructuring expenses recorded in Cost of goods sold),; change in fair value of contingent consideration liabilities,liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures,divestitures; equity in losses and earnings of unconsolidated subsidiaries,subsidiaries; equity investment fair value adjustments; impairment charges; and impairment charges.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). EBITDA, which is the basis for Segment EBITDA, is calculated as net income less net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations, and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense. See Note 16,24, "Segment and Geographic Information"Information" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for a reconciliation of total Segment EBITDA to net income.
Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021
Wholesale - North America
Third Party Revenue.
The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Wholesale - North America | 2022 | | 2021 | | Organic | | Acquisition and Divestiture | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 4,207 | | | $ | 4,037 | | | 11.4 | % | (1) | (7.0) | % | (3) | (0.2) | % | | 4.2 | % |
| Other revenue | 349 | | | 339 | | | 2.5 | % | (2) | 0.4 | % | | (0.1) | % | | 2.8 | % |
| Total third party revenue | $ | 4,556 | | | $ | 4,376 | | | 10.7 | % | | (6.4) | % | | (0.2) | % | | 4.1 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue increased 11.4% for the year ended December 31, 2022 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs. Aftermarket collision parts volumes decreased for the year ended December 31, 2022, due to ocean freight delays and supply chain challenges in the first half of the year. As these issues eased in the second half, aftermarket collision parts volumes showed year over year improvement. Recycled parts volume from our salvage business was roughly flat year over year.
(2)Organic other revenue increased 2.5%, or $8 million, related to (i) a $22 million increase in revenue from other scrap (e.g., aluminum) and cores due to higher prices as well as higher volumes, partially offset by (ii) a $9 million decrease in revenue from precious metals (platinum, palladium, and rhodium) primarily due to lower prices partially offset by higher volumes and (iii) a $5 million decrease in revenue from scrap steel due to lower prices partially offset by higher volumes. |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| North America | 2019 | | 2018 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 4,600,903 |
| | $ | 4,558,220 |
| | 0.9 | % | (1 | ) | 0.2 | % | | (0.2 | )% | | 0.9 | % |
| Other revenue | 607,686 |
| | 623,744 |
| | (3.4 | )% | (2 | ) | 0.8 | % | | (0.0 | )% | | (2.6 | )% |
| Total third party revenue | $ | 5,208,589 |
| | $ | 5,181,964 |
| | 0.4 | % | | 0.3 | % | | (0.2 | )% | | 0.5 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
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(1) | Parts and services organic revenue increased 0.9% for the year ended December 31, 2019 compared to the prior year period. This relatively low growth rate was impacted by (i) lower revenue in our glass and aviation businesses, which had unfavorable effects on organic growth of 0.4% and 0.2%, respectively, and (ii) collision and liability related auto claims being 1.4% lower for the year ended December 31, 2019 compared to the prior year period, which adversely impacted volume in our wholesale operations. Additionally, our North America segment generated a 5.7% organic growth rate for parts and services revenue in the year ended December 31, 2018, due in part to severe winter weather conditions. Facing a strong comparable period and with less favorable weather conditions in 2019, organic parts and services revenue growth was below our historical average. |
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(2) | The $21 million year over year organic decrease in other revenue primarily related to (i) a $67 million decrease in revenue from scrap steel and other metals primarily related to lower prices, partially offset by increased volumes, and (ii) a $12 million decrease in core revenue primarily related to decreased volumes, partially offset by (iii) a $62 million increase in revenue from precious metals (platinum, palladium and rhodium) primarily due to higher prices. |
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(3) | Acquisition related growth in 2019 reflected revenue from our acquisitions of seven wholesale businesses and one self service business from the beginning of 2018 through the one-year anniversary of the acquisitions, partially offset by the disposal of our aviation business in the third quarter of 2019. |
Segment EBITDA
.
Segment EBITDA increased $53$83 million, or 8.0%10.7%, for the year ended December 31, 20192022 compared to the prior year, despite the $18 million negative year over year effect related to the PGW business, which we divested in the second quarter of 2022. The increase is attributable to higher prices on parts and productivity initiatives helping to offset inflationary pressures related to ocean freight, labor, supplies and fuel. The increase was partially offset by decreases attributable to precious metals and scrap steel. We estimate that precious metals and scrap steel pricing had an unfavorable effect of $41 million, or 0.8%, on Segment EBITDA margin relative to the comparable prior year period. Sequential decreases
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment:
| | | | | | | | | | | |
| Wholesale - North America | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2021 | | 17.6 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 0.6 | % | (1) |
| Change in segment operating expenses | | 0.4 | % | (2) |
| Change in other income and expenses, net | | 0.1 | % | |
| Segment EBITDA for the year ended December 31, 2022 | | 18.7 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)The increase in gross margin of 0.6% was driven by (i) a 0.6% mix benefit resulting from the PGW divestiture in the second quarter and (ii) productivity and pricing initiatives which focused on offsetting inflation on product cost and inbound freight, partially offset by (iii) an unfavorable impact of 0.6% from a decrease in commodity prices.
(2)The decrease in segment operating expenses as a percentage of revenue primarily reflects favorable impacts of (i) 0.3% related to personnel costs due to lower incentive compensation, (ii) 0.2% from lower charitable contributions, and (iii) other individually immaterial factors representing a 0.2% favorable impact in the aggregate, partially offset by (iv) a 0.3% unfavorable impact related to professional fees.
Europe
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Europe segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Europe | 2022 | | 2021 | | Organic | | Acquisition and Divestiture | | Foreign Exchange (2) | | Total Change |
| Parts & services revenue | $ | 5,711 | | | $ | 6,033 | | | 5.1 | % | (1) | 0.4 | % | | (10.8) | % | | (5.3) | % |
| Other revenue | 24 | | | 29 | | | (6.1) | % | | — | % | | (11.9) | % | | (18.0) | % |
| Total third party revenue | $ | 5,735 | | | $ | 6,062 | | | 5.0 | % | | 0.4 | % | | (10.8) | % | | (5.4) | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue for the year ended December 31, 2022 increased by 5.1% (5.6% on a per day basis), primarily driven by pricing initiatives which focused on offsetting inflation on input costs across all geographies. The organic revenue growth across most of our European operations was partially offset by 0.4% of a negative effect on certain operations and product lines due to the Ukraine/Russia conflict.
(2)Exchange rates decreased our revenue growth by $654 million, or 10.8%, primarily due to the stronger U.S. dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2022 relative to the prior year.
Segment EBITDA
Segment EBITDA decreased $33 million, or 5.4%, for the year ended December 31, 2022 compared to the prior year. Our Europe Segment EBITDA included a negative year over year impact of $71 million related to the translation of local currency results into U.S. dollars at lower exchange rates than those experienced during the year ended December 31, 2021. On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased $38 million, or 6.1%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the year ended December 31, 2022.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
| | | | | | | | | | | |
| Europe | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2021 | | 10.2 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 0.1 | % | (1) |
| Change in segment operating expenses | | (0.1) | % | (2) |
| | | |
| Segment EBITDA for the year ended December 31, 2022 | | 10.2 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)The increase in gross margin was primarily attributable to favorable impacts of pricing initiatives and margin improvement initiatives undertaken to support profitable revenue growth despite inflationary pressures.
(2)The increase in segment operating expenses as a percentage of revenue primarily reflects unfavorable impacts of (i) 0.4% from increased freight, vehicle, and fuel expenses due to inflationary pressures and supply chain constraints and (ii) 0.2% from increased personnel costs primarily due to inflationary pressures, partially offset by (iii) other individually immaterial factors representing a 0.5% favorable impact in the aggregate.
Specialty
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Specialty segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Specialty | 2022 | | 2021 | | Organic (1) | | Acquisition and Divestiture (2) | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 1,788 | | | $ | 1,864 | | | (9.9) | % | | 6.1 | % | | (0.3) | % | | (4.1) | % |
| Other revenue | — | | | — | | | — | % | | — | % | | — | % | | — | % |
| Total third party revenue | $ | 1,788 | | | $ | 1,864 | | | (9.9) | % | | 6.1 | % | | (0.3) | % | | (4.1) | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue for the year ended December 31, 2022, decreased by 9.9% due to strong comparative growth for the year ended December 31, 2021, when parts and services organic revenue growth was 20.2%; demand softness from lower new vehicle sales caused by supply chain challenges; and a decrease in drop shipment volumes.
(2)Acquisition related growth for the year ended December 31, 2022 reflected revenue from our acquisitions of three Specialty businesses from the beginning of 2021 through the one-year anniversary of the acquisition dates.
Segment EBITDA
Segment EBITDA decreased $24 million, or 10.9%, for the year ended December 31, 2022 compared to the prior year primarily due to the organic revenue decline and the negative effect of inflation on overhead expenses.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
| | | | | | | | | | | |
| Specialty | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2021 | | 12.0 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 0.5 | % | (1) |
| Change in segment operating expenses | | (1.4) | % | (2) |
| | | |
| Segment EBITDA for the year ended December 31, 2022 | | 11.1 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)The increase in gross margin primarily was driven by pricing initiatives which focused on offsetting inflation on input costs and lower customer rebate levels due to lower customer attainment of rebate targets, partially offset by a 0.8% unfavorable impact from acquisitions.
(2)The increase in segment operating expenses as a percentage of revenue primarily reflects unfavorable impacts of (i) 0.8% in personnel costs primarily as a result of wage inflation and lower operating leverage due to the organic parts and services revenue decline, (ii) 0.5% in vehicle and fuel expenses primarily due to higher fuel costs, (iii) 0.3% in fixed facility expenses as a result of lower operating leverage due to the organic parts and services revenue decline, and (iv) several individually immaterial factors that had an unfavorable impact of 0.4% in the aggregate, partially offset by (v) a favorable impact of 0.6% from operating expense synergies and leverage generated from the 2021 acquisitions.
Self Service
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Self Service segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Self Service | 2022 | | 2021 | | Organic | | Acquisition and Divestiture(3) |
| Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 227 | | | $ | 207 | | | 9.9 | % | (1) | (0.1) | % | | — | % | | 9.8 | % |
| Other revenue | 488 | | | 580 | | | (13.4) | % | (2) | (2.4) | % |
| — | % | | (15.8) | % |
| Total third party revenue | $ | 715 | | | $ | 787 | | | (7.3) | % | | (1.8) | % | | — | % | | (9.1) | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue increased 9.9% for the year ended December 31, 2022 compared to the prior year, primarily driven by pricing initiatives which focused on offsetting inflation on input costs resulting from greater competition for vehicles.
(2)Other organic revenue decreased 13.4%, or $78 million, year over year due to (i) a $58 million decrease in revenue from precious metals (platinum, palladium, and rhodium) due to lower prices and, to a lesser extent, lower volumes, and (ii) a $33 million decrease in revenue from scrap steel due to lower volumes and, to a lesser extent, lower prices, partially offset by (iii) a $13 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher prices.
(3)Acquisition and divestiture revenue was a net decrease of $14 million, or 1.8% primarily due to the divestiture of a business in the third quarter of 2022. See "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and Divestitures" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the divestiture.
Segment EBITDA
Segment EBITDA decreased $92 million, or 52.3%, for the year ended December 31, 2022 compared to the prior year. The decrease is primarily attributable to unfavorable movements in commodity prices compared to the prior year. Decreases in precious metals prices contributed an estimated $34 million decline in Segment EBITDA relative to the year ended December 31, 2021. In addition, net sequential changes in scrap steel prices in our salvage and self service operations had ana $15 million unfavorable impact of $23on Segment EBITDA during the year ended December 31, 2022, compared to a $26 million on North America Segment EBITDAfavorable impact during the year ended December 31, 2021. The unfavorable impacts for the year ended December 31, 2019, compared to a $5 million favorable impact for the year ended December 31, 2018. This unfavorable impact2022 resulted from the decrease in scrap steel prices between the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle. We estimate that precious metals and scrap steel pricing had an unfavorable effect of 8.6% on Segment EBITDA margin relative to the comparable prior year period.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Self Service segment:
| | | | | | | | | | | |
| Self Service | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2021 | | 22.3 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | (6.6) | % | (1) |
| Change in segment operating expenses | | (4.1) | % | (2) |
| Change in other income and expenses, net | | 0.1 | % | |
| Segment EBITDA for the year ended December 31, 2022 | | 11.7 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)The decrease in gross margin reflects (i) an unfavorable impact of 7.1% resulting from movements in metals prices partially offset by (ii) a net favorable impact due to pricing initiatives for parts and services implemented to mitigate the effects of higher car costs.
(2)The increase in segment operating expenses as a percentage of revenue reflects (i) a negative leverage effect of 2.9% from decreases in metals revenue (ii) an unfavorable impact of 0.4% due to higher advertising expense, and (iii) other individually immaterial factors representing a 0.8% unfavorable impact in the aggregate.
Year Ended December 31, 2021 Compared to Year Ended December 31, 2020
Wholesale - North America
Third Party Revenue
The following table summarizes the changes in third party revenue by category in our Wholesale - North America segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Wholesale - North America | 2021 | | 2020 | | Organic | | Acquisition and Divestiture | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 4,037 | | | $ | 3,786 | | | 5.8 | % | (1) | 0.4 | % | | 0.4 | % | | 6.6 | % |
| Other revenue | 339 | | | 253 | | | 33.3 | % | (2) | 0.1 | % | | 0.4 | % | | 33.8 | % |
| Total third party revenue | $ | 4,376 | | | $ | 4,039 | | | 7.5 | % | | 0.4 | % | | 0.4 | % | | 8.3 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue increased 5.8% (6.7% on a per day basis) for the year ended December 31, 2021 compared to the prior year period, primarily driven by pricing and growth from recycled and remanufactured major mechanical parts and aftermarket automotive glass products. While mobility statistics improved relative to 2020, aftermarket collision parts revenue was roughly flat year-over-year due to the constraints on availability of parts caused by supply chain issues in 2021.
(2)The $84 million year over year organic increase in other revenue is primarily related to (i) a $36 million increase in revenue from other scrap and cores primarily related to higher prices and higher volumes, (ii) a $24 million increase in revenue from scrap steel due to higher prices and to a lesser extent, higher volumes, (iii) a $24 million increase in revenue from precious metals (platinum, palladium, and rhodium) primarily due to higher prices.
Segment EBITDA
Segment EBITDA increased $104 million, or 15.7%, for the year ended December 31, 2021 despite the impact of two fewer selling days compared to the prior year period.This increase is attributable to margin initiatives, rightsizing actions, metals prices and the favorable effect from the revenue recovery compared to the prior year when the COVID-19 impact was more severe. These were partially offset by negative impacts due to aftermarket fill rates and inflationary increases in costs. Increases in precious metals prices contributed an estimated $18 million increase in Segment EBITDA relative to the year ended December 31, 2020. Additionally, net sequential increases in scrap steel prices in our salvage operations had a $16 million favorable impact on Segment EBITDA for the year ended December 31, 2021, compared to a $3 million favorable impact for the year ended December 31, 2020. We estimate that precious metals and scrap steel pricing had a favorable effect of $31 million, or 0.6%, on Segment EBITDA margin relative to the comparable prior year period.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Wholesale - North America segment:
| | | | | | | | | | | |
| Wholesale - North America | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2020 | | 16.5 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 1.8 | % | (1) |
| Change in segment operating expenses | | (0.5) | % | (2) |
| Change in other expense, net and net income attributable to continuing noncontrolling interest | | (0.2) | % | (3) |
| Segment EBITDA for the year ended December 31, 2021 | | 17.6 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1) The increase in gross margin was favorable primarily due to the positive impact of higher precious metals and scrap steel prices, pricing initiatives and cost reductions from operational efficiencies and rightsizing efforts. Compared to the prior year, input costs have risen, with (i) inflationary pressures impacting product and freight costs in aftermarket and (ii) limited supply combined with heightened competition at auctions contributing to higher salvage costs. We are adjusting prices dynamically to address input cost increases and market conditions such as inventory availability and demand, and, in some cases, we experienced a margin benefit in 2021 as higher prices were enacted ahead of turning the higher cost inventory.
|
| | | | |
| North America | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2018 | | 12.7 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 1.3 | % | (1) |
| Change in segment operating expenses | | (0.6 | )% | (2) |
| Change in other expense, net and net income attributable to continuing noncontrolling interest | | 0.2 | % | (3) |
| Segment EBITDA for the year ended December 31, 2019 | | 13.7 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in gross margin primarily reflected favorable impacts of 1.3% from our wholesale operations and 0.3% from the disposal of our aviation business in the third quarter of 2019, partially offset by several individually immaterial factors that had an unfavorable impact of 0.3% in the aggregate. The increase in wholesale gross margin was primarily attributable to ongoing margin improvement initiatives and, to a lesser extent, the favorable impact from higher prices of precious metals (platinum, palladium and rhodium) compared to the prior year period. |
| |
(2) | The increase in segment operating expenses as a percentage of revenue is primarily related to a 0.4% increase in facility expenses principally due to higher expenses in rent related to expansions and renewals. |
| |
(3) | The decrease in other expense, net and net income attributable to continuing noncontrolling interest was due to several individually immaterial factors that had a favorable impact of 0.2% in the aggregate. |
(3) The unfavorable impact in other expense, net and net income attributable to continuing noncontrolling interest of 0.2% was primarily related to higher insurance proceeds received for the year ended December 31, 2020.
Europe
Third Party Revenue
.
The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Europe | 2021 | | 2020 | | Organic | | Acquisition and Divestiture (2) | | Foreign Exchange (3) | | Total Change |
| Parts & services revenue | $ | 6,033 | | | $ | 5,470 | | | 6.2 | % | (1) | (0.4) | % | | 4.6 | % | | 10.3 | % |
| Other revenue | 29 | | | 22 | | | 24.1 | % | | — | % | | 5.5 | % | | 29.6 | % |
| Total third party revenue | $ | 6,062 | | | $ | 5,492 | | | 6.2 | % | | (0.4) | % | | 4.6 | % | | 10.4 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| Europe | 2019 | | 2018 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change |
| Parts & services revenue | $ | 5,817,547 |
| | $ | 5,202,231 |
| | 0.1 | % | | 16.3 | % | | (4.6 | )% | | 11.8 | % |
| Other revenue | 20,577 |
| | 19,523 |
| | (1.7 | )% | | 12.8 | % | | (5.8 | )% | | 5.4 | % |
| Total third party revenue | $ | 5,838,124 |
| | $ | 5,221,754 |
| | 0.1 | % | | 16.3 | % | | (4.6 | )% | | 11.8 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Parts and services organic revenue increased for the year ended December 31, 2019, mainly driven by our Eastern European and U.K. operations, which had low single-digit growth rates. Softer economic conditions across the continent continued to have a negative impact on revenue growth, most notably in Germany and Italy. |
| |
(2) | Acquisition related growth for the year ended December 31, 2019 was $850 million, or 16.3%, primarily from our acquisition of Stahlgruber. |
| |
(3) | Compared to the prior year, exchange rates decreased our revenue growth by $240 million, or 4.6%, primarily due to the stronger U.S. dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2019 compared to the prior year period. |
(2)Acquisition and divestiture related decline for the year ended December 31, 2021 was primarily as a result of the disposals of a non-core telecommunications operation in Germany in the second quarter of 2020 and five additional smaller disposals in 2021 and 2020.
(3)Compared to the prior year, exchange rates increased our revenue growth by $251 million, or 4.6%, primarily due to the weaker U.S. dollar against the euro, pound sterling and Czech koruna for the year ended December 31, 2021 relative to the prior year period.
Segment EBITDA
.
Segment EBITDA increased $31$190 million, or 7.5%44.5%, for the year ended December 31, 20192021 compared to the prior year period.year. Our Europe Segment EBITDA included a negativepositive year over year impact of $21$20 million related to the translation of local currency results into U.S. dollars at lowerhigher exchange rates than those experienced duringfor the year ended December 31, 2018.2020. On a constant currency basis (i.e., excluding the translation impact), Segment EBITDA increased by $53$170 million, or 12.4%39.8%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations–Consolidated section above for further detail regarding foreign currency impact on our results for the year ended December 31, 2019. 2021.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Europe segment:
| | | | | | | | | | | |
| Europe | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2020 | | 7.8 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 1.5 | % | (1) |
| Change in segment operating expenses | | 0.8 | % | (2) |
| Change in other expense, net and net income attributable to continuing noncontrolling interest | | 0.1 | % | |
| Segment EBITDA for the year ended December 31, 2021 | | 10.2 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | |
| Europe | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2018 | | 8.1 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 0.2 | % | (1) |
| Change in segment operating expenses | | (0.5 | )% | (2) |
| Segment EBITDA for the year ended December 31, 2019 | | 7.8 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
49
| |
(1) | Gross margin increased primarily due to (i) a 0.4% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment and (ii) a 0.3% increase in our U.K. operations primarily as a result of decreased costs related to the national distribution facility, primarily due to expenses related to temporary service issues in 2018 that did not reoccur in 2019, as well as decreased inventory reserves, partially offset by (iii) a 0.3% unfavorable impact related to our Benelux and Italy operations, principally due to higher inventory write-offs and lower prices, and (iv) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate. |
(1) The increase in gross margin was primarily attributable to a favorable impact of 1.4% as a result of net price increases implemented in response to inflationary pressures that are impacting product and freight costs and other margin improvement initiatives related to procurement. Additionally, there was a 0.2% benefit from the disposal of non-core operations in 2020.
(2) The decrease in segment operating expenses was primarilyas a percentage of revenue reflects favorable impacts of (i) 0.4% from bad debt expense due to (i) a 0.4%customers' improved solvency and an increase in personnelreserve in the prior year related to the COVID-19 pandemic, (ii) 0.3% from freight, vehicle and fuel expenses principally as a result of the negative leverage effect and wage inflation due to low unemploymenthigher internet and mail order sales in the prior year, which have higher freight costs, and (iii) several individually immaterial factors that had a favorable impact of 0.3% in the aggregate. These were partially offset by personnel costs that had an unfavorable impact of 0.2% compared to the prior year due to government grants received in the prior year to cover employee costs in countries such as the U.K. and Germany (a lesser amount was received in 2021) and increased incentive compensation that was partially offset by a decrease from other personnel-related costs, including salariesfavorable leverage effect and wages and non-incentive benefits, primarily due to reduced headcount and (ii) a 0.2% increase in transformation expenses related to the 1 LKQ Europe program.reductions.
Specialty
Third Party Revenue
.
The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Specialty | 2021 | | 2020 | | Organic (1) | | Acquisition and Divestiture (2) | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 1,864 | | | $ | 1,505 | | | 20.2 | % | | 3.0 | % | | 0.6 | % | | 23.8 | % |
| Other revenue | — | | | — | | | — | % | | — | % | | — | % | | — | % |
| Total third party revenue | $ | 1,864 | | | $ | 1,505 | | | 20.2 | % | | 3.0 | % | | 0.6 | % | | 23.8 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| Specialty | 2019 | | 2018 | | Organic (1) | | Acquisition | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 1,459,396 |
| | $ | 1,472,956 |
| | (0.7 | )% | | — | % | | (0.3 | )% | | (0.9 | )% |
| Other revenue | — |
| | — |
| | — | % | | — | % | | — | % | | — | % |
| Total third party revenue | $ | 1,459,396 |
| | $ | 1,472,956 |
| | (0.7 | )% | | — | % | | (0.3 | )% | | (0.9 | )% |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The organic decline in parts and services revenue was driven by lower year over year wholesale drop ship sales largely due to supplier policy changes restricting our ability to sell to certain online retailers; as well as decreased sales volumes in our Canada operations compared to the prior year period, primarily due to softening economic conditions. This organic decline was partially offset by modest growth in both our automotive and RV businesses in the U.S., largely due to expansion of our product line coverage, strong exclusive line performance, and continued roll-out of new product applications for new model year vehicles. |
(2)Acquisition related growth for 2021 reflected revenue from our acquisitions of four Specialty businesses since the beginning of 2020 through the one-year anniversary of the acquisition dates.
Segment EBITDA
.
Segment EBITDA decreased $7increased $60 million, or 4.4%37.2%, for the year ended December 31, 20192021 compared to the prior year period. primarily due to increased revenue as noted above and expanded margin as discussed below.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
| | | | | | | | | | | |
| Specialty | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2020 | | 10.8 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 0.9 | % | (1) |
| Change in segment operating expenses | | 0.2 | % | (2) |
| | | |
| Segment EBITDA for the year ended December 31, 2021 | | 12.0 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1) The increase in gross margin primarily reflects lower discounting to recover increased input costs and, to a lesser extent, favorable product and channel mix.
(2) The decrease in segment operating expenses as a percentage of revenue reflects a favorable impact of (i) 0.3% in personnel costs, partially offset by (ii) an unfavorable impact of 0.2% due to increased incentive compensation.
|
| | | | |
| Specialty | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2018 | | 11.4 | % | |
| (Decrease) increase due to: | | | |
| Change in gross margin | | (1.2 | )% | (1) |
| Change in segment operating expenses | | 0.6 | % | (2) |
| Change in other expense, net | | 0.1 | % | |
| Segment EBITDA for the year ended December 31, 2019 | | 11.0 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decrease in gross margin reflects unfavorable impacts of (i) 0.4% of higher product costs, primarily due to non-recurring benefits from supplier discounts resulting from strategic purchasing efforts in the fourth quarter of 2017, which had a favorable impact on the year ended December 31, 2018 as they were recognized over a turn of inventory, (ii) 0.4% due to unfavorable product mix in 2019, and (iii) several individually immaterial factors that had an unfavorable impact of 0.4% in the aggregate. |
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(2) | The decrease in segment operating expenses reflects favorable impacts of (i) 0.5% in personnel costs primarily due to reduced headcount and (ii) 0.3% in freight expenses due to a decreased use of third party freight, partially offset by (iii) several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate. |
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
North America
Third Party Revenue
.
The following table summarizes the changes in third party revenue by category in our North AmericaSelf Service segment (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | Percentage Change in Revenue |
| Self Service | 2021 | | 2020 | | Organic | | Acquisition and Divestiture | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 207 | | | $ | 203 | | | 1.7 | % | (1) | — | % | | — | % | | 1.7 | % |
| Other revenue | 580 | | | 390 | | | 49.0 | % | (2) | — | % | | — | % | | 49.0 | % |
| Total third party revenue | $ | 787 | | | $ | 593 | | | 32.8 | % | | — | % | | — | % | | 32.8 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
(1)Parts and services organic revenue increased 1.7% for the year ended December 31, 2021 compared to the prior year period, primarily driven by pricing initiatives.
(2)The 49.0%, or $190 million, year over year decrease in other revenue is related to (i) a $109 million increase in revenue from scrap steel related to higher prices, (ii) a $56 million increase in revenue from precious metals (platinum, palladium, and rhodium) due to higher prices, and (iii) a $25 million increase in revenue from other scrap (including aluminum) and cores primarily related to higher prices. |
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| North America | 2018 | | 2017 | | Organic | | Acquisition (3) | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 4,558,220 |
| | $ | 4,278,531 |
| | 5.7 | % | (1 | ) | 0.8 | % | | 0.0 | % | | 6.5 | % |
| Other revenue | 623,744 |
| | 520,370 |
| | 19.6 | % | (2 | ) | 0.3 | % | | 0.0 | % | | 19.9 | % |
| Total third party revenue | $ | 5,181,964 |
| | $ | 4,798,901 |
| | 7.2 | % | | 0.8 | % | | 0.0 | % | | 8.0 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in parts and services revenue was attributable to roughly equal impacts of favorable pricing and increased sales volumes in our wholesale operations. The volume increases were primarily driven by (i) incremental sales related to an agreement signed in December 2017 for the distribution of batteries, and (ii) to a lesser extent, severe winter weather conditions in the first quarter of 2018 compared to mild winter weather conditions in the prior year period. Organic growth in parts and services revenue for our North America segment on a per day basis was 5.3% as there was one additional selling day in 2018 compared to 2017. |
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(2) | The $103 million increase in other revenue primarily related to (i) a $64 million increase in revenue from scrap steel and other metals primarily related to higher prices and, to a lesser extent, increased volumes, year over year, (ii) a $24 million increase in revenue from metals found in catalytic converters (platinum, palladium, and rhodium) primarily due to higher prices and, to a lesser extent, increased volumes, year over year, and (iii) a $7 million increase in core revenue primarily related to increased volumes year over year. |
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(3) | Acquisition related growth in 2018 reflected revenue from our acquisition of ten wholesale businesses from the beginning of 2017 up to the one-year anniversary of the acquisition dates. |
Segment EBITDA
. Segment EBITDA increased $5$62 million, or 0.7%54.4%, in 2018the year ended December 31, 2021 compared to the prior year period. The increase is primarily attributable to favorable movements in commodity prices compared to the prior year. Sequential increasesIncreases in precious metals prices contributed an estimated $43 million increase in Segment EBITDA relative to the year ended December 31, 2020. In addition, net sequential changes in scrap steel prices in our salvage and self service operations had aan $26 million favorable impact of $5 million on North America Segment EBITDA during the year ended December 31, 2018,2021, compared to a $12$13 million positivefavorable impact onduring the year ended December 31, 2017. This favorable impact resulted from the increase in2020.We estimate that precious metals and scrap steel prices betweenpricing had a favorable effect of $56 million, or 3.1%, on Segment EBITDA margin relative to the date we purchased a vehicle, which influences the price we pay for a vehicle, and the date we scrapped a vehicle, which influences the price we receive for scrapping a vehicle. comparable prior year period.
The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our North AmericaSelf Service segment:
| | | | | | | | | | | |
| Self Service | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2020 | | 19.1 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | (3.0) | % | (1) |
| Change in segment operating expenses | | 6.2 | % | (2) |
| | | |
| Segment EBITDA for the year ended December 31, 2021 | | 22.3 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
|
| | | | |
| North America | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2017 | | 13.7 | % | |
| Decrease due to: | | | |
| Change in gross margin | | (0.5 | )% | (1) |
| Change in segment operating expenses | | (0.3 | )% | (2) |
| Change in other expense, net and net income (loss) attributable to noncontrolling interest | | (0.2 | )% | (3) |
| Segment EBITDA for the year ended December 31, 2018 | | 12.7 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decrease in gross margin reflected unfavorable impacts of 0.3% and 0.2% from our wholesale and self service operations, respectively. The decrease in wholesale gross margin is primarily attributable to(1)The decrease in gross margin primarily reflects (i) a shift in our sales toward lower margin products, including batteries, compared to the prior year period, and (ii) higher car costs in our salvage operations. The decrease in self service gross margin is primarily attributable to higher car costs as a result of increases in scrap prices in the first half of the year. While higher car costs can produce more gross margin dollars, these cars tend to have a dilutive effect on the gross margin percentage as parts revenue will typically increase at a lesser rate than the rise in average car cost. Self service gross margin was negatively impacted in the second half of 2018 due to declining scrap steel prices as the higher cost vehicles were scrapped. |
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(2) | The increase in segment operating expenses as a percentage of revenue primarily reflected (i) a 0.3% increase in vehicle expenses primarily due to increased vehicle rental leases to handle incremental volumes as well as increases in fuel prices, and (ii) a 0.2% increase in freight expenses due to a higher use of, and increased prices of, third party freight, partially offset by (iii) several individually immaterial factors that had a favorable impact of 0.1% in the aggregate. |
| |
(3) | The increase in other expense, net and net income (loss) attributable to noncontrolling interest was primarily due to several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate. |
Europe
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Europe segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| Europe | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange (3) | | Total Change |
| Parts & services revenue | $ | 5,202,231 |
| | $ | 3,628,906 |
| | 2.9 | % | | 36.7 | % | | 3.8 | % | | 43.4 | % |
| Other revenue | 19,523 |
| | 7,905 |
| | 74.2 | % | | 72.8 | % | | (0.0 | )% | | 147.0 | % |
| Total third party revenue | $ | 5,221,754 |
| | $ | 3,636,811 |
| | 3.1 | % | | 36.7 | % | | 3.8 | % | | 43.6 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Parts and services revenue growth for the year varied by geography. In our Eastern European operations, revenue grew in the high single digits due to both existing and new branches (we added 68 since the beginning of 2017). Our Western European operations experienced slight declines to mid-single digit growth for the year due primarily to higher volumes in the second quarter of 2018 (partly attributable to the timing of the Easter holiday) offsetting softness in the remainder of the year. While we expect to achieve lower organic growth rates in these more mature markets than in Eastern Europe, our revenue growth in 2018 was negatively impacted by competitor actions, economic conditions in certain countries, such as Italy, and warmer than normal weather conditions. Organic growth in parts and services revenue for our Europe segment on a per day basis was 2.6% as there was one additional selling day in 2018 compared to 2017. |
| |
(2) | Acquisition related growth for the year ended December 31, 2018 included $1.1 billion, or 30.2%, $79 million, or 2.2%, and $72 million, or 2.0%, from our acquisitions of Stahlgruber and aftermarket parts distribution businesses in Poland and Belgium, respectively. The remainder of our acquired revenue growth included revenue from our |
acquisitions of 20 wholesale businesses in our Europe segment since the beginning of 2017 through the one-year anniversary of the acquisitions.
| |
(3) | Compared to the prior year, exchange rates increased our revenue growth by $137 million, or 3.8%, primarily due to the weaker U.S. dollar against the pound sterling, euro and Czech koruna during 2018 relative to 2017. |
Segment EBITDA. Segment EBITDA increased $104 million, or 32.4%, in 2018 compared to the prior year. Our Europe Segment EBITDA included a positive year over year impact of $15 million related to the translation of local currency results into U.S. dollars at higher exchange rates than those experienced during 2017. On a constant currency basis (i.e. excluding the translation impact), Segment EBITDA increased by $89 million, or 27.9%, compared to the prior year. Refer to the Foreign Currency Impact discussion within the Results of Operations - Consolidated section above for further detail regarding foreign currency impact on our results for the year ended December 31, 2018. 3.5% resulting from movements in metals prices.
(2)The following table summarizes the changesincrease in Segment EBITDAsegment operating expense as a percentage of revenue reflects(i) a positive leverage effect of 7.1% from increases in our Europe segment:metals revenue, partially offset by (ii) a 0.7% unfavorable impact on personnel costs primarily related to increased incentive compensation and salaries and wages due to inflationary wage adjustments, and(iii) other individually immaterial factors representing a 0.2% unfavorable impact in the aggregate.
|
| | | | |
| Europe | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2017 | | 8.8 | % | |
| Decrease due to: | | | |
| Change in gross margin | | (0.2 | )% | (1) |
| Change in segment operating expenses | | (0.4 | )% | (2) |
| Change in other expense, net and net income (loss) attributable to noncontrolling interest | | (0.1 | )% | |
| Segment EBITDA for the year ended December 31, 2018 | | 8.1 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The decline in gross margin was due to (i) a 0.6% decrease related to our U.K. operations primarily as a result of incremental costs related to the national distribution facility, principally due to replenishment issues and related stock availability in the first quarter at our national distribution center and branches that led to some temporary service issues and increased labor costs to manually stock and receive product, and higher customer incentives, partially offset by increased supplier rebates, and(ii) a 0.3% net decrease due to mix related to our acquisition of an aftermarket parts distribution business in Poland during the third quarter of 2017. The unfavorable effects were partially offset by (i) a 0.4% increase in gross margin in our Benelux operations primarily due to increased supplier rebates and the ongoing move from a three-step to a two-step distribution model, and (ii) a 0.3% favorable impact related to an increase in supplier rebates as a result of centralized procurement for our Europe segment.
|
| |
(2) | The increase in segment operating expenses as a percentage of revenue was primarily due to a 0.4% increase in personnel expenses principally as a result of (i) negative leverage effect, as personnel costs grew at a greater rate than organic revenue, and (ii) increased headcount in our Eastern European operations as new branches were opened, as well as wage inflation due to low unemployment in the region. Additionally, a 0.2% increase in professional fees, primarily due to new information technology projects and other system enhancements, added to the unfavorable change in segment operating expenses. The unfavorable effects were partially offset by a 0.2% decrease in freight expenses due to a decreased use of third party freight in our U.K. operations. |
Specialty
Third Party Revenue. The following table summarizes the changes in third party revenue by category in our Specialty segment (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Percentage Change in Revenue |
| Specialty | 2018 | | 2017 | | Organic (1) | | Acquisition (2) | | Foreign Exchange | | Total Change |
| Parts & services revenue | $ | 1,472,956 |
| | $ | 1,301,197 |
| | 4.6 | % | | 8.6 | % | | 0.0 | % | | 13.2 | % |
| Other revenue | — |
| | — |
| | — | % | | — | % | | — | % | | — | % |
| Total third party revenue | $ | 1,472,956 |
| | $ | 1,301,197 |
| | 4.6 | % | | 8.6 | % | | 0.0 | % | | 13.2 | % |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | Organic growth in parts and services revenue was primarily due to higher volumes across both our automotive and RV businesses, largely due to expansion of our product line coverage, strong exclusive line performance, and year over year growth of new vehicle sales of pickups, sport utility vehicles and other highly accessorized vehicles. Organic growth in parts and services revenue for our Specialty segment on a per day basis was 4.2% as there was one additional selling day in 2018 compared to 2017. |
| |
(2) | Acquisition related growth in 2018 included $110 million, or 8.4%, from our acquisition of Warn through the one-year anniversary of the acquisition date. The remainder of our acquired revenue growth reflected an immaterial amount of acquired revenue from our acquisitions of three wholesale businesses from the beginning of 2017 up to the one-year anniversary of the acquisition dates. |
Segment EBITDA. Segment EBITDA increased $26 million, or 18.5%, in 2018 compared to the prior year. The following table summarizes the changes in Segment EBITDA as a percentage of revenue in our Specialty segment:
|
| | | | |
| Specialty | | Percentage of Total Segment Revenue | |
| Segment EBITDA for the year ended December 31, 2017 | | 10.9 | % | |
| Increase (decrease) due to: | | | |
| Change in gross margin | | 1.3 | % | (1) |
| Change in segment operating expenses | | (0.6 | )% | (2) |
| Change in other expense, net | | (0.2 | )% | (3) |
| Segment EBITDA for the year ended December 31, 2018 | | 11.4 | % | |
| Note: In the table above, the sum of the individual percentages may not equal the total due to rounding. |
| |
(1) | The increase in gross margin reflected favorable impacts of (i) 0.8% from our acquisition of Warn, which has a higher gross margin than our other Specialty operations, and (ii) 0.6% from our initiatives to improve gross margin. The favorable effects were partially offset by 0.2% of increased inventory write-downs as damaged and defective product was identified during our warehouse expansion projects on the West Coast and in the Southeastern U.S. |
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(2) | The increase in segment operating expenses reflected unfavorable impacts of (i) 0.3% in personnel costs primarily due to wage inflation, increased distribution expenses driven by a decreased use of third party freight and increased delivery routes to improve service levels, as well as higher employee benefit costs, (ii) 0.2% in vehicle and fuel expenses primarily due to increased fuel prices, and (iii) by several individually immaterial factors that had an unfavorable impact of 0.1% in the aggregate. |
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(3) | The increase in other expense, net is due to several individually immaterial factors that had an unfavorable impact of 0.2% in the aggregate. |
Liquidity and Capital Resources
On January 5, 2023, we entered into a new credit agreement and terminated the senior secured credit agreement ("Prior Credit Agreement"), scheduled to mature on January 29, 2024. The new credit agreement includes a $500 million unsecured term loan, payable in full on January 5, 2026, and an unsecured revolving credit facility of up to a U.S. dollar equivalent of $2.0 billion, which matures on January 5, 2028. See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement.
The following table summarizes liquidity data as of the dates indicated (in
thousands)millions):
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Cash and cash equivalents | $ | 523,020 |
| | $ | 331,761 |
|
Total debt (1) | 4,072,026 |
| | 4,347,697 |
|
Current maturities (2) | 326,648 |
| | 122,117 |
|
Capacity under credit facilities (3) | 3,260,000 |
| | 3,260,000 |
|
Availability under credit facilities (3) | 1,922,671 |
| | 1,697,698 |
|
| Total liquidity (cash and cash equivalents plus availability under credit facilities) | 2,445,691 |
| | 2,029,459 |
|
| |
| | | | | | | | | | | | | | | | | | | | | | | Adjusted(4) | | December 31, | | | | December 31, 2022 | | 2022 | | 2021 | | | | Cash and cash equivalents | $ | 278 | | | $ | 278 | | | $ | 274 | | | | | Total debt | 2,662 | | (5) | 2,662 | | (1) | 2,824 | | (1) | | Current maturities (2) | 34 | | | 34 | | | 35 | | | | Capacity under credit facilities (3) | 2,000 | | | 3,150 | | | 3,150 | | | | Availability under credit facilities (3) | 645 | | | 1,295 | | | 1,194 | | | | | Total liquidity (cash and cash equivalents plus availability under credit facilities) | 923 | | | 1,573 | | | 1,468 | | | |
(1) Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $6 million and $12 million as of December 31, 2022, and 2021, respectively). (2) Debt amounts reflect the gross values to be repaid in the next 12 months (excluding immaterial debt issuance costs as of December 31, 2022, and 2021, respectively). (3) Capacity under credit facilities includes our revolving credit facilities and availability under credit facilities is reduced by our outstanding letters of credit. (4) Amounts presented represent the termination of the Prior Credit Agreement and inclusion of the new credit agreement as if both were in effect as of December 31, 2022. See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement. (5) Debt amount presented above reflects the gross values to be repaid (excluding debt issuance costs of $13 million as of December 31, 2022).
(1)
| Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of $30 million and $37 million as of December 31, 2019 and December 31, 2018, respectively). |
| |
(2) | Debt amounts reflect the gross values to be repaid (excluding debt issuance costs of immaterial amounts as of both December 31, 2019 and December 31, 2018). |
| |
(3) | Capacity under credit facilities includes our revolving credit facilities and our receivables securitization facility. Availability under credit facilities is reduced by our outstanding letters of credit. |
We assess our liquidity in terms of our ability to fund our operations and provide for expansion through both internal development and acquisitions. Our primary sources of liquidity are cash flows from operations and our credit facilities. We utilize our cash flows from operations to fund working capital and capital expenditures, with the excess amounts going towards funding acquisitions, paying down outstanding debt, paying dividends or repurchasing LKQour common stock. As we have pursued acquisitions as part of our historical growth strategy, our cash flows from operations have not always been sufficient to cover our investing activities. To fund our acquisitions,acquisitions, we have accessed various forms of debt financing, including revolving credit facilities and senior notes andnotes. We currently believe we have sufficient access to capital markets to support our receivables securitization facility.future growth objectives.
As of December 31, 2019,2022, we had debt outstanding and additional available sources of financing as follows:
•Senior secured credit facilities maturing in January 2024, composed of term loans totaling $350$3,150 million in revolving credit ($3411,786 million outstanding at December 31, 2019) and $3.15 billion in revolving credit ($1.3 billion outstanding at December 31, 2019)2022), bearing interest at variable rates, (although a portion of the outstanding debt is hedged through interest rate swap contracts), with availability reduced by $69 million of amounts outstanding under letters of credit
U.S. Notes (2023) totaling $600 million, maturing in May 2023 and bearing interest at a 4.75% fixed rate (redeemed in full on January 10, 2020)
•Euro Notes (2024) totaling $561$535 million (€500 million), maturing in April 2024 and bearing interest at a 3.875% fixed rate
•Euro Notes (2026/28)(2028) totaling $1.1 billion$268 million (€1.0 billion), consisting of (i) €750 million maturing in April 2026 and bearing interest at a 3.625% fixed rate, and (ii) €250 million250 million) maturing in April 2028 and bearing interest at a 4.125% fixed rate
Receivables securitization facility with availability up to $110
We had approximately $1,295 million (no outstanding balance as of December 31, 2019), maturing in November 2021 and bearing interest at variable commercial paper rates
From time to time, we may undertake financing transactions to increase our available liquidity, such as (i) our November 2018 amendment to our senior secured credit facility and (ii) the issuance of the Euro Notes (2026/28) in April 2018 related to the Stahlgruber acquisition. Given the long-term nature of our investment in Stahlgruber, combined with favorable interest rates, we decided to fund the acquisition primarily through long-term, fixed rate notes. We believe this approach provides financial flexibility to execute our long-term growth strategy while maintaining availability under our revolver. If we see an attractive acquisition opportunity, we have the ability to use our revolver to move quickly and have certainty of funding up to the amount of our then-available liquidity. In December 2019, we announced our intention to redeem our U.S. Notes (2023) to eliminate higher cost debt with lower interest rate borrowings on our credit facilities and cash on hand. We completed the redemption in January 2020.
Asplace as of December 31, 2019, we had approximately $1.9 billion available under our credit facilities.2022. Combined with approximately $523$278 millionof cash and cash equivalents at December 31, 2019,2022, we had approximately $2.4 billion in$1,573 million in available liquidity, an increase of $416$105 million overfrom our available liquidity as of December 31, 2018.2021.
With our ability to generate free cash flow, we were comfortable with reducing the size of our credit facilities from $3.15 billion to $2.5 billion when we terminated the Prior Credit Agreement and entered into the new credit agreement in January 2023. We believe that our current liquidity and cash expected to be generated by operating activities in future periods will be sufficient to meet our current operating and capital requirements, althoughrequirements. Our capital allocation strategy includes spending to support growth driven capital projects, complete synergistic acquisitions, and return stockholder value through the payment of dividends and repurchasing shares of our common stock.
A summary of the dividend activity for our common stock for the year ended December 31, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | |
| 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 |
| $0.25 | | July 26, 2022 | | August 11, 2022 | | September 1, 2022 |
| $0.275 | | October 25, 2022 | | November 17, 2022 | | December 1, 2022 |
On February 21, 2023, our Board of Directors declared a quarterly cash dividend of $0.275 per share of common stock, payable on March 30, 2023, to stockholders of record at the close of business on March 16, 2023.
We believe that our future cash flow generation will permit us to continue paying dividends in future periods; however, the timing, amount and frequency of such sources mayfuture dividends will be subject to approval by our Board of Directors, and based on considerations of capital availability, and various other factors, many of which are outside of our control.
With $1,573 million of total liquidity as of December 31, 2022 ($923 million on an adjusted basis) and $34 million of current maturities, we have access to funds to meet our near term commitments. We have a surplus of current assets over current liabilities, which further reduces the risk of short-term cash shortfalls.
Our total liquidity includes availability under our Prior Credit Agreement, which included the two financial maintenance covenants presented below. The required debt covenants per the Prior Credit Agreement and our actual ratios with respect to those covenants were calculated in accordance with the Prior Credit Agreement as follows as of December 31, 2022:
| | | | | | | | | | | |
| Covenant Level | | Ratio Achieved as of December 31, 2022 |
| Maximum net leverage ratio | 4.00 : 1.00 | | 1.4 |
| Minimum interest coverage ratio | 3.00 : 1.00 | | 26.5 |
The terms net leverage ratio and minimum interest coverage ratio used in the Prior Credit Agreement are specifically calculated per the Prior Credit Agreement and differ in specified ways from comparable US GAAP or common usage terms. The new credit agreement contains similar financial covenants but replaces the maximum net leverage ratio with a maximum total leverage ratio (calculated as 1.5x as of December 31, 2022) while maintaining the same 4.00 : 1.00 requirement.
Our Prior Credit Agreement contained customary covenants that imposed limitations and conditions on our ability to enter into certain transactions. During the second quarter of 2022, two ratings agencies, S&P Global Ratings and Moody's Investors Service, upgraded our issuer credit rating to an investment grade rating of 'BBB-' and 'Baa3', respectively, and rated our outlook as stable. With the assignment of an investment grade rating, we were no longer required to comply with certain restrictive covenants under the Prior Credit Agreement, and we were no longer required to provide collateral to secure the borrowings under the Prior Credit Agreement. We were in compliance with all applicable covenants under our Prior Credit Agreement and new credit agreement as of December 31, 2022. The new credit agreement also does not be sufficient for future acquisitions dependinghave restrictions on their size. our ability to enter into certain transactions, such as dividend payments, share repurchases and asset sales.
The indentures relating to our Euro Notes do not include financial maintenance covenants, and the indentures will not restrict our ability to draw funds under the credit facility. The indentures do not prohibit amendments to the financial covenants under the credit facility as needed.
While we believe that we have adequate capacity under our existing credit facilities, from time to time we may need to raise additional funds through public or private financing, strategic relationships or other arrangements.modification of our existing credit facilities. There can be no assurance that additional funding, or refinancing of our credit facilities, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants or higher interest costs. Our failure to raise capital if and when needed could have a material adverse impacteffect on our business, operating results, and financial condition.
Beginning in 2019, a number of our European suppliers began participating in
We utilize supply chain financing programs in select countries underarrangements, which they may sell their accounts receivable to the participating financial institutions, allowingallow us to extendimprove our operating cash flows by extending payment terms. We expect moreterms with certain suppliers will begin participatingwho participate in supply chain financing programs in 2020.the programs. Financial institutions participate in the supply chain financing programinitiative on an uncommitted basis and can cease purchasing receivables from our suppliers at any time. These programs areThe initiative is at the sole discretion of both the supplier and the financial institution on terms that are negotiated between them. IfIn the future, if the
financial institutions diddo not continue to purchase receivables from our suppliers under these programs,the initiative, the participating vendorssuppliers may have a need to renegotiate their payment terms with us, which in turn could cause our borrowings under our revolving credit facility to increase.
Borrowings All outstanding payments owed under the credit agreement accrue interest at variable rates which are tiedinitiative to the LIBOR orparticipating financial institutions are recorded within Accounts payable in our Consolidated Balance Sheets. As of December 31, 2022, we had approximately $248 million of Accounts payable outstanding under the Canadian Dollar Offered Rate ("CDOR"), depending onarrangements.
In the currency and the duration of the borrowing, plus an applicable margin rate that is subject to change quarterly based on our reported leverage ratio. We holdpast, we have held interest rate swaps to hedge the variable rates on a portion of our credit agreement borrowings with the effect of fixing the interest rates on the respective notional amounts. In addition, we holdand currency swaps that contain an interest rate swap component and a foreign currency forward contract component that, when combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. These derivative transactions are described in Note 11, "Derivative Instruments and Hedging Activities" to the consolidated financial statements in Part II, Item 8component. As of this Annual Report on Form 10-K. After giving effect toDecember 31, 2022, we did not have any of these contracts theoutstanding. The weighted average interest rate on borrowings outstanding under our credit agreementPrior Credit Agreement was 4.2% at December 31, 2019 was 1.6%.2022. Including our senior notes, our overall weighted average interest rate on borrowings was 3.0%4.2% at December 31, 2019.
After 2021, it is unclear whether banks2022. Prior to entering into the new credit agreement on January 5, 2023, our borrowings in U.S. dollars accrued interest at London Inter-Bank Offered Rate (i.e. LIBOR). Under the new credit agreement, our borrowings will continue to provide LIBOR submissions tobear interest at Secured Overnight Financing Rate (i.e. SOFR) plus the administrator of LIBOR, and no consensus currently exists as to what benchmark rate or rates may become accepted alternatives to LIBOR. We cannot currently predict the effect of the discontinuation of,applicable spread or other changes to, LIBOR or any establishment of alternative referencerisk-free interest rates inthat are applicable for the United States, the European Union or elsewhere on the global capital markets. The uncertainty regarding the future of LIBOR, as well as the transition from LIBOR to any alternative reference rate or rates, could have adverse impacts on our variable rate obligations that currently use LIBOR asspecified currency plus a benchmark rate. We are in the process of evaluating our financing obligations and other contracts that refer to LIBOR. Outstanding debt under our Credit Agreement, which constitutes the most significant of our LIBOR-based debt obligations, contains provisions that address the potential discontinuation of LIBOR and facilitate the adoption of an alternate rate of interest.spread. We do not believe thatexpect the discontinuation of LIBOR, or its replacement with an alternative reference rate orchange in benchmark rates will have a material impact on our results of operations, financial position or liquidity.
Cash However, we project that the increase in benchmark interest payments were $143rates in the United States and Europe in 2022 and potential for further increases in 2023 to combat rising inflation will drive higher interest expense of $45 million for the year ended December 31, 2019, including $92to $55 million in semi-annual interest payments2023 relative to 2022. See Note 18, "Long-Term Obligations" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for information related to our U.S. Notes (2023), Euro Notes (2024)borrowings and Euro Notes (2026/2028). Interest payments on our Euro Notes (2024) and Euro Notes (2026/2028) are made in April and October.related interest.
We had outstanding credit agreement borrowingsPrior Credit Agreement borrowings of $1.6 billion $1,786 million and $1.7 billion$1,887 million at December 31, 20192022 and December 31, 2018,2021, respectively. Of these amounts $18 million and $9 million was classified as, there were no current maturities at December 31, 2019 and 2018, respectively.2022 or 2021. The new credit agreement has no scheduled principal payments in 2023.
The scheduled maturities of long-term obligations outstanding at December 31, 20192022 are as follows (in thousands)millions):
|
| | | |
| Years ending December 31: | |
2020 (1) | $ | 326,648 |
|
2021 (1) | 133,951 |
|
| 2022 | 25,912 |
|
| 2023 | 21,650 |
|
2024 (1) | 2,427,714 |
|
| Thereafter | 1,136,151 |
|
Total debt (2) | $ | 4,072,026 |
|
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| | | | |
| Adjusted(4) | | | |
| December 31, 2022 | | December 31, 2022 | |
2023 (1) | $ | 34 | | | $ | 34 | | |
| 2024 | 548 | | | 2,334 | | |
| 2025 | 10 | | | 10 | | |
| 2026 | 503 | | | 3 | | |
| 2027 | 3 | | | 3 | | |
| Thereafter | 1,564 | | | 278 | | |
| Total debt | $ | 2,662 | | (3) | $ | 2,662 | | (2) |
| |
(1) | Of the $600 million U.S. Notes (2023) that were redeemed in January 2020, in the table above $185 million is included in 2020 (reflecting the amount repaid with cash on hand), $105 million is included in 2021 (reflecting the amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 2024 (reflecting the amount repaid using borrowings under the revolving credit facility). |
| |
(2) | The total(1)Long-term obligations maturing by December 31, 2023 include $15 million of short-term debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $30 million as of December 31, 2019). |
Our credit agreement contains customary covenants that impose limitations and conditions on our abilitymay be extended beyond the current year ending December 31, 2023.
(2)The total debt amounts presented above reflect the gross values to enter into certain transactions. The credit agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio. We were in compliance with all restrictive covenants under our credit agreementbe repaid (excluding debt issuance costs of $6 million as of December 31, 2019.2022).
(3)The following summarizes our requiredtotal debt covenants and our actual ratios with respectamounts presented above reflect the gross values to those covenants as calculated per the credit agreementbe repaid (excluding debt issuance costs of $13 million as of December 31, 2019:2022).
|
| | | |
| Covenant Level | | Ratio Achieved as of December 31, 2019 |
Maximum net leverage ratio | 4.25:1.00 | | 2.6 |
Minimum interest coverage ratio | 3.00:1.00 | | 10.4 |
The terms net leverage ratio(4)Amounts presented represent the termination of the Prior Credit Agreement and minimum interest coverage ratio used ininclusion of the new credit agreement are specifically calculated peras if both were in effect as of December 31, 2022. See Note 25, "Subsequent Events" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the new credit agreement and differ in specified ways from comparable GAAP or common usage terms.agreement.
As of December 31, 2019,2022, the Company had cash and cash equivalents of $523$278 million, of which $234$227 million was held by foreign subsidiaries. In general, it is our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and that position has not changed following the enactment of the Tax Act and the related imposition of the transition tax. Distributions of dividends from our foreign subsidiaries, if any, would be generally exempt from further U.S. taxation, either as a result of the new 100% participation exemption under the Tax Act, or due to the previous taxation of foreign earnings under the transition tax and the GILTI regime.subsidiaries. We believe that we have sufficient cash flow and liquidity to meet our financial obligations in the U.S. without repatriating our foreign earnings. We may, from time to time, choose to selectively repatriate foreign earnings if doing so supports our financing or liquidity objectives. Distributions of dividends from our foreign subsidiaries, if any, would be generally exempt from further U.S. taxation, either as a result of the 100% participation exemption under the Tax Cuts and Jobs Act enacted in 2017, or due to the previous taxation of foreign earnings under the transition tax and the Global Intangible Low-Taxed Income regime ("GILTI").
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
The procurement of inventory is the largest operating use of our funds. We normally pay for aftermarket product purchases on standard payment terms or at the time of shipment, depending on the manufacturer and the negotiated payment terms. We normally pay for salvage vehicles acquired at salvage auctions and under direct procurement arrangements at the time that we take possession of the vehicles.
The following table sets forth a summary of our aftermarket and manufactured inventory procurement for the years ended December 31, 20192022, and 20182021 (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | 2021 | | | | Change | |
| Wholesale - North America | | $ | 1,172 | | | $ | 1,107 | | | | | $ | 65 | | (1) |
| Europe | | 3,498 | | | 3,829 | | | | | (331) | | (2) |
| Specialty | | 1,304 | | | 1,452 | | | | | (148) | | (3) |
| Total | | $ | 5,974 | | | $ | 6,388 | | | | | $ | (414) | | |
(1)Inventory purchases across the Wholesale - North America segment increased for the year ended December 31, 2022 compared to the prior year primarily due to required restocking to keep up with the demand for our products. |
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2019 | | 2018 | | Change | |
| North America | | $ | 1,372,600 |
| | $ | 1,393,700 |
| | $ | (21,100 | ) | (1) |
| Europe | | 3,966,000 |
| | 3,635,400 |
| | 330,600 |
| (2) |
| Specialty | | 1,107,200 |
| | 1,087,600 |
| | 19,600 |
| (3) |
| Total | | $ | 6,445,800 |
| | $ | 6,116,700 |
| | $ | 329,100 |
| |
| |
(1) | In North America, aftermarket purchases during the year ended December 31, 2019 decreased compared to the prior year period primarily as a result of an increased focus on inventory reduction. |
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(2) | In our Europe segment, the increase in purchases during the year ended December 31, 2019 was primarily driven by (i) a $588 million increase attributable to incremental inventory purchases as a result of our acquisition of Stahlgruber in the second quarter of 2018, partially offset by (ii) a $79 million decrease attributable to our U.K. operations primarily due to inventory reduction efforts. There was also a decrease of $168 million in inventory purchases attributable to the decrease in the value of the euro and pound sterling in the year ended December 31, 2019 compared to the prior year period. |
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(3) | Specialty inventory purchases increased $20 million during the year ended December 31, 2019 compared to the prior year period primarily as a result of targeted purchases to increase annual supplier rebate achievement and build stock to support our 2020 initiatives. |
(3)The decrease in inventory purchases in the Specialty segment compared to the prior year was primarily due to matching inventory levels with demand. This was partially offset by inventory purchases made by companies acquired in the second half of 2021.
The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 20192022, and 20182021 (in thousands):
|
| | | | | | | | | |
| | Year Ended December 31, | |
| | 2019 | | 2018 | | % Change | |
| North America wholesale salvage cars and trucks | 309 |
| | 310 |
| | (0.3 | )% | |
| Europe wholesale salvage cars and trucks | 25 |
| | 28 |
| | (10.7 | )% | |
| Self service and "crush only" cars | 591 |
| | 562 |
| | 5.2 | % | (1) |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | |
| 2022 | | 2021 | | | | % Change | |
| Wholesale - North America salvage vehicles | 246 | | 239 | | | | 2.9 | % | |
| Europe wholesale salvage vehicles | 29 | | | 26 | | | | 11.5 | % | |
| Self Service salvage vehicles | 517 | | 542 | | | | (4.6) | % | |
(1) Compared
Wholesale - North America salvage purchases in 2022 increased relative to the prior year we havedue to limitations in the prior year on vehicles at auctions. Self Service salvage vehicle purchases in 2022 decreased due to increased the numbermarket competition and decreased availability of self service and "crush only" vehicles purchased in 2019 to support growth in our operations.vehicles.
The following table summarizes the components of the year-over-year increasechange in cash provided by operating activities (in millions):
| | | | | | | | |
| Operating Cash | |
| Net cash provided by operating activities for the year ended December 31, 2021 | $ | 1,367 | | |
Increase (decrease) due to: | | |
| | |
| | |
Working capital accounts: (1) | | |
| Receivables, net | — | | |
| Inventories | (107) | | |
| Accounts payable | (14) | | |
| Other operating activities | 4 | | (2) |
| Net cash provided by operating activities for the year ended December 31, 2022 | $ | 1,250 | | |
(1) Cash flows related to our primary working capital accounts can be volatile as the sales and purchases, payments and collections can be timed differently from period to period.
|
| | | | |
| Net cash provided by operating activities for the year ended December 31, 2018 | $ | 711 |
| |
| Increase (decrease) due to: | | |
| Operating income | 14 |
| (1) |
| Non-cash depreciation and amortization expense | 20 |
| (2) |
| Impairment of net assets held for sale and goodwill | 14 |
| (3) |
| Cash paid for taxes | 19 |
| |
| Cash paid for interest | (5 | ) | |
Working capital accounts: (4) | | |
| Accounts receivable | 26 |
| |
| Inventory | 143 |
| |
| Accounts payable | 81 |
| |
| Other operating activities | 41 |
| (5) |
| Net cash provided by operating activities for the year ended December 31, 2019 | $ | 1,064 |
| |
| |
(1) | Refer•Receivables, net had a similar impact on cash provided by operating activities year over year. This was driven by a $26 million outflow for our Wholesale - North America segment primarily due to the Results of Operations – Consolidated section for further information on the increase in operating income. |
| |
(2) | Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations – Consolidated section. |
| |
(3) | In the years ended December 31, 2019 and 2018, we recorded impairment charges on net assets held for sale and goodwill, noting that the 2019 charges exceeded the prior year by $14 million. See "Net Assets Held for Sale" and "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charges. |
| |
(4) | Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period. |
Inventory represented an incremental $143increase in organic revenue in 2022 compared to 2021, which translated to higher receivables balances in 2022. This was partially offset by a $14 million inflow for our Europe segment and a $12 million inflow for our Specialty segment, both due to lesser overall cash outflows in cash inflows in 20192022 as a result of deliberatecollections and timing of sales.
•Inventories represented $107 million in incremental cash outflows for the year ended December 31, 2022 compared to the same period of 2021 as a result of inventory reduction effortsincreases in the Europe and(i) Wholesale - North America segments to reflect organic revenue conditions, as disclosed in the procurement section above.
Accounts payable produced an incremental $81segment of $151 million in cash inflows primarily due to timing effects related to our May 30, 2018 acquisition of Stahlgruber. Additionally, we increased accounts payable through extension of vendor terms in North America. The supply chain financing programs in Europe did not have a material impact on accounts payable in 2019.
Accounts receivable represented an incremental $26 million in cash inflows in 2019, primarily attributable to focus on collectionsincreased cash paid for inventory in our Specialtythe current year as a result of higher input costs and volume increases due to strong demand and (ii) Europe segment of $101 million, primarily attributable to increased cash paid for inventory in the current year as a result of higher input costs, volume increases due to strong demand and U.K. operations,strategic inventory purchases to curb the impacts of supply chain constraints, which was partially offset by inventory decreases in the (iii) Specialty segment of $127 million primarily related to decreasing inventory purchasing levels to align with softening demand and (iv) Self Service segment of $18 million primarily related to lower vehicle purchases in 2022 due to increased market competition and decreased availability of vehicles.
•Accounts payable was a $14 million detriment to cash provided by operating activities year over year. This change was primarily attributable a lower cash inflow in our Europe segment of $187 million and a cash outflow of $38 million from our Specialty segment partially offset by our Wholesale - North America segment which contributed a $211 million cash inflow driven by higher accounts payable balances and timing of payments.
(2) Primarily related to offsetting effects from the Stahlgruber acquisition,(i) non-cash items in net income, including gain on disposal of businesses, refer to "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and toDivestitures," for further information, (ii) cash paid for taxes, and (iii) a lesser extent, the unwindnumber of a receivables factoring program at Stahlgruber.individually insignificant fluctuations in cash paid for other operating activities.
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(5) | Reflects a number of individually insignificant fluctuations in cash paid for other operating activities. |
Net cash provided by investing activities totaled $172 million and net cash used in investing activities totaled $265$419 million for the years ended December 31, 2022 and 2021, respectively. Proceeds from the disposal of businesses (primarily PGW) were $399 million for the year ended December 31, 2022 compared to $7 million for the year ended December 31, 2019, compared to $1.5 billion of cash used in investing activities during2021. Property, plant and equipment purchases were $222 million for the year ended December 31, 2018.2022 compared to $293 million in the prior year. We invested $27$124 million of cash, net of cash acquired, in business acquisitions duringfor the year ended December 31, 20192021 compared to $1.2 billion during the year ended December 31, 2018. Property, plant and equipment purchases were $266$4 million in 2019 compared2022.
The following table reconciles Net Cash Provided by Operating Activities to $250 million in the prior year. The period over period increase in cash outflows for purchases of property, plant and equipment was primarily related to our Europe segment. We received $18 million of net proceeds from divestitures of assets held for sale during the year ended December 31, 2019; no such proceeds were received in 2018.Free Cash Flow (in millions):
| | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| | | | | | 2022 | | 2021 |
| Net cash provided by operating activities | | | | | $ | 1,250 | | | $ | 1,367 | |
| Less: purchases of property, plant and equipment | | | | | 222 | | | 293 | |
| Free cash flow | | | | | $ | 1,028 | | | $ | 1,074 | |
Net cash used in financing activities totaled $601increased by $409 million for the year ended December 31, 2019,2022 compared to net cash provided by financing activities2021 due primarily to higher payment of $883dividends in 2022 of $211 million, during the year ended December 31, 2018. We received proceedsincreases in repurchases of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended December 31, 2018; no such proceeds were received in the current year. We repurchased $292 million of our common stock during the year ended December 31, 2019 compared to $60of $163 million during the year ended December 31, 2018. We also paid $21 million of debt issuance costs during 2018, primarily related to the issuance of the Euro Notes (2026/28); no such costs were incurred in 2019. During the year ended December 31, 2019,and higher net repayments of debt of $133 million, partially offset by a decrease in settlement of our borrowings totaled $301cross currency swap and other foreign exchange forward contracts in 2021 of $89 million compared to $273 million during the year ended December 31, 2018.(no similar transaction in 2022).
We intend to continue to evaluate markets for potential growth through the internal development of distribution centers, processing and sales facilities, and warehouses, through further integration of our facilities, and through selected business acquisitions. Our future liquidity and capital requirements will depend upon numerous factors, including the costs and timing of our internal development efforts and the success of those efforts,efforts.
We have various contractual obligations and commitments arising in the costs and timingnormal course of expansion of our sales and marketing activities, and the costs and timing of future business acquisitions.
Year Ended December 31, 2018 Compared to Year Ended December 31, 2017
business. The following table sets forth a summary ofrepresent our aftermarketanticipated material cash requirements from known contractual and manufactured inventory procurement for the years ended December 31, 2018 and 2017 (in thousands):
|
| | | | | | | | | | | | | |
| | | Year Ended December 31, | |
| | | 2018 | | 2017 | | Change | |
| North America | | $ | 1,393,700 |
| | $ | 1,367,600 |
| | $ | 26,100 |
| (1) |
| Europe | | 3,635,400 |
| | 2,355,300 |
| | 1,280,100 |
| (2) |
| Specialty | | 1,087,600 |
| | 1,006,600 |
| | 81,000 |
| (3) |
| Total | | $ | 6,116,700 |
| | $ | 4,729,500 |
| | $ | 1,387,200 |
| |
| |
(1) | In North America, aftermarket purchases during the year ended December 31, 2018 increased compared to the comparable prior year period to support growth across our operations. |
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(2) | In our Europe segment, the increase in purchases during the year ended December 31, 2018 was primarily driven by (i) an $821 million increase attributable to inventory purchases at Stahlgruber from the date of acquisition through December 31, 2018, (ii) a $181 million increase primarily attributable to our Eastern Europe operations, of which $73 million was due to incremental inventory purchases in the first seven months of 2018other obligations as a result of our acquisition of an aftermarket parts distribution business in Poland in the third quarter of 2017; the remaining increase was primarily due to branch expansion in Eastern Europe, and (iii) a $146 million increase in purchases at our Benelux operations, of which $41 million was attributable to incremental inventory purchases in the first six months of 2018 as a result of our acquisitions of aftermarket parts distribution businesses in Belgium in the third quarter of 2017. There was also an increase of $88 million in inventory purchases driven by the increase in the value of the euro and pound sterling in 2018 compared to 2017. |
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(3) | In our Specialty segment, the acquisition of Warn in November 2017 added incremental purchases of $71 million during the year ended December 31, 2018, which includes purchases of aftermarket inventory and raw materials used in the manufacturing of specialty products. Specialty inventory purchases also increased during the year ended December 31, 2018 compared to the prior year to support growth in our operations. |
The following table sets forth a summary of our global wholesale salvage and self service procurement of vehicles for the years ended December 31, 2018 and 2017 (in thousands):
|
| | | | | | | | | |
| | Year Ended December 31, | |
| | 2018 | | 2017 | | % Change | |
| North America wholesale salvage cars and trucks | 310 |
| | 310 |
| | — | % | |
| Europe wholesale salvage cars and trucks | 28 |
| | 25 |
| | 12.0 | % | |
| Self service and "crush only" cars | 562 |
| | 542 |
| | 3.7 | % | (1) |
(1) Compared to the prior year, we have increased the number of self service and "crush only" vehicles purchased in 2018 to support growth in our operations.
The following table summarizes the components of the year-over-year increase in cash provided by operating activities (in millions):
|
| | | | |
| Net cash provided by operating activities for the year ended December 31, 2017 | $ | 519 |
| |
Increase (decrease) due to: | | |
| Operating income | 37 |
| (1) |
| Non-cash depreciation and amortization expense | 64 |
| (2) |
| Impairment of net assets held for sale and goodwill | 33 |
| (3) |
| Cash paid for taxes | 73 |
| |
| Cash paid for interest | (42 | ) | |
Working capital accounts: (4) | | |
| Accounts receivable | 39 |
| |
| Inventory | 72 |
| |
| Accounts payable | (103 | ) | (5) |
| Pension funding | (9 | ) | (6) |
| Other operating activities | 28 |
| (7) |
| Net cash provided by operating activities for the year ended December 31, 2018 | $ | 711 |
| |
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(1) | Refer to the Results of Operations - Consolidated section for further information on the increase in operating income. |
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(2) | Non-cash depreciation and amortization expense increased compared to the prior year period as discussed in the Results of Operations - Consolidated section. |
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(3) | In the fourth quarter of 2018, we recorded an impairment charge on the goodwill in our Aviation reporting unit. See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on the impairment charge. |
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(4) | Cash flows related to our primary working capital accounts can be volatile as the purchases, payments and collections can be timed differently from period to period and can be influenced by factors outside of our control. |
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(5) | Includes an outflow of $116 million related to Stahlgruber, primarily resulting from the timing of the acquisition. Due to the timing of processing invoice payments after the closing date, we assumed a larger payable balance but acquired more cash at closing. However, the cash acquired at closing is reflected in the Investing section of the cash flow statement on the Acquisitions, net of cash and restricted cash acquired line. |
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(6) | During the year ended December 31, 2018, we made a special contribution of $9 million to one of our North America pension plans. See Note 14, "Employee Benefit Plans" to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on our pension plans. |
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(7) | Reflects a number of individually insignificant fluctuations in cash paid for other operating activities. |
Net cash used in investing activities totaled $1.5 billion for the year ended December 31, 2018, compared to $385 million of cash used in investing activities during the year ended December 31, 2017. We invested $1.2 billion of cash, net of cash acquired, in business acquisitions during the year ended December 31, 2018 compared to $513 million during the year ended December 31, 2017. We received net proceeds from the sale of our glass manufacturing business totaling $301 million during the year ended December 31, 2017; no such proceeds were received in 2018. Property, plant and equipment purchases were $250 million in 2018 compared to $179 million in the prior year. The period over period increase in cash outflows for purchases of property, plant and equipment was primarily related to our North America and Europe segments. We had $28 million of proceeds from the disposals of property, plant and equipment in 2018 compared to $9 million in the prior year; the increase was primarily related to our North America segment. We invested $60 million in unconsolidated subsidiaries in 2018 compared to $8 million in the prior year, primarily due to the $48 million Mekonomen rights issue in the fourth quarter of 2018; there was no rights offering in 2017. During the year ended December 31, 2018, we received $37 million of deferred purchase price proceeds on receivables under our factoring arrangement that was acquired in our Stahlgruber acquisition; no such proceeds were received in 2017. The arrangement was subsequently terminated in December 2018.
Net cash provided by financing activities totaled $883 million for the year ended December 31, 2018, compared to net cash used in financing activities of $113 million during the year ended December 31, 2017. We received proceeds of $1.2 billion from our issuance of the Euro Notes (2026/28) during the year ended December 31, 2018; no such proceeds were received in the prior year. We repurchased $60 million of our common stock during 2018 following the Board of Directors' authorization of a stock repurchase program in October 2018; we did not repurchase any common stock during 2017. We also paid $21 million of debt issuance costs during 2018, primarily related to the issuance of the Euro Notes (2026/28), compared to $4 million paid during 2017 in connection with our December 2017 amendment of our credit facilities. During the year ended December 31, 2018, net repayments of our borrowings totaled $273 million compared to $115 million during the year ended December 31, 2017.
During the year ended December 31, 2018, foreign exchange rates decreased cash, cash equivalents and restricted cash by $77 million, compared to an increase of $24 million in the prior year. The current year impact was primarily related to a $66 million decrease resulting from the decline in the euro exchange rate between April 9, 2018, the date we received the proceeds from the Euro Notes (2026/28), and May 30, 2018, the date we paid the cash proceeds for the Stahlgruber acquisition.
Off-Balance Sheet Arrangements and Future Commitments
Except as described below, we do not have any off-balance sheet arrangements or undisclosed borrowings or debt that would be required to be disclosed pursuant to Item 303 of Regulation S-K under the Securities Exchange Act of 1934. Additionally, we do not have any synthetic leases.
As of December 31, 2019, there were letters2022.
•Long-term debt of credit outstanding in the aggregate amount$2,662 million and related interest totaling $178 million, of $69 million.
We guarantee the residual values for the majority of our vehicles. Had we terminated all of our operating leases subjectwhich $34 million and $110 million, respectively is expected to these guarantees at December 31, 2019, our portion of the guaranteed residual value would have totaled approximately $67 million.be paid within twelve months. See Note 13, "Leases"18, "Long-Term Obligations" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for furthermore information on leases.related to debt amounts outstanding at December 31, 2022.
•In December 2019, we modified the sharesOperating lease payments of a noncontrolling interest$1,673 million, of a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shareswhich $269 million is expected to be paid within twelve months. See Note 21, "Leases" to the minority shareholder. The new redeemable shares contain 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. The put option is outside the control of the Company to exercise. See "Stockholders'
Equity–Noncontrolling Interest" in Note 4, "Summary of Significant Accounting Policies" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information.
The following table represents our future commitments under contractual obligations as ofmore information related to lease amounts outstanding at December 31, 2019 (in millions):2022.
|
| | | | | | | | | | | | | | | | | | | |
| | Total | | Less than 1 Year | | 1-3 Years | | 3-5 Years | | More than 5 Years |
| Contractual obligations | | | | | | | | | |
Long-term debt (1) (2) | $ | 4,625.9 |
| | $ | 447.3 |
| | $ | 369.7 |
| | $ | 2,607.8 |
| | $ | 1,201.1 |
|
Finance lease obligations (3) | 52.1 |
| | 10.1 |
| | 15.9 |
| | 6.7 |
| | 19.4 |
|
Operating leases (4) | 1,804.8 |
| | 288.7 |
| | 449.7 |
| | 306.4 |
| | 760.0 |
|
Purchase obligations (5) | 553.8 |
| | 499.2 |
| | 54.6 |
| | — |
| | — |
|
Other long-term obligations (6) | 249.0 |
| | 112.2 |
| | 94.7 |
| | 26.9 |
| | 15.2 |
|
| Total | $ | 7,285.6 |
| | $ | 1,357.5 |
| | $ | 984.6 |
| | $ | 2,947.8 |
| | $ | 1,995.7 |
|
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(1) | Our long-term debt under contractual•Purchase obligations above includes interest of $581 million on the balances outstanding as of December 31, 2019. The long-term debt balance excludes debt issuance costs, as these expenses have already been paid. Interest on our senior notes, notes payable, and other long-term debt is calculated based on the respective stated rates. Interest on our variable rate credit facilities is calculated based on the weighted average rates, including the impact of interest rate swaps through their respective expiration dates, in effect for each tranche of borrowings as of December 31, 2019. Future estimated interest expense for the next year, one to three years, and three to five years is $116 million, $225 million and $164 million, respectively. Estimated interest expense beyond five years is $76 million. |
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(2) | Includes $614 million of U.S. Notes (2023) redeemed on January 10, 2020, inclusive of principal, an early-redemption premium and interest. Of this $614 million, $199 million is included in less than 1 year (reflecting the amount repaid with cash on hand), $105 million is included in 1-3 years (reflecting the amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 3-5 years (reflecting the amount repaid using borrowings under the revolving credit facility). |
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(3) | Interest on finance lease obligations of $11 million is included based on incremental borrowing or implied rates. Future estimated interest expense for the next year, one to three years, and three to five years is $1 million, $1 million and $1 million, respectively. Estimated interest expense beyond five years is $9 million. |
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(4) | The operating lease payments above do not include certain tax, insurance and maintenance costs, which are also required contractual obligations under our operating leases but are generally not fixed and can fluctuate from year to year. Also, we have excluded future minimum lease payments for leases that have been signed but have not commenced as of December 31, 2019. |
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(5) | Our purchase obligations include open purchase orders for aftermarket inventory. |
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(6) | Our other long-term obligations consist of (i) estimated payments for our self-insurance reserves of $97 million, (ii) outstanding estimated payments of $33 million on the repatriation of earnings as a result of the Tax Act, (iii) a total of $8 million of guaranteed dividend payments to be made in quarterly installments through January 2024 to the minority shareholder of a subsidiary acquired in connection with the Stahlgruber acquisition, and (iv) $110 million representing primarily other asset purchase commitments and payments for deferred compensation plans. |
The table above excludes amounts related to our defined benefit pension plans. As of December 31, 2019, the projected benefit obligation for our defined benefit pension plans was $225 million, and the fair value of the related plan assets was $83 million. Total expected contributions to our pension plans, including amounts that we expect to pay in benefits directly to participants, are $13$611 million for the year ended December 31, 2020.open purchase orders for aftermarket inventory all expected to be paid within twelve months.
•Net pension obligations of $133 million, of which $5 million is expected to be paid within twelve months. Benefit payments for our funded plans will be made from plan assets, whereas benefit payments for our unfunded plans are made from cash flows from operating activities. See Note 14,22, "Employee Benefit Plans" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for furthermore information related to ournet pension plans, includingobligations at December 31, 2022.
•Self-insurance reserves of $126 million, of which $62 million is expected to be paid within twelve months. See Note 6, "Self-Insurance Reserves" to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for more information relatedrelates to expected benefit payments for the next 10 years and the plan assets available to satisfy those benefit payments.self-insurance reserves at December 31, 2022.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks arising from adverse changes in:
•foreign exchange rates;
•interest rates;
•commodity prices; and
commodity prices.•inflation.
Foreign Exchange Rates
Foreign currency fluctuations may impact the financial results we report for the portions of our business that operate in functional currencies other than the U.S. dollar. Our operations outside of the U.S. represented 50.3%48.2% and 47.9%49.4% of our revenue during 2019years ended December 31, 2022 and 2018,2021, respectively. An increase or decrease in the strength of the U.S. dollar against these currencies by 10% would result in a 5.0%4.8% change in our consolidated revenue and a 2.9%3.0% change in our operating income for the year ended December 31, 2019.2022. See our Results of Operations discussion in Part II, Item 7 of this Annual Report on Form 10-K for additional information regarding the impact of fluctuations in exchange rates on our year over year results.
Additionally, we are exposed to foreign currency fluctuations with respect to the purchase of aftermarket products from foreign countries, primarily in Europe and Asia. To the extent that our inventory purchases are not denominated in the functional currency of the purchasing location, we are exposed to exchange rate fluctuations. In several of our operations, we purchase inventory from manufacturers in Taiwan in U.S. dollars, which exposes us to fluctuations in the relationship between the local functional currency and the U.S. dollar, as well as fluctuations between the U.S. dollar and the Taiwan dollar. We hedge our exposure to foreign currency fluctuations related to a portion of inventory purchases in our Europe operations, but the notional amount and fair value of these foreign currency forward contracts at December 31, 20192022 were immaterial. We do not currently attempt to hedge foreign currency exposure related to our foreign currency denominated inventory purchases in our Wholesale - North America operations, and we may not be able to pass on any resulting price increases to our customers.
To the extent that we are exposed to foreign currency fluctuations related to non-functional currency denominated financing transactions, we may hedge the exposure through the use of foreign currency forward contracts. As of December 31, 2022, we did not hold foreign currency forward contracts related to non-functional currency denominated debt.
Other than with respect to a portion of our foreign currency denominated inventory purchases and, from time to time, certain financing transactions, we do not hold derivative contracts to hedge foreign currency risk. Our net investment in foreign operations is partially hedged by the foreign currency denominated borrowings we use to fund foreign acquisitions; however, our ability to use foreign currency denominated borrowings to finance our foreign operations may be limited based on local tax laws. We have elected not to hedge the foreign currency risk related to the interest payments on foreign third party borrowings as we generate cash flows in the local currencies that can be used to fund debt payments. As of December 31, 2019,2022, we had outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion and €250 million under our Euro Notes (2026/28)(2028), and £208 million, €229 million, CAD $130€748 million and SEK 270Swedish Krona ("SEK") 75 million under our revolving credit facilities. As of December 31, 2018,2021, we had outstanding borrowings of €500 million under our Euro Notes (2024), €1.0 billion and €250 million under our Euro Notes (2026/28)(2028), and £290 million, €163 million, CAD $130€940 million and SEK 275145 million under our revolving credit facilities.
Interest Rates
Our results of operations are exposed to changes in interest rates primarily with respect to borrowings under our credit facilities, where interest rates are tied to the prime rate, LIBOR, SOFR, Canadian Dollar Offered Rate, Euro Interbank Offered Rate, SONIA, or CDOR.Swiss Average Rate Overnight. Therefore, we implemented a policy to manage our exposure to variable interest rates on a portion of our outstanding variable rate debt instruments through the use of interest rate swap contracts. These contracts convertconverted a portion of our variable rate debt to fixed rate debt, matching the currency, effective dates and maturity dates to specific debt instruments. NetWe designated our interest rate swap contracts as cash flow hedges, and net interest payments or receipts from interest rate swap contracts are included as adjustments to interest expense. All of our interest rate swap contracts have been executed with banks that we believe are creditworthy (Wells Fargo Bank, N.A.; Bank of America, N.A.; Citizens, N.A.; HSBC Bank USA, N.A.; and Banco Bilbao Vizcaya Argentaria, S.A.).
As of December 31, 2019, we held eight interest rate swap contracts representing a total of $480 million of U.S. dollar-denominated notional amount debt. Our interest rate swap contracts are designated as cash flow hedges and modify the variable rate nature of that portion of our variable rate debt. These swaps have maturity dates ranging from January 2021 through June 2021. As of December 31, 2019, the fair value of the interest rate swap contracts was an asset of $3 million. The values of such contracts are subject to changes in interest rates.
In addition to these interest rate swaps, as of December 31, 2019 we held four cross currency swap agreements for a total notional amount of $467 million (€435 million) with maturity dates in October 2020 and January 2021. These cross currency swaps contain an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convert variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The swaps are intended to reduce uncertainty in cash flows in U.S. dollars and euros in connection with intercompany financing arrangements. The cross currency swaps were also executed with banks we believe
are creditworthy (Wells Fargo Bank, N.A.; Bank of America, N.A.; and MUFG Bank, Ltd. ("MUFG") (formerly known as The Bank of Tokyo-Mitsubishi UFJ, Ltd.)). As of December 31, 2019, the fair values of the interest rate swap components of the cross currency swaps were an immaterial asset and a liability of $1 million, and the fair values of the foreign currency forward components were an asset of $3 million and a liability of $23 million. The values of these contracts are subject to changes in interest rates and foreign currency exchange rates.
In total, weWe had 59%none of our variable rate debt under our credit facilities at fixed rates at December 31, 2019 compared to 57% at2022 or December 31, 2018.2021. In February 2023, we entered into two sets of interest rate swap agreements. See Note 10,18, "Long-Term Obligations" and, Note 11,19, "Derivative Instruments and Hedging Activities" and Note 25, "Subsequent Events" to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information.
At December 31, 2019,2022, we had approximately $663$1,786 million of variable rate debt that was not hedged. Using sensitivity analysis, a 100 basis point movement in interest rates would change interest expense by $7$18 million over the next twelve months. Redeeming the U.S. Notes (2023) in January 2020 increased our unhedged variable rate debt by $415 million.
Commodity Prices
We are exposed to market risk related to price fluctuations in scrap metal and other metals (including precious metals, such as platinum, palladium, and rhodium)rhodium, contained in some recycled parts, such as catalytic converters). Market prices of these metals affect the amount that we pay for our inventory and the revenue that we generate from sales of these metals. As both our revenue and costs are affected by the price fluctuations, we have a natural hedge against the changes. However, there is typically a lag between the effect on our revenue from metal price fluctuations and inventory cost changes, and there is no guarantee that the vehicle costs will decrease or increase at the same rate as the metals prices. Therefore, we can experience positive or negative gross margin effects in periods of rising or falling metals prices, particularly when such prices move rapidly. Additionally, if market prices were to change at a greaterhigher or lower rate than our vehicle acquisition costs, we could experience a positive or negative effect on our operating margin. The average of scrap metal prices for 2019 hasthe year ended December 31, 2022 decreased 28%by 3% over the average for 2018.2021, noting that prices rose sequentially in 2021 and in the first half of 2022 before declining 31% in the second half of the year. The average prices of rhodium, palladium, and platinum decreased by 22%, 11% and 11%, respectively, for the year ended December 31, 2022 over the average prices for the year ended December 31, 2021.
Inflation
We are exposed to market risks related to inflation in product, labor, shipping, freight and general overhead costs. In 2022, inflation has increased to rates beyond recent history, and we have experienced rising costs. We have adjusted our prices and are driving productivity initiatives to mitigate the inflationary effects. If these pressures continue or increase in severity, we may not be able to fully offset such higher costs through price increases and productivity initiatives. Inflationary pressures in the future may have an adverse effect on our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net revenue if the selling prices of our products do not increase with these increased costs, we cannot identify cost efficiencies, or the higher prices impact demand.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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INDEX TO FINANCIAL STATEMENTS
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| LKQ CORPORATION AND SUBSIDIARIES | |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of LKQ Corporation and subsidiaries (the "Company") as of December 31, 20192022 and 2018,2021, the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows, and stockholders' equity for each of the three years in the period ended December 31, 2019,2022, and the related notes and(collectively referred to as the financial statement schedule listed in the Index at Item 15."financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192022 and 2018,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2022, based on criteria established in Internal Control –— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020,23, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 4 to the financial statements, the Company has changed its method of accounting for leases in 2019 due to adoption of ASC 842, Leases.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment –- Refer to Note 43 to the financial statements.
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company determines the fair value of its reporting units using a discounted cash flow model and the market approach, which require management to make significant estimates and assumptions. The goodwill balance subject to the impairment assessments was $4.4$4.3 billion as of December 31, 2019,2022 and is allocated to four reporting units.
Auditing the estimates and assumptions that impacted the valuation of certain reporting units involved especially subjective judgment; specifically, the forecasts of future revenue and profit margins (“forecasts”), the selection of discount rates, and the determination of market multiples, and the selection of discount rates.multiples.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the forecasts, determination of market multiples, and the selection of discount rates, and determination of market multiples included the following, among others:
·
•We tested the effectiveness of controls over the annual goodwill impairment assessment,assessments, including those over the forecasts and the selection of the discount rates and market multiples.
·
•We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts.
·
•We evaluated the reasonableness of management’s forecasts by comparing the forecasts to (1) historical results, (2) internal communications to management and the Board of Directors, and (3) analyst and industry reports of the Company and companies in its peer group.group, and (4) forecasts used in the preceding impairment assessments.
·
•With the assistance of our fair value specialists, we evaluated the discount rates, including (1) testing the underlying source information and the mathematical accuracy of the calculations, and(2) developing a range of independent estimates and comparing those to the discount rates selectedused by management.management, and (3) comparing the discount rates used by management to those used in the preceding impairment assessments.
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•With the assistance of our fair value specialists, we evaluated the market multiples, including testing the underlying source information and mathematical accuracy of the calculations, and comparing the multiples selected by management to its guideline public companies. companies and the multiples used in the preceding impairment assessments.
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/s/ DELOITTE & TOUCHE LLP |
/s/ DELOITTE & TOUCHE LLP
Chicago, ILIllinois
February 23, 2023
February 27, 2020
We have served as the Company's auditor since 1998.
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income (In thousands, except per share data) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue | $ | 12,506,109 |
| | $ | 11,876,674 |
| | 9,736,909 |
|
| Cost of goods sold | 7,654,315 |
| | 7,301,817 |
| | 5,937,286 |
|
| Gross margin | 4,851,794 |
| | 4,574,857 |
| | 3,799,623 |
|
| Selling, general and administrative expenses | 3,580,300 |
| | 3,352,731 |
| | 2,715,407 |
|
| Restructuring and acquisition related expenses | 36,979 |
| | 32,428 |
| | 19,672 |
|
| Impairment of net assets held for sale and goodwill | 47,102 |
| | 33,244 |
| | — |
|
| Depreciation and amortization | 290,770 |
| | 274,213 |
| | 219,546 |
|
| Operating income | 896,643 |
| | 882,241 |
| | 844,998 |
|
| Other expense (income): | | | | | |
| Interest expense | 138,504 |
| | 146,377 |
| | 101,640 |
|
| (Gain) loss on debt extinguishment | (128 | ) | | 1,350 |
| | 456 |
|
| Interest income and other income, net | (32,755 | ) | | (8,917 | ) | | (23,725 | ) |
| Total other expense, net | 105,621 |
| | 138,810 |
| | 78,371 |
|
| Income from continuing operations before provision for income taxes | 791,022 |
| | 743,431 |
| | 766,627 |
|
| Provision for income taxes | 215,330 |
| | 191,395 |
| | 235,560 |
|
| Equity in (losses) earnings of unconsolidated subsidiaries | (32,277 | ) | | (64,471 | ) | | 5,907 |
|
| Income from continuing operations | 543,415 |
| | 487,565 |
| | 536,974 |
|
| Net income (loss) from discontinued operations | 1,619 |
| | (4,397 | ) | | (6,746 | ) |
| Net income | 545,034 |
| | 483,168 |
| | 530,228 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 2,800 |
| | 3,050 |
| | (3,516 | ) |
| Less: net income attributable to discontinued noncontrolling interest | 974 |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 541,260 |
| | $ | 480,118 |
| | $ | 533,744 |
|
| | | | | | |
Basic earnings per share: (1) | | | | | |
| Income from continuing operations | $ | 1.75 |
| | $ | 1.55 |
| | $ | 1.74 |
|
| Net income (loss) from discontinued operations | 0.01 |
| | (0.01 | ) | | (0.02 | ) |
| Net income | 1.76 |
| | 1.54 |
| | 1.72 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 0.01 |
| | 0.01 |
| | (0.01 | ) |
| Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 1.75 |
| | $ | 1.53 |
| | $ | 1.73 |
|
| | | | | | |
Diluted earnings per share: (1) | | | | | |
| Income from continuing operations | $ | 1.75 |
|
| $ | 1.54 |
|
| $ | 1.73 |
|
| Net income (loss) from discontinued operations | 0.01 |
| | (0.01 | ) | | (0.02 | ) |
| Net income | 1.75 |
| | 1.53 |
| | 1.71 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 0.01 |
| | 0.01 |
| | (0.01 | ) |
| Less: net income attributable to discontinued noncontrolling interest | 0.00 |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | $ | 1.74 |
| | $ | 1.52 |
| | $ | 1.72 |
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Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2022, of the Company and our report dated February 23, 2023, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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| /s/ DELOITTE & TOUCHE LLP |
Chicago, Illinois
February 23, 2023
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(In millions, except per share data)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenue | $ | 12,794 | | | $ | 13,089 | | | $ | 11,629 | |
| Cost of goods sold | 7,571 | | | 7,767 | | | 7,036 | |
| | | | | |
| Gross margin | 5,223 | | | 5,322 | | | 4,593 | |
| Selling, general and administrative expenses | 3,544 | | | 3,568 | | | 3,266 | |
| Restructuring and transaction related expenses | 20 | | | 20 | | | 66 | |
| (Gain) on disposal of businesses and impairment of net assets held for sale | (159) | | | — | | | 3 | |
| Depreciation and amortization | 237 | | | 260 | | | 272 | |
| | | | | |
| Operating income | 1,581 | | | 1,474 | | | 986 | |
| Other expense (income): | | | | | |
| Interest expense | 78 | | | 72 | | | 104 | |
| Loss on debt extinguishment | — | | | 24 | | | 13 | |
| Interest income and other income, net | (15) | | | (21) | | | (16) | |
| Total other expense, net | 63 | | | 75 | | | 101 | |
| Income from continuing operations before provision for income taxes | 1,518 | | | 1,399 | | | 885 | |
| Provision for income taxes | 385 | | | 331 | | | 250 | |
| Equity in earnings of unconsolidated subsidiaries | 11 | | | 23 | | | 5 | |
| Income from continuing operations | 1,144 | | | 1,091 | | | 640 | |
| Net income from discontinued operations | 6 | | | 1 | | | — | |
| Net income | 1,150 | | | 1,092 | | | 640 | |
| Less: net income attributable to continuing noncontrolling interest | 1 | | | 1 | | | 2 | |
| | | | | |
| Net income attributable to LKQ stockholders | $ | 1,149 | | | $ | 1,091 | | | $ | 638 | |
| | | | | |
Basic earnings per share: (1) | | | | | |
| Income from continuing operations | $ | 4.13 | | | $ | 3.68 | | | $ | 2.10 | |
| Net income from discontinued operations | 0.02 | | | — | | | — | |
| Net income | 4.15 | | | 3.68 | | | 2.10 | |
| Less: net income attributable to continuing noncontrolling interest | 0.01 | | | — | | | 0.01 | |
| | | | | |
| Net income attributable to LKQ stockholders | $ | 4.15 | | | $ | 3.68 | | | $ | 2.10 | |
| | | | | |
Diluted earnings per share: (1) | | | | | |
| Income from continuing operations | $ | 4.12 | | | $ | 3.67 | | | $ | 2.10 | |
| Net income from discontinued operations | 0.02 | | | — | | | — | |
| Net income | 4.14 | | | 3.67 | | | 2.10 | |
| Less: net income attributable to continuing noncontrolling interest | 0.01 | | | — | | | 0.01 | |
| | | | | |
| Net income attributable to LKQ stockholders | $ | 4.13 | | | $ | 3.66 | | | $ | 2.09 | |
(1) The sum of the individual earnings per share amounts may not equal the total due to rounding.
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
6563
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Net income | $ | 1,150 | | | $ | 1,092 | | | $ | 640 | |
| Less: net income attributable to continuing noncontrolling interest | 1 | | | 1 | | | 2 | |
| | | | | |
| Net income attributable to LKQ stockholders | 1,149 | | | 1,091 | | | 638 | |
| | | | | |
| Other comprehensive (loss) income: | | | | | |
| Foreign currency translation, net of tax | (212) | | | (64) | | | 114 | |
| Net change in unrealized gains/losses on cash flow hedges, net of tax | — | | | 1 | | | (6) | |
| Net change in unrealized gains/losses on pension plans, net of tax | 35 | | | 9 | | | (1) | |
| Other comprehensive income (loss) from unconsolidated subsidiaries | 7 | | | — | | | (5) | |
| Other comprehensive (loss) income | (170) | | | (54) | | | 102 | |
| | | | | |
| Comprehensive income | 980 | | | 1,038 | | | 742 | |
| Less: comprehensive income attributable to continuing noncontrolling interest | 1 | | | 1 | | | 2 | |
| | | | | |
| Comprehensive income attributable to LKQ stockholders | $ | 979 | | | $ | 1,037 | | | $ | 740 | |
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Net income | $ | 545,034 |
| | $ | 483,168 |
| | $ | 530,228 |
|
| Less: net income (loss) attributable to continuing noncontrolling interest | 2,800 |
| | 3,050 |
| | (3,516 | ) |
| Less: net income attributable to discontinued noncontrolling interest | 974 |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | 541,260 |
| | 480,118 |
| | 533,744 |
|
| | | | | | |
| Other comprehensive income (loss): | | | | | |
| Foreign currency translation, net of tax | 6,704 |
| | (108,523 | ) | | 200,596 |
|
| Net change in unrealized gains/losses on cash flow hedges, net of tax | (9,016 | ) | | 350 |
| | 3,447 |
|
| Net change in unrealized gains/losses on pension plans, net of tax | (23,859 | ) | | 697 |
| | (6,035 | ) |
| Net change in other comprehensive income (loss) from unconsolidated subsidiaries | 236 |
| | (2,343 | ) | | (1,309 | ) |
| Other comprehensive (loss) income | (25,935 | ) | | (109,819 | ) | | 196,699 |
|
| | | | | | |
| Comprehensive income | 519,099 |
| | 373,349 |
| | 726,927 |
|
| Less: comprehensive income (loss) attributable to continuing noncontrolling interest | 2,800 |
| | 3,050 |
| | (3,516 | ) |
| Less: comprehensive income attributable to discontinued noncontrolling interest | 974 |
| | — |
| | — |
|
| Comprehensive income attributable to LKQ stockholders | $ | 515,325 |
| | $ | 370,299 |
| | $ | 730,443 |
|
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
6664
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except per share data)
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 278 | | | $ | 274 | |
| Receivables, net | 998 | | | 1,073 | |
| Inventories | 2,752 | | | 2,611 | |
| | | |
| Prepaid expenses and other current assets | 230 | | | 296 | |
| | | |
| Total current assets | 4,258 | | | 4,254 | |
| Property, plant and equipment, net | 1,236 | | | 1,299 | |
| Operating lease assets, net | 1,227 | | | 1,361 | |
| Goodwill | 4,319 | | | 4,540 | |
| Other intangibles, net | 653 | | | 746 | |
| Equity method investments | 141 | | | 181 | |
| Other noncurrent assets | 204 | | | 225 | |
| Total assets | $ | 12,038 | | | $ | 12,606 | |
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 1,339 | | | $ | 1,176 | |
| Accrued expenses: | | | |
| Accrued payroll-related liabilities | 218 | | | 261 | |
| Refund liability | 109 | | | 107 | |
| | | |
| Other accrued expenses | 294 | | | 271 | |
| | | |
| | | |
| Current portion of operating lease liabilities | 188 | | | 203 | |
| Current portion of long-term obligations | 34 | | | 35 | |
| Other current liabilities | 89 | | | 112 | |
| | | |
| Total current liabilities | 2,271 | | | 2,165 | |
| Long-term operating lease liabilities, excluding current portion | 1,091 | | | 1,209 | |
| Long-term obligations, excluding current portion | 2,622 | | | 2,777 | |
| Deferred income taxes | 280 | | | 279 | |
| Other noncurrent liabilities | 283 | | | 365 | |
| Commitments and contingencies | | | |
| Redeemable noncontrolling interest | 24 | | | 24 | |
| Stockholders' equity: | | | |
Common stock, $0.01 par value, 1,000.0 shares authorized, 322.4 shares issued and 267.3 shares outstanding at December 31, 2022; 321.6 shares issued and 287.0 shares outstanding at December 31, 2021 | 3 | | | 3 | |
| Additional paid-in capital | 1,506 | | | 1,474 | |
| Retained earnings | 6,656 | | | 5,794 | |
| Accumulated other comprehensive loss | (323) | | | (153) | |
| Treasury stock, at cost; 55.1 shares at December 31, 2022 and 34.6 shares at December 31, 2021 | (2,389) | | | (1,346) | |
| Total Company stockholders' equity | 5,453 | | | 5,772 | |
| Noncontrolling interest | 14 | | | 15 | |
| Total stockholders' equity | 5,467 | | | 5,787 | |
| Total liabilities and stockholders' equity | $ | 12,038 | | | $ | 12,606 | |
| | | |
LKQ CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data) |
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 523,020 |
| | $ | 331,761 |
|
| Receivables, net | 1,131,132 |
| | 1,154,083 |
|
| Inventories | 2,772,777 |
| | 2,836,075 |
|
| Prepaid expenses and other current assets | 260,890 |
| | 199,030 |
|
| Total current assets | 4,687,819 |
| | 4,520,949 |
|
| Property, plant and equipment, net | 1,234,400 |
| | 1,220,162 |
|
| Operating lease assets, net | 1,308,511 |
| | — |
|
| Intangible assets: | | | |
| Goodwill | 4,406,535 |
| | 4,381,458 |
|
| Other intangibles, net | 850,338 |
| | 928,752 |
|
| Equity method investments | 139,243 |
| | 179,169 |
|
| Other noncurrent assets | 153,110 |
| | 162,912 |
|
| Total assets | $ | 12,779,956 |
| | $ | 11,393,402 |
|
| Liabilities and Stockholders' Equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 942,795 |
| | $ | 942,398 |
|
| Accrued expenses: | | | |
| Accrued payroll-related liabilities | 179,203 |
| | 172,005 |
|
| Refund liability | 97,314 |
| | 104,585 |
|
| Other accrued expenses | 289,683 |
| | 288,425 |
|
| Other current liabilities | 121,623 |
| | 61,109 |
|
| Current portion of operating lease liabilities | 221,527 |
| | — |
|
| Current portion of long-term obligations | 326,367 |
| | 121,826 |
|
| Total current liabilities | 2,178,512 |
| | 1,690,348 |
|
| Long-term operating lease liabilities, excluding current portion | 1,137,597 |
| | — |
|
| Long-term obligations, excluding current portion | 3,715,389 |
| | 4,188,674 |
|
| Deferred income taxes | 310,129 |
| | 311,434 |
|
| Other noncurrent liabilities | 365,672 |
| | 364,194 |
|
| Commitments and contingencies |
| |
|
|
| Redeemable noncontrolling interest | 24,077 |
| | — |
|
| Stockholders' equity: | | | |
Common stock, $0.01 par value, 1,000,000,000 shares authorized, 319,927,243 shares issued and 306,731,328 shares outstanding at December 31, 2019; 318,417,821 shares issued and 316,146,114 shares outstanding at December 31, 2018 | 3,199 |
| | 3,184 |
|
| Additional paid-in capital | 1,418,239 |
| | 1,415,188 |
|
| Retained earnings | 4,140,136 |
| | 3,598,876 |
|
| Accumulated other comprehensive loss | (200,885 | ) | | (174,950 | ) |
| Treasury stock, at cost; 13,195,915 shares at December 31, 2019 and 2,271,707 shares at December 31, 2018 | (351,813 | ) | | (60,000 | ) |
| Total Company stockholders' equity | 5,008,876 |
| | 4,782,298 |
|
| Noncontrolling interest | 39,704 |
| | 56,454 |
|
| Total stockholders' equity | 5,048,580 |
| | 4,838,752 |
|
| Total liabilities and stockholders' equity | $ | 12,779,956 |
| | $ | 11,393,402 |
|
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
6765
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| | 2022 | | 2021 | | 2020 | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | |
| Net income | $ | 1,150 | | | $ | 1,092 | | | $ | 640 | | | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
| Depreciation and amortization | 264 | | | 284 | | | 299 | | | | |
| | | | | | | | |
| (Gain) on disposal of businesses and impairment of net assets held for sale | (159) | | | — | | | 3 | | | | |
| Stock-based compensation expense | 38 | | | 34 | | | 29 | | | | |
| Loss on debt extinguishment | — | | | 24 | | | 13 | | | | |
| Deferred income taxes | 6 | | | (27) | | | (34) | | | | |
| Other | (14) | | | (37) | | | (4) | | | | |
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | | | | |
| Receivables, net | (16) | | | (16) | | | 94 | | | | |
| Inventories | (342) | | | (235) | | | 433 | | | | |
| Prepaid income taxes/income taxes payable | 33 | | | (65) | | | 35 | | | | |
| Accounts payable | 269 | | | 283 | | | (64) | | | | |
| Other operating assets and liabilities | 21 | | | 30 | | | — | | | | |
| Net cash provided by operating activities | 1,250 | | | 1,367 | | | 1,444 | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | |
| Purchases of property, plant and equipment | (222) | | | (293) | | | (173) | | | | |
| Proceeds from disposals of property, plant and equipment | 9 | | | 20 | | | 17 | | | | |
| Acquisitions, net of cash acquired | (4) | | | (124) | | | (7) | | | | |
| Proceeds from disposals of businesses | 399 | | | 7 | | | 5 | | | | |
| | | | | | | | |
| Other investing activities, net | (10) | | | (29) | | | (8) | | | | |
| Net cash provided by (used in) investing activities | 172 | | | (419) | | | (166) | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | |
| Early-redemption premium | — | | | (16) | | | (9) | | | | |
| Repayment of Euro Notes (2026) | — | | | (883) | | | — | | | | |
| Repayment of U.S. Notes (2023) | — | | | — | | | (600) | | | | |
| Borrowings under revolving credit facilities | 1,644 | | | 5,035 | | | 841 | | | | |
| Repayments under revolving credit facilities | (1,675) | | | (3,717) | | | (1,473) | | | | |
| Repayments under term loans | — | | | (324) | | | (18) | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Borrowings under receivables securitization facility | — | | | — | | | 111 | | | | |
| Repayments under receivables securitization facility | — | | | — | | | (111) | | | | |
| Repayments of other debt, net | (17) | | | (26) | | | (116) | | | | |
| Settlement of derivative instruments, net | — | | | (89) | | | — | | | | |
| Dividends paid to LKQ stockholders | (284) | | | (73) | | | — | | | | |
| Purchase of treasury stock | (1,040) | | | (877) | | | (117) | | | | |
| Other financing activities, net | (22) | | | (15) | | | (21) | | | | |
| Net cash used in financing activities | (1,394) | | | (985) | | | (1,513) | | | | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (24) | | | (1) | | | 12 | | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 4 | | | (38) | | | (223) | | | | |
Cash and cash equivalents of continuing operations, beginning of period (1) | 274 | | | 312 | | | 528 | | | | |
| Add: Cash and cash equivalents of discontinued operations, beginning of period | — | | | — | | | 7 | | | | |
| Cash and cash equivalents of continuing and discontinued operations, beginning of period | 274 | | | 312 | | | 535 | | | | |
| Cash and cash equivalents, end of period | $ | 278 | | | $ | 274 | | | $ | 312 | | | | |
| | | | | | | | |
| | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) The balance as of January 1, 2020 included restricted cash of $5 million.
LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) |
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
| Net income | $ | 545,034 |
| | $ | 483,168 |
| | $ | 530,228 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 314,406 |
| | 294,077 |
| | 230,203 |
|
| Impairment of equity method investments | 41,057 |
| | 70,895 |
| | — |
|
| Impairment of net assets held for sale and goodwill | 47,102 |
| | 33,244 |
| | — |
|
| Stock-based compensation expense | 27,695 |
| | 22,760 |
| | 22,832 |
|
| Deferred income taxes | 7,109 |
| | (2,180 | ) | | (46,537 | ) |
| Other | (16,311 | ) | | 8,466 |
| | 8,683 |
|
| Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: | | | | | |
| Receivables, net | 26,419 |
| | 241 |
| | (55,979 | ) |
| Inventories | 15,460 |
| | (127,153 | ) | | (203,857 | ) |
| Prepaid income taxes/income taxes payable | 25,776 |
| | (2,125 | ) | | 8,376 |
|
| Accounts payable | 3,712 |
| | (77,621 | ) | | 45,136 |
|
| Other operating assets and liabilities | 26,574 |
| | 6,967 |
| | (20,185 | ) |
| Net cash provided by operating activities | 1,064,033 |
| | 710,739 |
| | 518,900 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
| Purchases of property, plant and equipment | (265,730 | ) | | (250,027 | ) | | (179,090 | ) |
| Proceeds from disposals of property, plant and equipment | 16,045 |
| | 27,659 |
| | 8,707 |
|
| Acquisitions, net of cash and restricted cash acquired | (27,296 | ) | | (1,214,995 | ) | | (513,088 | ) |
| Proceeds from disposal of businesses | 18,469 |
| | — |
| | 301,297 |
|
| Investments in unconsolidated subsidiaries | (7,594 | ) | | (60,300 | ) | | (7,664 | ) |
| Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 36,991 |
| | — |
|
| Other investing activities, net | 1,253 |
| | 1,733 |
| | 5,243 |
|
| Net cash used in investing activities | (264,853 | ) | | (1,458,939 | ) | | (384,595 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
| Debt issuance costs | — |
| | (21,128 | ) | | (4,267 | ) |
| Proceeds from issuance of Euro Notes (2026/28) | — |
| | 1,232,100 |
| | — |
|
| Purchase of treasury stock | (291,813 | ) | | (60,000 | ) | | — |
|
| Borrowings under revolving credit facilities | 605,708 |
| | 1,667,325 |
| | 839,171 |
|
| Repayments under revolving credit facilities | (734,471 | ) | | (1,528,970 | ) | | (946,477 | ) |
| Repayments under term loans | (8,750 | ) | | (354,800 | ) | | (27,884 | ) |
| Borrowings under receivables securitization facility | 36,600 |
| | 10,120 |
| | 11,245 |
|
| Repayments under receivables securitization facility | (146,600 | ) | | (120 | ) | | (11,245 | ) |
| Payment of notes issued and assumed debt from acquisitions | (19,123 | ) | | (54,888 | ) | | — |
|
| (Repayments) borrowings of other debt, net | (33,922 | ) | | (11,730 | ) | | 19,706 |
|
| Other financing activities, net | (8,298 | ) | | 5,086 |
| | 7,184 |
|
| Net cash (used in) provided by financing activities | (600,669 | ) | | 882,995 |
| | (112,567 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (904 | ) | | (77,311 | ) | | 23,512 |
|
| Net increase in cash, cash equivalents and restricted cash | 197,607 |
| | 57,484 |
| | 45,250 |
|
| Cash, cash equivalents and restricted cash of continuing operations, beginning of period | 337,250 |
| | 279,766 |
| | 227,400 |
|
| Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period | — |
| | — |
| | 7,116 |
|
| Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period | 337,250 |
| | 279,766 |
| | 234,516 |
|
| Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period | 534,857 |
| | 337,250 |
| | 279,766 |
|
| Less: Cash and cash equivalents of discontinued operations, end of period | 6,470 |
| | — |
| | — |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 528,387 |
| | $ | 337,250 |
| | $ | 279,766 |
|
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
6866
Consolidated Statements of Cash Flows
(In millions)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Supplemental disclosure of cash paid for: | | | | | |
| Income taxes, net of refunds | $ | 346 | | | $ | 423 | | | $ | 248 | |
| Interest | 71 | | | 76 | | | 107 | |
LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (In thousands) |
| | | | | | | | | | | |
| Reconciliation of cash, cash equivalents and restricted cash: | | | | | |
| Cash and cash equivalents | $ | 523,020 |
| | $ | 331,761 |
| | $ | 279,766 |
|
| Restricted cash included in Other noncurrent assets | 5,367 |
| | 5,489 |
| | — |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 528,387 |
| | $ | 337,250 |
| | $ | 279,766 |
|
| | | | | | |
| Supplemental disclosure of cash paid for: | | | | | |
| Income taxes, net of refunds | $ | 181,306 |
| | $ | 200,098 |
| | $ | 273,019 |
|
| Interest | 143,121 |
| | 137,866 |
| | 95,707 |
|
| Supplemental disclosure of noncash investing and financing activities: | | | | | |
| Stock issued in acquisitions | $ | — |
| | $ | 251,334 |
| | $ | — |
|
| Noncash property, plant and equipment additions | 10,154 |
| | 16,518 |
| | 18,122 |
|
| Notes payable and other financing obligations, including notes issued, debt assumed and settlement of pre-existing balances in connection with business acquisitions | 47,887 |
| | 105,566 |
| | 59,045 |
|
| Notes and other financing receivables in connection with disposals of business/investment | — |
| | — |
| | 4,000 |
|
| Notes issued in connection with purchase of noncontrolling interest | 14,196 |
| | — |
| | — |
|
| Contingent consideration liabilities | 6,627 |
| | 3,107 |
| | 6,234 |
|
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
6967
LKQ CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(In millions, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| LKQ Stockholders | | | | |
| | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Noncontrolling Interest | | Total Stockholders' Equity |
| | Shares | | Amount | | Shares | | Amount |
| Balance as of December 31, 2019 | 319.9 | | | $ | 3 | | | (13.2) | | | $ | (352) | | | $ | 1,418 | | | $ | 4,141 | | | $ | (201) | | | $ | 40 | | | $ | 5,049 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 638 | | | — | | | 2 | | | 640 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 102 | | | — | | | 102 | |
| Purchase of treasury stock | — | | | — | | | (4.1) | | | (117) | | | — | | | — | | | — | | | — | | | (117) | |
| Vesting of restricted stock units, net of shares withheld for employee tax | 0.9 | | | — | | | — | | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 29 | | | — | | | — | | | — | | | 29 | |
| Exercise of stock options | 0.1 | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | |
| Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | |
| Adoption of ASU 2016-13 | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | — | | | (3) | |
| Disposition of subsidiary with noncontrolling interests (see Note 2) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (11) | | | (11) | |
| Purchase of noncontrolling interests (see Note 8) | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | (11) | | | (12) | |
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2020 | 320.9 | | | $ | 3 | | | (17.3) | | | $ | (469) | | | $ | 1,444 | | | $ | 4,776 | | | $ | (99) | | | $ | 16 | | | $ | 5,671 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 1,091 | | | — | | | 1 | | | 1,092 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (54) | | | — | | | (54) | |
| Purchase of treasury stock | — | | | — | | | (17.3) | | | (877) | | | — | | | — | | | — | | | — | | | (877) | |
| Vesting of restricted stock units, net of shares withheld for employee tax | 0.7 | | | — | | | — | | | — | | | (4) | | | — | | | — | | | — | | | (4) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 34 | | | — | | | — | | | — | | | 34 | |
| Dividends declared to LKQ stockholders ($0.25 per share) | — | | | — | | | — | | | — | | | — | | | (73) | | | — | | | — | | | (73) | |
| | | | | | | | | | | | | | | | | |
| Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2) | | | (2) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | 321.6 | | | $ | 3 | | | (34.6) | | | $ | (1,346) | | | $ | 1,474 | | | $ | 5,794 | | | $ | (153) | | | $ | 15 | | | $ | 5,787 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 1,149 | | | — | | | 1 | | | 1,150 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (170) | | | — | | | (170) | |
| Purchase of treasury stock | — | | | — | | | (20.5) | | | (1,043) | | | — | | | — | | | — | | | — | | | (1,043) | |
| Vesting of restricted stock units, net of shares withheld for employee tax | 0.8 | | | — | | | — | | | — | | | (6) | | | — | | | — | | | — | | | (6) | |
| Stock-based compensation expense | — | | | — | | | — | | | — | | | 38 | | | — | | | — | | | — | | | 38 | |
| Dividends declared to LKQ stockholders ($1.025 per share) | — | | | — | | | — | | | — | | | — | | | (287) | | | — | | | — | | | (287) | |
| | | | | | | | | | | | | | | | | |
| Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Foreign currency translation adjustment on noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
| Balance as of December 31, 2022 | 322.4 | | | $ | 3 | | | (55.1) | | | $ | (2,389) | | | $ | 1,506 | | | $ | 6,656 | | | $ | (323) | | | $ | 14 | | | $ | 5,467 | |
LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | LKQ Stockholders | | | | |
| | Common Stock | | Treasury Stock | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss) Income | | Noncontrolling Interest | | Total Stockholders' Equity |
| | Shares | | Amount | | Shares | | Amount |
| BALANCE, January 1, 2017 | 307,545 |
| | $ | 3,075 |
| | — |
| | $ | — |
| | $ | 1,116,690 |
| | $ | 2,590,359 |
| | $ | (267,175 | ) | | $ | — |
| | $ | 3,442,949 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 533,744 |
| | — |
| | (3,516 | ) | | 530,228 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 196,699 |
| | — |
| | 196,699 |
|
| Vesting of restricted stock units, net of shares withheld for employee tax | 749 |
| | 7 |
| | | | | | (4,332 | ) | | | | | | | | (4,325 | ) |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | 22,832 |
| | — |
| | — |
| | — |
| | 22,832 |
|
| Exercise of stock options | 867 |
| | 9 |
| | — |
| | — |
| | 7,461 |
| | — |
| | — |
| | — |
| | 7,470 |
|
| Tax withholdings related to net share settlements of stock-based compensation awards | (34 | ) | | — |
| | — |
| | — |
| | (1,200 | ) | | — |
| | — |
| | — |
| | (1,200 | ) |
| Sale of subsidiary shares to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,000 |
| | 12,000 |
|
| BALANCE, December 31, 2017 | 309,127 |
| | $ | 3,091 |
| | — |
| | $ | — |
| | $ | 1,141,451 |
| | $ | 3,124,103 |
| | $ | (70,476 | ) | | $ | 8,484 |
| | $ | 4,206,653 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 480,118 |
| | — |
| | 3,050 |
| | 483,168 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (109,819 | ) | | — |
| | (109,819 | ) |
| Stock issued in acquisitions | 8,056 |
| | 81 |
| | — |
| | — |
| | 251,253 |
| | — |
| | — |
| | — |
| | 251,334 |
|
| Purchase of treasury stock | — |
| | — |
| | (2,272 | ) | | (60,000 | ) | | — |
| | — |
| | — |
| | — |
| | (60,000 | ) |
| Vesting of restricted stock units, net of shares withheld for employee tax | 603 |
| | 6 |
| | — |
| | — |
| | (3,802 | ) | | — |
| | — |
| | — |
| | (3,796 | ) |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | 22,760 |
| | — |
| | — |
| | — |
| | 22,760 |
|
| Exercise of stock options | 686 |
| | 7 |
| | — |
| | — |
| | 5,296 |
| | — |
| | — |
| | — |
| | 5,303 |
|
| Tax withholdings related to net share settlements of stock-based compensation awards | (54 | ) | | (1 | ) | | — |
| | — |
| | (1,770 | ) | | — |
| | — |
| | — |
| | (1,771 | ) |
| Adoption of ASU 2018-02 (see Note 4) | — |
| | — |
| | — |
| | — |
| | — |
| | (5,345 | ) | | 5,345 |
| | — |
| | — |
|
| Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 810 |
| | 810 |
|
| Noncontrolling interests of businesses acquired | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,110 |
| | 44,110 |
|
| BALANCE, December 31, 2018 | 318,418 |
| | $ | 3,184 |
| | (2,272 | ) | | $ | (60,000 | ) | | $ | 1,415,188 |
| | $ | 3,598,876 |
| | $ | (174,950 | ) | | $ | 56,454 |
| | $ | 4,838,752 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 541,260 |
| | — |
| | 3,774 |
| | 545,034 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (25,935 | ) | | — |
| | (25,935 | ) |
| Purchase of treasury stock | — |
| | — |
| | (10,924 | ) | | (291,813 | ) | | — |
| | — |
| | — |
| | — |
| | (291,813 | ) |
| Vesting of restricted stock units, net of shares withheld for employee tax | 719 |
| | 7 |
| | — |
| | — |
| | (2,091 | ) | | — |
| | — |
| | — |
| | (2,084 | ) |
| Stock-based compensation expense | — |
| | — |
| | — |
| | — |
| | 27,695 |
| | — |
| | — |
| | — |
| | 27,695 |
|
| Exercise of stock options | 927 |
| | 9 |
| | — |
| | — |
| | 9,046 |
| | — |
| | — |
| | — |
| | 9,055 |
|
Tax withholdings related to net share settlements of stock-based compensation awards
| (137 | ) | | (1 | ) | | — |
| | — |
| | (4,494 | ) | | — |
| | — |
| | — |
| | (4,495 | ) |
The accompanying notes are an integral part of the consolidated financial statements.Consolidated Financial Statements.
7068
LKQ CORPORATION AND SUBSIDIARIES Consolidated Statements of Stockholders' Equity (In thousands) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Capital contributions from, net of dividends declared to, noncontrolling interest shareholder | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8,474 | ) | | (8,474 | ) |
Acquired noncontrolling interest (1) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,365 |
| | 10,365 |
|
Purchase and modification of noncontrolling interests (2) | — |
| | — |
| | — |
| | — |
| | (27,105 | ) | | — |
| | — |
| | (22,415 | ) | | (49,520 | ) |
| BALANCE, December 31, 2019 | 319,927 |
| | $ | 3,199 |
| | (13,196 | ) | | $ | (351,813 | ) | | $ | 1,418,239 |
| | $ | 4,140,136 |
| | $ | (200,885 | ) | | $ | 39,704 |
| | $ | 5,048,580 |
|
(1) The amount acquired during 2019 relates to discontinued operations. See Note 3, "Discontinued Operations," for further details.
(2) The amount recorded in 2019 relates to (i) the purchase of noncontrolling interest unrelated to a business combination, and (ii) the modification of noncontrolling interest shares. Refer to "Stockholders' Equity–Noncontrolling Interest" in Note 4, "Summary of Significant Accounting Policies," for further information.
The accompanying notes are an integral part of the consolidated financial statements.
71
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The financial statements represent the consolidationNote 1. Business
Description of Business
LKQ Corporation, a Delaware corporation, and its subsidiaries. LKQ Corporation is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We are a leading providerglobal distributor of alternative vehicle collisionproducts, including replacement parts, components, and systems used in the repair and maintenance of vehicles, and specialty vehicle aftermarket products and alternative vehicle mechanical replacement products, with our sales, processing,accessories designed to improve the performance, functionality and distribution facilities reaching most major marketsappearance of vehicles. We operate in the United States, and Canada. We are also a leading provider of alternative vehicle replacement and maintenance products inCanada, Germany, the United Kingdom, Germany,U.K., the Benelux region (Belgium, Netherlands, and Luxembourg), Italy, Czech Republic, Poland,Austria, Slovakia, Austria,Poland, and various other European countries. In addition to our wholesale operations, we operate self service retail facilities across the U.S. that sell recycled automotive products from end-of-life vehicles.
We are alsoorganized into four operating segments: Wholesale - North America; Europe; Specialty; and Self Service, each of which is presented as a leading distributorreportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of specialty vehicle aftermarket equipmentWholesale - North America and accessories reaching most major markets in the U.S. and Canada. In total, we operate approximately 1,700 facilities.Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change.
Note 2. Business Combinations
During the year ended December 31, 2019, we completed 7 acquisitions, including 3 wholesale businessesDiscontinued Operations and 1 self service business in North America, and 3 wholesale businesses in Europe. These acquisitions were not material to our results of operations or financial position as of and for the year ended December 31, 2019. Total acquisition date fair value of the consideration for our acquisitions for the year ended December 31, 2019 was $63 million, composed of $29 million of cash paid (net of cash acquired), $7 million for the estimated value of contingent payments to former owners (with maximum payments totaling $8 million), $2 million of other purchase price obligations (non-interest bearing), $21 million of notes payable, and $5 million of pre-existing balances considered to be effectively settled as a result of the acquisitions. In addition, we assumed $8 million of existing debt as of the acquisition dates.Divestitures
On May 30, 2018, we acquired Stahlgruber, a leading European wholesale distributor of aftermarket spare parts for passenger cars, tools, capital equipment and accessories with operations in Germany, Austria, Italy, Slovenia, and Croatia, with further sales to Switzerland. Total acquisition date fair value of the consideration for our Stahlgruber acquisition was €1.2 billion ($1.4 billion), composed of €1.0 billion ($1.1 billion) of cash paid (net of cash acquired), and €215 million ($251 million) of newly issued shares of LKQ common stock. We financed the acquisition with the proceeds from €1.0 billion ($1.2 billion) of senior notes, the direct issuance to Stahlgruber's owner of 8,055,569 newly issued shares of LKQ common stock, and borrowings under our existing revolving credit facility. We recorded $915 million ($908 million in 2018 and $7 million of adjustments in the six months ended June 30, 2019) of goodwill related to our acquisition of Stahlgruber, of which we expected $300 million to be deductible for income tax purposes. In the period between the acquisition date and December 31, 2018, Stahlgruber, which is reported in our Europe reportable segment, generated third party revenue of $1.1 billion and operating income of $52 million.
On May 3, 2018, the European Commission cleared the acquisition of Stahlgruber for the entire European Union, except with respect to the wholesale automotive parts business in the Czech Republic. The acquisition of Stahlgruber’s Czech Republic wholesale business was referred to the Czech Republic competition authority for review. On May 10, 2019, the Czech Republic competition authority approved our acquisition of Stahlgruber’s Czech Republic wholesale business subject to the requirement that we divest certain of the acquired locations. We acquired Stahlgruber’s Czech Republic wholesale business on May 29, 2019 and decided to divest all of the acquired locations. We immediately classified the business as discontinued operations because the business was never integrated into our Europe segment; see Note 3, "Discontinued Operations" for further information. The Czech Republic wholesale business represents an immaterial portion of Stahlgruber's revenue and profitability. There was no additional consideration beyond the previously remitted amounts for the Stahlgruber transaction required to complete the acquisition of the Czech Republic wholesale business.
In addition to our acquisition of Stahlgruber, during the year ended December 31, 2018, we completed acquisitions of 4 wholesale businesses in North America and 9 wholesale businesses in Europe. Total acquisition date fair value of the consideration for these acquisitions was $99 million, composed of $85 million of cash paid (net of cash and restricted cash acquired), $11 million of notes payable, and $3 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $5 million). During the year ended December 31, 2018, we recorded $68 million of goodwill related to these acquisitions, of which we expected $4 million to be deductible for income tax purposes. In the period
between the acquisition dates and December 31 2018, these acquisitions generated third party revenue of $46 million and operating income of $3 million.
During the year ended December 31, 2017, we completed 26 acquisitions including 6 wholesale businesses in North America, 16 wholesale businesses in Europe and 4 Specialty businesses. Our acquisitions in Europe included the acquisition of 4 aftermarket parts distribution businesses in Belgium in July 2017. Our Specialty acquisitions included the acquisition of the aftermarket business of Warn, a leading designer, manufacturer and marketer of high performance vehicle equipment and accessories, in November 2017.
Total acquisition date fair value of the consideration for our 2017 acquisitions was $542 million, composed of $510 million of cash paid (net of cash acquired), $6 million for the estimated value of contingent payments to former owners (with maximum potential payments totaling $19 million), $5 million of other purchase price obligations (non-interest bearing) and $20 million of notes payable. During the year ended December 31, 2017, we recorded $307 million of goodwill related to these acquisitions, of which we expected $21 million to be deductible for income tax purposes. In the period between the acquisition dates and December 31, 2017, these acquisitions generated revenue of $227 million and an operating loss of $2 million.
On October 4, 2016, we acquired substantially all of the business assets of Andrew Page, a distributor of aftermarket automotive parts in the U.K., out of receivership. The acquisition was subject to regulatory approval by the CMA in the U.K. The CMA concluded its review on October 31, 2017 and required us to divest less than 10% of the acquired locations. Total acquisition date fair value of the consideration for this acquisition was £16 million ($20 million). In connection with the acquisition, we recorded a gain on bargain purchase of $10 million ($8 million recorded in 2016 and $2 million recorded in 2017), which is presented in Interest income and other income, net in our Consolidated Statements of Income. We believe that we were able to acquire the net assets of Andrew Page for less than fair value as a result of (i) Andrew Page's financial difficulties that put the company into receivership prior to our acquisition and (ii) a motivated seller that desired to complete the sale in an expedient manner to ensure continuity of the business.
Our acquisitions are accounted for under the purchase method of accounting and are included in our consolidated financial statements from the dates of acquisition. The purchase prices were allocated to the net assets acquired based upon estimated fair values at the dates of acquisition. The purchase price allocations for the acquisitions made during the year ended December 31, 2019 are preliminary as we are in the process of determining the following: 1) valuation amounts for certain receivables, inventories and fixed assets acquired; 2) valuation amounts for certain intangible assets acquired; 3) the acquisition date fair value of certain liabilities assumed; and 4) the tax basis of the entities acquired. We have recorded preliminary estimates for certain of the items noted above and will record adjustments, if any, to the preliminary amounts upon finalization of the valuations.
During the year ended December 31, 2019, the measurement period adjustments recorded for acquisitions completed in prior periods were not material. The income statement effect of these measurement period adjustments that would have been recorded in previous reporting periods if the adjustments had been recognized as of the acquisition dates was immaterial.
The purchase price allocations for the acquisitions completed during the year ended December 31, 2018 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2018 |
| | Stahlgruber | | Other Acquisitions (1) | | Total |
| Receivables | $ | 144,826 |
| | $ | 19,171 |
| | $ | 163,997 |
|
| Receivable reserves | (2,818 | ) | | (918 | ) | | (3,736 | ) |
| Inventories | 380,238 |
| | 14,021 |
| | 394,259 |
|
| Prepaid expenses and other current assets | 10,970 |
| | 1,851 |
| | 12,821 |
|
Property, plant and equipment | 271,292 |
| | 5,711 |
| | 277,003 |
|
| Goodwill | 908,253 |
| | 64,637 |
| | 972,890 |
|
| Other intangibles | 285,255 |
| | 35,159 |
| | 320,414 |
|
| Other noncurrent assets | 16,625 |
| | 37 |
| | 16,662 |
|
| Deferred income taxes | (78,130 | ) | | (5,285 | ) | | (83,415 | ) |
| Current liabilities assumed | (346,788 | ) | | (20,116 | ) | | (366,904 | ) |
| Debt assumed | (79,925 | ) | | (4,875 | ) | | (84,800 | ) |
Other noncurrent liabilities assumed (2) | (80,824 | ) | | (10,306 | ) | | (91,130 | ) |
| Noncontrolling interest | (44,110 | ) | | — |
| | (44,110 | ) |
| Contingent consideration liabilities | — |
| | (3,107 | ) | | (3,107 | ) |
| Other purchase price obligations | (6,084 | ) | | 3,623 |
| | (2,461 | ) |
| Stock issued | (251,334 | ) | | — |
| | (251,334 | ) |
| Notes issued | — |
| | (11,347 | ) | | (11,347 | ) |
Gains on bargain purchases (3) | — |
| | (2,418 | ) | | (2,418 | ) |
| Settlement of other purchase price obligations (non-interest bearing) | — |
| | 1,711 |
| | 1,711 |
|
| Cash used in acquisitions, net of cash and restricted cash acquired | $ | 1,127,446 |
| | $ | 87,549 |
| | $ | 1,214,995 |
|
| |
(1) | The amounts recorded during the year ended December 31, 2018 include a $5 million adjustment to increase other intangibles related to our Warn acquisition and $4 million of adjustments to reduce other purchase price obligations related to other 2017 acquisitions. |
| |
(2) | The amount recorded for our acquisition of Stahlgruber includes a $79 million liability for certain pension obligations. |
| |
(3) | The amounts recorded during the year ended December 31, 2018 are due to the gains on bargain purchases related to (i) an acquisition in Europe completed in the second quarter of 2017 as a result of changes in the acquisition date fair value of the consideration, and (ii) three acquisitions in Europe completed during 2018. |
The fair value of our intangible assets is based on a number of inputs, including projections of future cash flows, discount rates, assumed royalty rates and customer attrition rates, all of which are Level 3 inputs. We used the relief-from-royalty method to value trade names, trademarks, software and other technology assets, and we used the multi-period excess earnings method to value customer relationships. The relief-from-royalty method assumes that the intangible asset has value to the extent that its owner is relieved of the obligation to pay royalties for the benefits received from the intangible asset. The multi-period excess earnings method is based on the present value of the incremental after-tax cash flows attributable only to the customer relationship after deducting contributory asset charges. The fair value of our property, plant and equipment is determined using inputs such as market comparables and current replacement or reproduction costs of the asset, adjusted for physical, functional and economic factors; these adjustments to arrive at fair value use unobservable inputs in which little or no market data exists, and therefore, these inputs are considered to be Level 3 inputs. See Note 12, "Fair Value Measurements" for further information regarding the tiers in the fair value hierarchy.
The acquisition of Stahlgruber expanded LKQ's geographic presence in continental Europe and serves as an additional strategic hub for our European operations. In addition, the acquisition of Stahlgruber should allow for continued improvement in procurement, logistics and infrastructure optimization. The primary objectives of our other acquisitions made during the years ended December 31, 2019 and 2018 were to create economic value for our stockholders by enhancing our position as a
leading source for alternative collision and mechanical repair products and to expand into other product lines and businesses that may benefit from our operating strengths.
When we identify potential acquisitions, we attempt to target companies with a leading market presence, an experienced management team and workforce that provides a fit with our existing operations, and strong cash flows. For certain of our acquisitions, we have identified cost savings and synergies as a result of integrating the company with our existing business that provide additional value to the combined entity. In many cases, acquiring companies with these characteristics will result in purchase prices that include a significant amount of goodwill.
The following pro forma summary presents the effect of the businesses acquired during the year ended December 31, 2019 as though the businesses had been acquired as of January 1, 2018, the businesses acquired during the year ended December 31, 2018 as though they had been acquired as of January 1, 2017, and the businesses acquired during the year ended December 31, 2017 as though they had been acquired as of January 1, 2016. We have excluded the May 29, 2019 acquisition of the Czech Republic wholesale business as the business was never integrated into our Europe segment. The pro forma adjustments are based upon unaudited financial information of the acquired entities (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue, as reported | $ | 12,506,109 |
| | $ | 11,876,674 |
| | $ | 9,736,909 |
|
| Revenue of purchased businesses for the period prior to acquisition: | | | | | |
| Stahlgruber | — |
| | 815,405 |
| | 1,756,893 |
|
| Other acquisitions | 24,614 |
| | 164,133 |
| | 448,721 |
|
| Pro forma revenue | $ | 12,530,723 |
| | $ | 12,856,212 |
| | $ | 11,942,523 |
|
| | | | | | |
Income from continuing operations, as reported (1) | $ | 543,415 |
| | $ | 487,565 |
| | $ | 536,974 |
|
| Income from continuing operations of purchased businesses for the period prior to acquisition, and pro forma purchase accounting adjustments: | | | | | |
| Stahlgruber | 14,481 |
| | 17,309 |
| | 4,796 |
|
| Other acquisitions | 3,664 |
| | 6,591 |
| | 16,667 |
|
Acquisition related expenses, net of tax (2) | 1,499 |
| | 14,524 |
| | 8,787 |
|
| Pro forma income from continuing operations | 563,059 |
| | 525,989 |
| | 567,224 |
|
| Less: Net income (loss) attributable to continuing noncontrolling interest, as reported | 2,800 |
| | 3,050 |
| | (3,516 | ) |
| Less: Pro forma net income attributable to noncontrolling interest | — |
| | 2,799 |
| | 1,095 |
|
Pro forma income from continuing operations attributable to LKQ stockholders (3) | $ | 560,259 |
| | $ | 520,140 |
| | $ | 569,645 |
|
| |
(1) | 2018 amounts include interest expense for the period from April 9, 2018 through December 31, 2018 recorded on the senior notes issued in connection with our acquisition of Stahlgruber. |
| |
(2) | Includes expenses related to acquisitions closed in the period and excludes expenses for acquisitions not yet completed. |
| |
(3) | Excludes our acquisition of the Czech Republic wholesale business which is classified as discontinued operations. |
Unaudited pro forma supplemental information is based upon accounting estimates and judgments that we believe are reasonable. The unaudited pro forma supplemental information includes the effect of purchase accounting adjustments, such as the adjustment of inventory acquired to fair value, adjustments to depreciation on acquired property, plant and equipment, adjustments to rent expense for above or below market leases, adjustments to amortization on acquired intangible assets, adjustments to interest expense, and the related tax effects. The pro forma impact of our acquisitions also reflects the elimination of acquisition related expenses, net of tax. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information regarding our acquisition related expenses. These pro forma results are not necessarily indicative of what would have occurred if the acquisitions had been in effect for the periods presented or of future results.
Note 3. Discontinued Operations
Glass Manufacturing Business
On In March 1, 2017,, LKQ we completed the sale of the PGW Auto Glass ("PGW") glass manufacturing business of its PGW subsidiary to a subsidiary of Vitro S.A.B. de C.V. ("Vitro") for a sales price of $301 million, including cash received of $316 million, net of cash disposed of $15 million. Related to this transaction, the remaining portion of the Glass operating segment was combined with our Wholesale – North America operating segment, which is part of our North America reportable segment, in the first quarter of 2017. See Note 16, "Segment and Geographic Information" for further information regarding our segments.
Upon execution of the Stock and Asset Purchase Agreement (the "Vitro Agreement") in December 2016, LKQ concluded that the glass manufacturing business met the criteria to be classified as held for sale in LKQ's consolidated financial statements.. In connection with the Vitro Agreement, the Companysale, LKQ and Vitro entered into a twelve month Transition Services Agreement commencing on the transaction date with two six-month renewal periods, a three-year Purchase and Supply Agreement and an Intellectual Property Agreement. The Purchase and Supply Agreement expires in the first quarter of 2020, while the Intellectual Property Agreement has a perpetual term; as of December 31, 2019, the Transition Services Agreement had expired.
The following table summarizes the operating results of the Company’s discontinued operations related to the sale described above for the years ended December 31, 2019, 2018 and 2017, as presented in Net income (loss) from discontinued operations in the Consolidated Statements of Income (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 (3) | | 2018 | | 2017 |
| Revenue | $ | — |
| | $ | — |
| | $ | 111,130 |
|
| Cost of goods sold | — |
| | — |
| | 100,084 |
|
| Selling, general and administrative expenses | 1,626 |
| | — |
| | 8,369 |
|
| Operating (loss) income | (1,626 | ) | | — |
| | 2,677 |
|
Total other expense, net (1) | — |
| | — |
| | 1,204 |
|
| (Loss) income from discontinued operations before taxes | (1,626 | ) | | — |
| | 3,881 |
|
| (Benefit) provision for income taxes | (1,572 | ) | | — |
| | 3,598 |
|
| Equity in loss of unconsolidated subsidiaries | — |
| | — |
| | (534 | ) |
| Loss from discontinued operations, net of tax | (54 | ) | | — |
| | (251 | ) |
Loss on sale of discontinued operations, net of tax (2) | — |
| | (4,397 | ) | | (6,495 | ) |
| Net loss from discontinued operations | $ | (54 | ) | | $ | (4,397 | ) | | $ | (6,746 | ) |
| |
(1) | The Company elected to allocate interest expense to discontinued operations based on the expected debt to be repaid. Under this approach, allocated interest from January 1, 2017 through the date of sale was $2 million. The other expenses, net were foreign currency gains and losses. |
(2) In the first quarter of 2017, upon closing of the sale and write-off of the net assets of the glass manufacturing business, we recorded a pre-tax loss on sale of $9 million, and a $4 million current tax benefit. The incremental loss primarily reflects a $6 million payable for intercompany sales from the glass manufacturing business to the aftermarket automotive glass distribution business incurred prior to closing, which was paid by LKQ during the second quarter of 2017, and capital expenditures in 2017 that were not reimbursed by the buyer. During the fourth quarter of 2017, we recorded an additional loss on sale of $2 million as a result of post sale net working capital adjustments. During the fourth quarter of 2018, we recorded a final current tax expense adjustment of $4 million to the loss on sale as a result of the completion of the tax return reporting the 2017 transaction. The adjustment was primarily attributable to a valuation allowance recognized on the carryforward of a capital loss arising from the sale, the tax benefit of which is not certain to be realized during the carryforward period.
| |
(3) | During the fourth quarter of 2019, we recorded a reserve related to a pre-disposition matter and the related deferred tax benefit, and we settled certain tax matters with Vitro, which are reflected in the benefit for income taxes. |
The glass manufacturing business had $4 million of operating cash outflows, $4 million of investing cash outflows mainly consisting of capital expenditures, and $15 million of financing cash inflows made up of parent financing for the period from January 1, 2017 through March 1, 2017.
Pursuant to the Purchase and Supply Agreement, our aftermarket automotive glass distribution business agreed to source various products from Vitro's glass manufacturing business annually for a three-year period beginning onin March 1, 2017. Between January 1, 2017 and the sale date of March 1, 2017, intercompany sales between the glass manufacturing business and the continuing aftermarket automotive glass distribution business of PGW, which were eliminatedending in
consolidation, were $8 million. February 2020. All purchases from Vitro, including those outside of the Purchase and Supply Agreement, for the yearstwo months ended December 31, 2019, 2018 and 2017,February 29, 2020 were $30 million, $24 million and $42 million, respectively.$4 million.
Czech Republic
As described in Note 2, "Business Combinations," we classified the acquired Stahlgruber Czech Republic wholesale business as discontinued operations. We expect to divest the business within the first half of 2020, and thus, the net assets are reflected on the Consolidated Balance Sheets at the lower of fair value less cost to sell or carrying value. As of December 31, 2019, the assets held for sale, liabilities held for sale, and noncontrolling interest are recorded within Prepaid expenses and other current assets, Other current liabilities, and Noncontrolling interest, respectively, on the Consolidated Balance Sheets. As of the acquisition date, we acquired $5 million of cash, assumed $6 million of existing debt and settled $6 million of pre-existing balances. DuringFor the year ended December 31, 2019,2022, we recorded $2to discontinued operations a $5 million benefit primarily related to the reassessment of a previously recorded valuation allowance on a deferred tax asset. For the year ended December 31, 2021, we recorded an insignificant gain related to the settlement of certain tax matters with Vitro.
Czech Republic
In February 2020, we completed the sale of the Czech Republic business of Stahlgruber GmbH ("Stahlgruber"), resulting in an immaterial loss on the sale. As part of the transaction, we purchased the 48.2% noncontrolling interest from the minority shareholder for a purchase price of €8 million, which included the issuance of €4 million of notes payable, and then immediately thereafter sold 100% of the business for a purchase price of €14 million, which included €7 million of notes receivable. This transaction resulted in a disposition of noncontrolling interest of $11 million. From January 1, 2020 through the date of sale, we recorded an insignificant amount of net income (excluding the loss on sale) from discontinued operations related to the business, of which $1 millionan insignificant amount was attributable to the noncontrolling interest.
Fair value was based
Other Divestitures (Not Classified in Discontinued Operations)
In April 2022, we completed the sale of our PGW aftermarket glass business within our Wholesale - North America segment, to a third party for $361 million resulting in recognition of a $155 million pretax gain ($127 million after tax).
In September 2022, we completed the sale of a business within our Self Service segment, to a third party, resulting in proceeds of $25 million and the recognition of a $4 million pretax gain ($3 million after tax).
In May 2020, we completed the sale of a non-core telecommunications operation within our Europe segment, resulting in proceeds of $4 million and the recognition of an insignificant loss on the estimated selling price, the inputs of which included projected market multiples and any reasonable offers. Due to the uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in the Company's analysis. The inputs utilized in the fair value estimate are classified as Level 3 within the fair value hierarchy. The fair value of the net assets was measured on a non-recurring basis as of December 31, 2019.sale.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4.3. Summary of Significant Accounting Policies
Basis of Presentation
The Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("US GAAP") and the rules and regulations of the U.S. Securities and Exchange Commission.
In the current year, we changed the presentation of our Consolidated Financial Statements from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.
Principles of Consolidation
The accompanying consolidated financial statementsConsolidated Financial Statements include the accounts of LKQ Corporation and its subsidiaries. All intercompany transactions and accounts have been eliminated.
Use of Estimates
In preparing our financial statements
The preparation of the Consolidated Financial Statements in conformityaccordance with accounting principles generally accepted in the United States of America, we are requiredUS GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statementsConsolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period.reported periods. We base our estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results and outcomes could differ from those estimates.
Foreign Currency Translation
Our reporting currency is the U.S. dollar. For most of our international operations, the local currency is the functional currency. Assets and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses are reported as a component of Accumulated other comprehensive income (loss) in stockholders' equity.
Revenue Recognition
See Note 5, "Revenue Recognition"
We recognize revenue when a sales arrangement with a customer exists (e.g., contract, purchase orders, others), the transaction price is fixed or determinable and we have satisfied its performance obligations per the sales arrangement. The majority of our revenue originates from contracts with a single performance obligation to deliver parts, whereby the performance obligation is satisfied when control of the parts is transferred to the customer per the arranged shipping terms. Some of our contracts contain a combination of delivering parts and performing services, which are distinct and accounted for as separate performance obligations. Revenue for the service component is recognized as the services are rendered.
Our revenue is measured at the determinable transaction price, net of any variable considerations granted to customers. Variable considerations include the right to return parts, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. These variable considerations are estimated throughout the year based on various factors, including contract terms, historical experience and performance levels.
Sales tax and other tax amounts collected from customers for remittance to governmental authorities are excluded from revenue in the Consolidated Statements of Income and are shown as a current liability on the Consolidated Balance Sheets until remitted.
Any incremental costs to obtain a contract (commissions earned by our accounting policies relatedsales representatives on product sales) are expensed when incurred, as the amortization period of the asset would be one year or less due to revenue.the short-term nature of our contracts.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cost of Goods Sold
Our cost
Cost of goods sold includes: the price we pay for inventory, net of vendor discounts, rebates or other incentives; inbound freight and other transportation costs to bring inventory into our facilities; and overhead costs related to purchasing, warehousing and transporting our products from our distribution warehouses to our selling locations. For our salvage, remanufactured, refurbished and refurbishedmanufactured products, our cost of goods sold also includes direct and indirect labor, equipment costs, depreciation, and other overhead to transform inventory into finished products suitable for sale. Cost of goods sold also includes expenses for our service-type warranties and for our assurance-type warranty programs. See Note 5, "Revenue Recognition" for additional information related to our warranty programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include: personnel costs for employees in selling, general and administrative functions; costs to operate our branch locations, corporate offices and back office support centers; costs to transport our products from our facilities to our customers; and other selling, general and administrative expenses, such as professional fees, supplies, and advertising expenses. The costs included in selling,Selling, general and administrative expenses do not relate to inventory processing or conversion activities, and, as such, are classified below the grossGross margin line in our Consolidated Statements of Income.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash. Restricted cash includes cash for which the Company's ability to withdraw funds at any time is contractually limited. As of both December 31, 2019 and 2018, we had $5 million of restricted cash that is recorded in Other noncurrent assets on the Consolidated Balance Sheets.
Receivables and Allowance for Doubtful Accounts
In the normal course of business, we extend credit to customers after a review of each customer's credit history. We recorded a reserve for uncollectible accounts of approximately $53 million and $57 million at December 31, 2019 and 2018, respectively. The reserve is based upon the aging of the accounts receivable, our assessment of the collectability of specific customer accounts and historical experience. Receivables are written off once collection efforts have been exhausted. Recoveries of receivables previously written off are recorded when received.
Concentrations of Credit Risk
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing our cash and cash equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed of a large number of geographically diverse customers.
Inventories
We classify our inventory into the following categories: (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products.
An aftermarket product is a new vehicle product manufactured by a company other than the original equipment manufacturer. For all of our aftermarket products, excluding our aftermarket automotive glass products, cost is established based on the average price we pay for parts; for our aftermarket automotive glass products inventory, cost is established using the first-in first-out method. Inventory cost for all of our aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; LKQ will apply new parts, products or materials to these parts in order to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores. The cost of our refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs.
A salvage product is a recycled vehicle part suitable for sale as a replacement part. Cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling the vehicle. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the facility's inventory at expected selling prices, the assessment of which incorporates the sales probability based on a part's number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing, and also includes expenses incurred for freight in, direct manufacturing costs and other overhead costs.
A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Cost is established using the first-in first-out method.
For all inventory, carrying value is recorded at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.
Inventories consist of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Aftermarket and refurbished products | $ | 2,297,895 |
| | $ | 2,309,458 |
|
| Salvage and remanufactured products | 447,908 |
| | 503,199 |
|
| Manufactured products | 26,974 |
| | 23,418 |
|
| Total inventories | $ | 2,772,777 |
| | $ | 2,836,075 |
|
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of December 31, 2019, manufactured products inventory was composed of $17 million of raw materials, $3 million
of work in process, and $6 million of finished goods. As of December 31, 2018, manufactured products inventory was composed of $17 million of raw materials, $2 million of work in process, and $4 million of finished goods.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Expenditures for major additions and improvements that extend the useful life of the related asset are capitalized. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities. Depreciation is calculated using the straight-line method over the estimated useful lives or, in the case of leasehold improvements, the term of the related lease and reasonably assured renewal periods, if shorter.
Our estimated useful lives are as follows:
|
| |
Land improvements | 10-20 years |
Buildings and improvements | 20-40 years |
Machinery and equipment | 3-20 years |
Computer equipment and software | 3-10 years |
Vehicles and trailers | 3-10 years |
Furniture and fixtures | 5-7 years |
Property, plant and equipment consists of the following (in thousands):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Land and improvements | $ | 194,437 |
| | $ | 177,998 |
|
| Buildings and improvements | 384,918 |
| | 351,733 |
|
| Machinery and equipment | 679,292 |
| | 617,424 |
|
| Computer equipment and software | 153,900 |
| | 143,547 |
|
| Vehicles and trailers | 156,334 |
| | 150,824 |
|
| Furniture and fixtures | 52,601 |
| | 58,919 |
|
| Leasehold improvements | 295,534 |
| | 278,687 |
|
| Finance lease assets | 71,724 |
| | 61,310 |
|
| | 1,988,740 |
| | 1,840,442 |
|
| Less—Accumulated depreciation | (807,680 | ) | | (685,751 | ) |
| Construction in progress | 53,340 |
| | 65,471 |
|
| Total property, plant and equipment, net | $ | 1,234,400 |
| | $ | 1,220,162 |
|
We record depreciation expense associated with our refurbishing, remanufacturing, manufacturing and furnace operations as well as our distribution centers in Cost of goods sold in the Consolidated Statements of Income. We report depreciation
Stock-Based Compensation
For the restricted stock units ("RSUs") that contain both a performance-based vesting condition and a time-based vesting condition, we recognize compensation expense resulting from restructuring programs in Restructuring and acquisition related expenses. All other depreciationusing the accelerated attribution method, pursuant to which expense is reported in Depreciation and amortization. Total depreciation expenserecognized straight-line over the requisite service period for the years ended December 31, 2019, 2018, and 2017 was $174 million, $157 million, and $129 million, respectively.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excesseach separate vesting tranche of the fair valueaward. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete.entire award.
Goodwill
For performance-based RSUs ("PSUs"), the expense is tested for impairment at least annually, and we performed annual impairment tests duringcalculated using the fourth quarters of 2019, 2018 and 2017. Goodwill impairment testing may also be performedprojected award value, which is based on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates of our reporting units are established using weightingsestimate of the resultsachievement of the performance objectives, and is recognized on a discounted cash flow methodology and a comparative market multiples approach.straight-line basis over the performance period.
Based on the annual goodwill impairment test in 2019, we determined no impairment existed as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 25%.
Based on our annual goodwill impairment test in 2018, we determined the carrying value of our Aviation reporting unit exceeded the fair value estimate by more than the carrying value, thus we recorded an impairment charge of $33 million, which represented the total carrying value of goodwill in our Aviation reporting unit (subsequently sold in the third quarter of 2019). The impairment charge was due to a decrease in the fair value estimate from the prior year fair value estimate, primarily driven by a significant deterioration in the outlook for the Aviation reporting unit due to competition, customer financial issues and changing market conditions for the airplane platforms that the business services, which lowered our projected gross margin and related future cash flows. We reported the impairment charge in Impairment of net assets held for sale and goodwill in the Consolidated Statements of Income for the year ended December 31, 2018.
The changes in the carrying amount of goodwill by reportable segment are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | North America | | Europe | | Specialty | | Total |
| Balance as of January 1, 2018 | $ | 1,709,354 |
| | $ | 1,414,898 |
| | $ | 412,259 |
| | $ | 3,536,511 |
|
| Business acquisitions and adjustments to previously recorded goodwill | 6,805 |
| | 970,923 |
| | (4,838 | ) | | 972,890 |
|
| Impairment of goodwill | (33,244 | ) | | — |
| | — |
| | (33,244 | ) |
| Exchange rate effects | (9,383 | ) | | (85,532 | ) | | 216 |
| | (94,699 | ) |
| Balance as of December 31, 2018 | $ | 1,673,532 |
| | $ | 2,300,289 |
| | $ | 407,637 |
| | $ | 4,381,458 |
|
| Business acquisitions and adjustments to previously recorded goodwill | 38,913 |
| | 15,099 |
| | — |
| | 54,012 |
|
| Reclassified to net assets held for sale and discontinued operations | — |
| | (4,721 | ) | | — |
| | (4,721 | ) |
| Disposal of business | — |
| | (1,919 | ) | | — |
| | (1,919 | ) |
| Exchange rate effects | 5,599 |
| | (27,847 | ) | | (47 | ) | | (22,295 | ) |
| Balance as of December 31, 2019 | $ | 1,718,044 |
| | $ | 2,280,901 |
| | $ | 407,590 |
| | $ | 4,406,535 |
|
| Accumulated impairment losses as of December 31, 2019 | $ | (33,244 | ) | | $ | — |
| | $ | — |
| | $ | (33,244 | ) |
The componentsimpacts of other intangibles, netforfeitures on RSUs and PSUs expense are recorded as follows (in thousands):they occur.
|
| | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| Intangible assets subject to amortization | $ | 769,038 |
| | $ | 847,452 |
|
| Indefinite-lived intangible assets | | | |
| Trademarks | 81,300 |
| | 81,300 |
|
| Total | $ | 850,338 |
| | $ | 928,752 |
|
The components of intangible assets subject to amortization are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Trade names and trademarks | $ | 488,945 |
| | $ | (119,957 | ) | | $ | 368,988 |
| | $ | 496,166 |
| | $ | (94,451 | ) | | $ | 401,715 |
|
| Customer and supplier relationships | 580,052 |
| | (321,650 | ) | | 258,402 |
| | 593,517 |
| | (247,464 | ) | | 346,053 |
|
| Software and other technology related assets | 248,941 |
| | (108,979 | ) | | 139,962 |
| | 176,118 |
| | (79,283 | ) | | 96,835 |
|
| Covenants not to compete | 13,435 |
| | (11,749 | ) | | 1,686 |
| | 13,344 |
| | (10,495 | ) | | 2,849 |
|
| Total | $ | 1,331,373 |
| | $ | (562,335 | ) | | $ | 769,038 |
| | $ | 1,279,145 |
| | $ | (431,693 | ) | | $ | 847,452 |
|
The components of intangible assets acquired as part of our acquisitions in 2018 are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, 2018 |
| | Stahlgruber | | Other Acquisitions (1) | | Total |
| Trade names and trademarks | $ | 173,946 |
| | $ | 8,870 |
| | $ | 182,816 |
|
| Customer and supplier relationships | 77,980 |
| | 20,779 |
| | 98,759 |
|
| Software and other technology related assets | 33,329 |
| | 376 |
| | 33,705 |
|
| Covenants not to compete | — |
| | — |
| | — |
|
| Total | $ | 285,255 |
| | $ | 30,025 |
| | $ | 315,280 |
|
(1) The amountsFinancial assistance received from governments is recorded during the year ended December 31, 2018 exclude amounts related to our 2017 acquisitions, including a $5 million adjustment to increase other intangibles related to our 2017 acquisition of Warn.
The weighted-average amortization periods for our intangible assets acquired during the years ended December 31, 2018 and 2017 are as follows (in years):
|
| | | | | | | | | | |
| | Year Ended | | Year Ended |
| | December 31, 2018 | | December 31, 2017 |
| | Stahlgruber | | Other Acquisitions | | Total | | All Acquisitions |
| Trade names and trademarks | 18.0 |
| | 10.0 |
| | 17.6 |
| | 11.2 |
| Customer and supplier relationships | 3.0 |
| | 7.9 |
| | 4.0 |
| | 18.6 |
| Software and other technology related assets | 5.2 |
| | 6.5 |
| | 5.2 |
| | 11.1 |
| Covenants not to compete | — |
| | — |
| | — |
| | 4.4 |
| Total acquired finite-lived intangible assets | 12.4 |
| | 8.5 |
| | 12.0 |
| | 16.5 |
Our estimated useful lives for our finite-lived intangible assets are as follows:
|
| | | |
| Method of Amortization | | Useful Life |
Trade names and trademarks | Straight-line | | 4-30 years |
Customer and supplier relationships | Accelerated | | 3-20 years |
Software and other technology related assets | Straight-line | | 3-15 years |
Covenants not to compete | Straight-line | | 2-5 years |
Amortization expense for intangibles was $140 million, $137 million, and $102 million during the years ended December 31, 2019, 2018, and 2017, respectively. Estimated amortization expense for each of the five yearsperiod in the period ending December 31, 2024 is $120 million, $93 million, $80 million, $70 million and $64 million, respectively.
Net Assets Held for Sale
During the year ended December 31, 2019, we committed to plans to sell certain businesses in our North America and Europe segments. As a result, these businesses were classified as net assets held for sale and were required to be adjusted to the lower of fair value less cost to sell or carrying value, resulting in impairment charges totaling $47 million for the year ended December 31, 2019 (presented in Impairment of net assets held for sale and goodwill in the Consolidated Statements of Income).
In the third quarter of 2019, we completed the sales of 2 of these businesses, our aviation business in North America and a wholesale business in Bulgaria. The disposed businesses were immaterial, generating annualized revenue of approximately $55 million prior to the divestiture.
Excluding the Stahlgruber Czech Republic wholesale business discussed in Note 3, "Discontinued Operations," as of December 31, 2019, there were $19 million of assets held for sale, including $5 million of goodwill that was reclassified as held for sale related to our Europe segment, and $9 million of liabilities held for sale, which were recorded within Prepaid
expenses and other current assets and Other current liabilities, respectively, on the Consolidated Balance Sheets. We expect the remaining assets held for sale to be disposed of during the next twelve months. The assets held for sale generated annualized revenue of $87 million during the year ended December 31, 2019.
We are required to record net assets of our held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values were based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for our discounted cash flow analysis of the businesses were based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling pricesincur the costs that the assistance is intended to calculate the fair value, the inputs to our estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process,offset, only if it is possibleprobable that actual results could differ fromwe will meet the estimates used in our analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of December 31, 2019.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. Other than the impairment charges recorded upon the classification of certain businesses in our North America and Europe segments as held for sale discussed in the "Net Assets Held for Sale" section above, there were no material adjustments to the carrying value of long-lived assets during the years ended December 31, 2019, 2018 or 2017.
Investments in Unconsolidated Subsidiaries
Our investment in unconsolidated subsidiaries was $139 million and $179 million as of December 31, 2019 and December 31, 2018, respectively.
Europe Segment
Our investment in unconsolidated subsidiaries in Europe was $122 million and $163 million as of December 31, 2019 and December 31, 2018, respectively. We recorded equity in losses of $33 million and $65 million during the years ended December 31, 2019 and December 31, 2018, respectively, and equity in earnings of $6 million during the year ended December 31, 2017 related to our investments in unconsolidated subsidiaries in our Europe segment, mainly related to our investment in Mekonomen.
On December 1, 2016, we acquired a 26.5% equity interest in Mekonomen for an aggregate purchase price of $181 million. In October 2018, we acquired an additional $48 million of equity in Mekonomen at a discounted share price as part of its rights issue, increasing our equity interest to 26.6%. We are accounting for our interest in Mekonomen using the equity method of accounting, as our investment gives us the ability to exercise significant influence, but not control, over the investee. As of December 31, 2019, our share of the book value of Mekonomen's net assets exceeded the book value of our investment in Mekonomen by $5 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We are recording our equity in the net earnings of Mekonomen on a one quarter lag.
During the years ended December 31, 2019 and 2018, we recognized other-than-temporary impairment charges of $40 million and $71 million, respectively, which represented the difference in the carrying value and the fair value of our investment in Mekonomen. The fair value of our investment in Mekonomen was determined using the Mekonomen share prices as of the dates of our impairment tests. The impairment charges are recorded in Equity in (losses) earnings of unconsolidated subsidiaries in our Consolidated Statements of Income.
In May 2018, we received a cash dividend of $8 million (SEK 67 million) related to our investment in Mekonomen. Mekonomen announced in February 2019 that the Mekonomen Board of Directors proposed no dividend payment in 2019. The Level 1 fair value of our equity investment in the publicly traded Mekonomen common stock at December 31, 2019 was $149 million (using the Mekonomen share price of SEK 93 as of December 31, 2019) compared to a carrying value of $111 million.
In 2018, we participated in a rights issue with preferential rights for Mekonomen's existing shareholders, who were given the right to subscribe for four new Mekonomen shares per seven existing owned shares at a discounted share price. The rights issue represented a derivative instrument related to our right to acquire Mekonomen shares at a discount. We measured the derivative instrument at fair value, and we recorded a derivative loss of $5 million in Interest income and other income, net in the Consolidated Statements of Income in October 2018 upon the settlement of the derivative instrument.
North America Segment
Our investment in unconsolidated subsidiaries in the North America segment was $18 million and $16 million as of December 31, 2019 and December 31, 2018, respectively. The equity in earnings for the North America equity investments was
$1 million for the year ended December 31, 2019 and an immaterial amount for the year ended December 31, 2018; we did not have any equity in earnings in the North America segment in 2017.
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 year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record the warranty costs in Cost of goods sold in our Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Consolidated Balance Sheets based on the expected timing of the related payments.
The changes in the warranty reserve are as follows (in thousands):
|
| | | |
| Balance as of January 1, 2018 | $ | 23,151 |
|
| Warranty expense | 43,682 |
|
| Warranty claims | (43,571 | ) |
| Balance as of December 31, 2018 | 23,262 |
|
| Warranty expense | 58,253 |
|
| Warranty claims | (56,074 | ) |
| Balance as of December 31, 2019 | $ | 25,441 |
|
Self-Insurance Reserves
We self-insure a portion of employee medical benefitsconditions required under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, directors and officers liability, workers' compensation, and property coverage, under deductible insurance programs. The insurance premium costs are expensed over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of ultimate cost, which is calculated using analysis of historical data. We monitor new claims and claim development as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. Total self-insurance reserves were $109 million and $105 million, of which $54 million and $52 million was classified as current, as of December 31, 2019 and 2018, respectively, and are classified as Other accrued expenses on the Consolidated Balance Sheets. The remaining balances of self-insurance reserves are classified as Other noncurrent liabilities, which reflects management's estimates of when claims will be paid. We had outstanding letters of credit of $69 million and $65 million at December 31, 2019 and 2018, respectively, to guarantee self-insurance claims payments. While we do not expect the amounts ultimately paid to differ significantly from our estimates, our insurance reserves and corresponding expenses could be affected if future claims experience differs significantly from historical trends and assumptions.
Litigation and Related Contingencies
We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.
Stockholders' Equityassistance.
Treasury Stock
On October 25, 2018, our Board of Directors authorized a stock repurchase program under which we were authorized to purchase up to $500 million of our common stock from time to time through October 25, 2021. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Delaware law imposes restrictions on stock repurchases.
On October 25, 2019, our Board of Directors authorized an increase to our existing stock repurchase program under which the Company may purchase up to an additional $500 million of our common stock from time to time through October 25, 2022; this extended date also applies to the original repurchase program. With the increase, the Board of Directors has authorized a total of $1.0 billion of common stock repurchases.
During the year ended December 31, 2019, we repurchased 10.9 million shares of common stock for an aggregate price of $292 million. During 2018, we repurchased 2.3 million shares of common stock for an aggregate price of $60 million. As of December 31, 2019, there was $648 million of remaining capacity under our repurchase program. Repurchased shares are accounted for as treasury stock using the cost method.
NoncontrollingInterest
In July 2019, we purchased substantially all of the noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition for a purchase price of $19 million, which included the issuance of $14 million of notes payable. This purchase resulted in a net decrease to Noncontrolling interest of $10 million and a decrease to Additional paid-in capital of $9 million in our consolidated financial statements as of December 31, 2019.
In December 2019, we modified the shares of a noncontrolling interest of a subsidiary acquired in connection with the Stahlgruber acquisition and issued new redeemable shares to the minority shareholder. The new 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 the Company 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 new 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 the control of the Company, we recorded a $24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Consolidated Balance Sheets. This transaction also resulted in a decrease to Additional paid-in capital of $18 million, a decrease to Noncontrolling interest of $12 million, and a $7 million dividend payable ($2 million recorded in Other current liabilities and $5 million in Other noncurrent liabilities) in our consolidated financial statements as of December 31, 2019. The redeemable noncontrolling interest and dividend payable represent noncash financing activities in our Consolidated Statements of Cash Flows.
Income Taxes
Current income taxes are provided on income reported for financial reporting purposes, adjusted for transactions that do not enter into the computation of income taxes payable in the same year. Deferred income taxes have beenare provided to show the effect offor temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before we are able to realize their benefit or that future deductibility is uncertain. Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.
We recognize the benefits of uncertain tax positions taken or expected to be taken in tax returns in the provision for income taxes only for those positions that are more likely than not to be realized. We follow a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately forecast actual outcomes. Our policy is to include any interest and penalties associated with income tax obligations in income tax expense.
During 2017,
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, operating accounts, and deposits readily convertible to known amounts of cash.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Credit Losses
Receivables, net are reported net of an allowance for credit losses. The allowance is measured on a pool basis when similar risk characteristics exist, and a loss-rate for each pool is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions (e.g. management's evaluation of the aging of customer receivable balances and the financial condition of our customers) as well as changes in forecasted macroeconomic conditions, such as changes in the unemployment rate, gross domestic product growth rate or credit default rates.
Concentrations of Credit Risks
Financial instruments that potentially subject us to significant concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. We control our exposure to credit risk associated with these instruments by (i) placing cash and cash equivalents with several major financial institutions; (ii) holding high-quality financial instruments; and (iii) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures. In addition, our overall credit risk with respect to accounts receivable is limited to some extent because our customer base is composed of a large number of geographically diverse customers.
Inventories
Our inventory is stated at the lower of cost or net realizable value. Net realizable value can be influenced by current anticipated demand. If actual demand is lower than our estimates, additional reductions to inventory carrying value would be necessary in the period such determination is made.
The cost of our inventory is determined differently based on the category of inventory; (i) aftermarket and refurbished products, (ii) salvage and remanufactured products, and (iii) manufactured products.
An aftermarket product is a new tax legislation was signed into law making significant changesvehicle product manufactured by a company other than the original equipment manufacturer. For aftermarket products, cost is established based on the average price paid for parts. Inventory cost for aftermarket products includes expenses incurred for freight in and overhead costs; for items purchased from foreign companies, import fees and duties and transportation insurance are also included. Aftermarket automotive glass products, which we no longer stock after the sale of PGW in 2022, were costed using the first-in first-out method. Refurbished products are parts that require cosmetic repairs, such as wheels, bumper covers and lights; we will apply new parts, products or materials to these parts to produce the finished product. Refurbished inventory cost is based upon the average price we pay for cores, which are recycled automotive parts that are not suitable for sale as a replacement part without further processing. The cost of refurbished inventory also includes expenses incurred for freight in, labor and other overhead costs.
A salvage product is a recycled vehicle part suitable for sale as a replacement part. Salvage product cost is established based upon the price we pay for a vehicle, including auction, storage and towing fees, as well as expenditures for buying and dismantling the vehicle. Inventory carrying value is determined using the average cost to sales percentage at each of our facilities and applying that percentage to the Internal Revenue Code. See Note 15, "Income Taxes" for further information regardingfacility's inventory at expected selling prices, the new tax law.
Rental Expense
We recognize rental expenseassessment of which incorporates the sales probability based on a part's number of days in stock and historical demand. The average cost to sales percentage is derived from each facility's historical profitability for salvage vehicles. Remanufactured products are used parts that have been inspected, rebuilt, or reconditioned to restore functionality and performance, such as remanufactured engines and transmissions. Remanufactured inventory cost is based upon the price paid for cores and expenses incurred for freight in, direct manufacturing costs and other overhead costs.
A manufactured product is a new vehicle product. Manufactured product inventory can be a raw material, work-in-process or finished good. Manufactured product cost is established using the first-in first-out method.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost less accumulated depreciation. Depreciation is calculated using the straight-line basismethod over the respectiveestimated useful lives or, in the case of leasehold improvements, the term of the related lease terms, includingand reasonably assured renewal periods, if shorter. Depreciation expense associated with refurbishing, remanufacturing, manufacturing and furnace operations as well as distribution centers are recorded in Cost of goods sold in the Consolidated Statements of Income. Depreciation expense resulting from restructuring programs is recorded in Restructuring and transaction
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related expenses in the Consolidated Statements of Income. All other depreciation expense is reported in Depreciation and amortization in the Consolidated Statements of Income.
Expenditures for allmajor additions and improvements that extend the useful life of the related asset are capitalized. Expenditures for maintenance and repairs are recorded as incurred to Selling, general and administrative expenses in the Consolidated Statements of Income. As property, plant and equipment are sold or retired, the applicable cost and accumulated depreciation are removed from the accounts and any resulting gain or loss thereon is recognized. Construction in progress consists primarily of building and land improvements at our existing facilities.
Intangible Assets
Intangible assets consist primarily of goodwill (the cost of purchased businesses in excess of the fair value of the identifiable net assets acquired) and other specifically identifiable intangible assets, such as trade names, trademarks, customer and supplier relationships, software and other technology related assets, and covenants not to compete.
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. We performed annual impairment tests during the fourth quarters of 2022, 2021 and 2020. Goodwill and indefinite-lived intangible assets impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. The fair value estimates of our operating leases.
Foreign Currency Translation
For mostgoodwill reporting units were established using weightings of our foreign operations, the local currency is the functional currency. Assetsresults of a discounted cash flow methodology and liabilities are translated into U.S. dollars at the period-ending exchange rate. Statements of Income amounts are translated to U.S. dollars using monthly average exchange rates during the period. Translation gains and losses are reported as a component of Accumulated other comprehensive income (loss) in stockholders' equity.
Recent Accounting Pronouncements
Adoption of New Lease Standardcomparative market multiples approach.
In February 2016,
Based on the Financial Accounting Standards Boardannual goodwill and indefinite-lived intangible assets impairment test performed in the fourth quarter of 2022, we determined no impairment existed. The goodwill reporting units had a fair value estimate which exceeded the carrying value by at least 40%.
Leases
We determine if an arrangement is a lease at contract inception with lease right-of-use ("FASB"ROU") issued Accounting Standards Update 2016-02, "Leases" ("ASU 2016-02"), which represents the FASB Accounting Standards Codification Topic 842 ("ASC 842"), to increase transparency and comparability by recognizing lease assets and lease liabilities being recognized based on the Consolidated Balance Sheets and disclosing keypresent value of the future minimum lease payments over the lease term at the commencement date. In determining the present value of future lease payments, we use the incremental borrowing rate based on the information about leasing arrangements. The main difference betweenavailable at commencement date when the prior standard and ASU 2016-02implicit rate is not readily determinable. We determine the recognitionincremental borrowing rate by analyzing yield curves with consideration of lease assetsterm, country and Company specific factors. In assessing the ROU asset, we include any lease liabilities by lesseesprepayments and exclude lease incentives. We account for those leases classifiedthe lease and non-lease components of a contract as operating leases under the prior standard.
We adopted the standard in the first quarter of 2019 using the modified retrospective approacha single lease component and elected the transition package of practical expedients permitted within the new standard, which, among other things, allows us to carryforward the historical lease classification. Forfor leases with aan initial term of 12 months or less, we have elected the short-term lease exemption, which allowed us to not recognize right-of-use assets orrecord an ROU asset and lease liabilitiesliability. In assessing the lease term, we include options to renew only when it is reasonably certain that the option will be exercised.
For certain lease agreements, rental payments are adjusted periodically for qualifying leases existing at transition and new leases we may enter into in the future. Additionally, we adoptedinflation. Typically, these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components.components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
Net Assets Held for Sale
We record the net assets of held for sale businesses at the lower of fair value less cost to sell or carrying value. Fair values are based on projected discounted cash flows and/or estimated selling prices. Management's assumptions for the discounted cash flow analyses of the businesses are based on projected revenues and profits, tax rates, capital expenditures, working capital requirements and discount rates. For businesses for which we utilized estimated selling prices to calculate the fair value, the inputs to the estimates included projected market multiples and any reasonable offers. Due to uncertainties in the estimation process, it is possible that actual results could differ from the estimates used in management's analysis. The inputs utilized in the fair value estimates are classified as Level 3 within the fair value hierarchy. The fair values of the net assets were measured on a non-recurring basis as of December 31, 2022. As of January 1, 2019,December 31, 2022 and 2021, assets and liabilities held for sale were insignificant. For the year ended December 31, 2020, we recorded both an operating lease assetnet impairment charges totaling $3 million on our net assets held for sale.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Impairment of Long-Lived Assets
Long-lived assets are reviewed for possible impairment whenever events or circumstances indicate that the carrying amount of such assets may not be recoverable. If such review indicates that the carrying amount of long-lived assets is not recoverable, the carrying amount of such assets is reduced to fair value. There were no material impairments to the carrying value of long-lived assets during the years ended December 31, 2022, 2021 or 2020.
Equity Method Investments
We account for our investments in unconsolidated subsidiaries using the equity method of accounting, as our investments give us the ability to exercise significant influence, but not control, over the investee. Under the equity method of accounting, the initial investment is recorded at cost and operating lease liabilitythe investment is subsequently adjusted for its proportionate share of $1.3 billion. The preexisting deferred rent liability balancesearnings or losses and dividends, including consideration of basis differences resulting from the historical straight-line treatment of operating leases was reclassified as a reductiondifference between the initial carrying amount of the lease asset upon adoption. The adoptioninvestment and the underlying equity in net assets, as applicable.
Warranty Reserve
Assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Consolidated Balance Sheets based on the expected timing of the standard didrelated payments. We record warranty costs in Cost of goods sold in our Consolidated Statements of Income.
Self-Insurance Reserves
We self-insure a portion of our employee medical benefits under the terms of our employee health insurance program. We purchase certain stop-loss insurance to limit our liability exposure. We also self-insure a portion of our property and casualty risk, which includes automobile liability, general liability, directors and officers liability, workers' compensation, and property coverage, under deductible insurance programs. The insurance premium costs are expensed over the contract periods. A reserve for liabilities associated with these losses is established for claims filed and claims incurred but not yet reported based upon our estimate of the ultimate cost, which is calculated using an analysis of historical data. We monitor new claim and claim developments as well as trends related to the claims incurred but not reported in order to assess the adequacy of our insurance reserves. The current portion of total self-insurance reserves is recorded in Other accrued expenses on the Consolidated Balance Sheet with the noncurrent portion is recorded in Other noncurrent liabilities on the Consolidated Balance Sheet, which reflects management's estimates of when claims will be paid.
Litigation and Related Contingencies
We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our Consolidated Statementsfinancial position, results of Incomeoperations or Statements of Cash Flows as operating lease payments will still be an operating cash outflow and capital lease payments will still be a financing cash outflow. The new standard did not have a material impact on our liquidity. The standard will have no impact on our debt covenant compliance under our current agreements as the covenant calculations are based on the prior lease accounting rules.flows.
Other Recently Adopted
Treasury Stock
We record common stock purchased for treasury stock at cost.
Recent Accounting Pronouncements
During the first quarter of 2019, we adopted ASU No. 2017-12, "Targeted Improvements to Accounting for Hedging Activities" ("ASU 2017-12"), which amends the hedge accounting recognition and presentation requirements in ASC 815 ("Derivatives and Hedging"). ASU 2017-12 significantly alters the hedge accounting model by making it easier for an entity to achieve and maintain hedge accounting and provides for accounting that better reflects an entity's risk management activities. We adopted the provisions of ASU 2017-12 by applying a modified retrospective approach to existing hedging relationships as of the adoption date. The adoption of ASU 2017-12 did not have a material impact on our consolidated financial statements.
Recently Issued Accounting Pronouncements
In August 2018,September 2022, the FASBFinancial Accounting Standards Board issued ASUAccounting Standards Update No. 2018-13, "Disclosure Framework- Changes to the2022-04, “Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure Requirements for Fair Value Measurement"of Supplier Finance Program Obligations” ("ASU 2018-13"2022-04"), which removes, modifies,requires the buyer in a supplier finance program to disclose certain information about their program, including key terms, balance sheet presentation of amounts, outstanding amounts at the end of each period, and adds certain disclosure requirements in ASC 820.rollforwards of balances. ASU 2018-132022-04 is effective for fiscal years and interim periods beginning after December 15, 2019; early adoption is permitted. We are in2022 on a retrospective basis, including interim periods within those fiscal years, except for the processdisclosure of evaluating the impact of this standard on our disclosures but do not currently believe that it will have a material impact.
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" ("ASU 2016-13"), and in November 2018 issued a subsequent amendment, ASU 2018-19, "Codification Improvements to Topic 326, Financial Instruments - Credit Losses" ("ASU 2018-19"). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. ASU 2018-19 will affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope of this amendment that represent the contractual right to receive cash. ASU 2016-13 and ASU 2018-19 should be applied on either a prospective transition or modified-retrospective approach depending on the subtopic. ASU 2016-13rollforward information, which is effective prospectively for annual periodsfiscal years beginning after December 15, 2019,2023. We are currently evaluating the impact ASU 2022-04 will have on our Consolidated Financial Statements and interimwill adopt ASU 2022-04 for all reporting periods therein. in 2023.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Aftermarket and refurbished products | $ | 2,279 | | | $ | 2,168 | |
| Salvage and remanufactured products | 427 | | | 406 | |
| Manufactured products | 46 | | | 37 | |
| Total inventories | $ | 2,752 | | | $ | 2,611 | |
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed 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. As of December 31, 2021, manufactured products inventory was composed of $27 million of raw materials, $4 million of work in process, and $5 million of finished goods.
Note 5. Property, Plant and Equipment
Property, plant and equipment consists of the following (in millions):
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| Useful Life | | 2022 | | 2021 |
| Land and improvements | 10 - 20 years(1) | | $ | 217 | | | $ | 204 | |
| Buildings and improvements | 20 - 40 years | | 409 | | | 415 | |
| Machinery and equipment | 3 - 20 years | | 776 | | | 739 | |
| Computer equipment and software | 3 - 10 years | | 124 | | | 115 | |
| Vehicles and trailers | 3 - 10 years | | 141 | | | 145 | |
| Furniture and fixtures | 5 - 7 years | | 61 | | | 58 | |
| Leasehold improvements | 1 - 20 years | | 398 | | | 350 | |
| Finance lease assets | | | 107 | | | 101 | |
| | | 2,233 | | | 2,127 | |
| Less—Accumulated depreciation | | | (1,049) | | | (987) | |
| Construction in progress | | | 52 | | | 159 | |
| Total property, plant and equipment, net | | | $ | 1,236 | | | $ | 1,299 | |
(1) Only applies to land improvements as land is not depreciated.
Total depreciation expense for the years ended December 31, 2022, 2021, and 2020 was $169 million, $180 million, and $180 million, respectively.
Supplemental disclosure of noncash investing activities is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | | |
| | 2022 | | 2021 | | 2020 | | | |
| Noncash property, plant and equipment additions in accounts payable and other accrued expenses | $ | 17 | | | $ | 14 | | | $ | 19 | | | | |
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Self-Insurance Reserves
To provide for the potential liabilities for certain risks, we use a combination of insurance and self-insurance mechanisms, including a consolidated, wholly-owned captive insurance subsidiary which provides insurance coverage for workers' compensation and automotive liability claim payments that are below our deductibles under our third-party policies. The activity related to our captive insurance subsidiary was not significant for the year ended December 31, 2022.
Total self-insurance reserves were $126 million and $117 million, of which $62 million and $61 million were classified as current, as of December 31, 2022 and 2021, respectively. We had outstanding letters of credit of $69 million at both December 31, 2022 and 2021, respectively, to guarantee self-insurance claims payments. While we do not anticipateexpect the adoptionamounts ultimately paid to differ significantly from the estimates, the insurance reserves and corresponding expenses could be affected if future claims experience differs significantly from historical trends and assumptions.
Note 7. Allowance for Credit Losses
Our reserve for expected credit losses was $54 million and $53 million as of this accounting standard will haveDecember 31, 2022 and December 31, 2021, respectively. The provision for credit losses was an expense of $9 million, benefit of $5 million, and expense of $25 million for the years ended December 31, 2022, 2021, and 2020, respectively.
A roll-forward of our allowance for credit losses is as follows (in millions):
| | | | | | | | | | | | | |
| 2022 | | 2021 |
| Balance as of January 1, | $ | 53 | | | $ | 70 | | | |
| | | | | |
| Provision for (benefit from) credit losses | 9 | | (5) | | | |
| Write-offs | (2) | | | (8) | | | |
| | | | | |
| | | | | |
| Impact of foreign currency | (6) | | | (4) | | | |
| Balance as of December 31, | $ | 54 | | | $ | 53 | | | |
Note 8. Noncontrolling Interest
In October 2020, we purchased all of the noncontrolling interest of a material impactsubsidiary in our Self Service segment for a purchase price of $10 million. This purchase resulted in a net decrease to Noncontrolling interest of $10 million and a decrease to Additional paid-in-capital of $1 million in our Consolidated Financial Statements as of December 31, 2020.
We present redeemable noncontrolling interest on our consolidatedbalance 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 Consolidated Balance Sheets.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Intangible Assets
The changes in the carrying amount of goodwill by reportable segment is as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| North America | | Europe | | Specialty | | Self Service | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance as of January 1, 2021, gross | $ | 1,472 | | | $ | 2,458 | | | $ | 413 | | | $ | 282 | | | $ | 4,625 | |
| Accumulated impairment losses as of January 1, 2021 | (33) | | | — | | | — | | | — | | | (33) | |
| Balance as of January 1, 2021 | 1,439 | | | 2,458 | | | 413 | | | 282 | | | 4,592 | |
| Business acquisitions and adjustments to previously recorded goodwill | 23 | | | 18 | | | 43 | | | — | | | 84 | |
| | | | | | | | | |
| | | | | | | | | |
| Exchange rate effects | 1 | | | (137) | | | — | | | — | | | (136) | |
| Balance as of December 31, 2021 | $ | 1,463 | | | $ | 2,339 | | | $ | 456 | | | $ | 282 | | | $ | 4,540 | |
| Business acquisitions and adjustments to previously recorded goodwill | — | | | 7 | | | — | | | — | | | 7 | |
| | | | | | | | | |
| Disposal of businesses | (58) | | | — | | | — | | | (7) | | | (65) | |
| Exchange rate effects | (8) | | | (155) | | | — | | | — | | | (163) | |
| Balance as of December 31, 2022 | $ | 1,397 | | | $ | 2,191 | | | $ | 456 | | | $ | 275 | | | $ | 4,319 | |
The components of other intangibles, net are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| | Gross
Carrying
Amount | | Accumulated
Amortization | | Net | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net |
| Trade names and trademarks | $ | 489 | | | $ | (194) | | | $ | 295 | | | $ | 514 | | | $ | (175) | | | $ | 339 | |
| Customer and supplier relationships | 479 | | | (340) | | | 139 | | | 604 | | | (425) | | | 179 | |
| Software and other technology related assets | 361 | | | (223) | | | 138 | | | 345 | | | (198) | | | 147 | |
| Covenants not to compete | 6 | | | (6) | | | — | | | 13 | | | (13) | | | — | |
| Total finite-lived intangible assets | 1,335 | | | (763) | | | 572 | | | 1,476 | | | (811) | | | 665 | |
| Indefinite-lived trademarks | 81 | | | — | | | 81 | | | 81 | | | — | | | 81 | |
| Total other intangible assets | $ | 1,416 | | | $ | (763) | | | $ | 653 | | | $ | 1,557 | | | $ | (811) | | | $ | 746 | |
Estimated useful lives for the finite-lived intangible assets are as follows:
| | | | | | | | | | | |
| Method of Amortization | | Useful Life |
| Trade names and trademarks | Straight-line | | 4-30 years |
| Customer and supplier relationships | Accelerated | | 3-20 years |
| Software and other technology related assets | Straight-line | | 3-15 years |
| Covenants not to compete | Straight-line | | 2-5 years |
Amortization expense for intangibles was $95 million, $104 million, and $119 million during the years ended December 31, 2022, 2021, and 2020, respectively. Estimated amortization expense for each of the five years in the period ending December 31, 2027 is $88 million, $77 million, $69 million, $62 million and $52 million, respectively.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Equity Method Investments
The carrying value of our Equity method investments were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Segment | | Ownership as of December 31, 2022 | | December 31, 2022 | | December 31, 2021 |
MEKO AB(1)(2)(3) | Europe | | 26.6% | | $ | 129 | | | $ | 145 | |
Other(4) | | | | | 12 | | | 36 | |
| Total | | | | | $ | 141 | | | $ | 181 | |
(1) As of December 31, 2022, the Level 1 fair value of our investment in MEKO AB ("Mekonomen") was $154 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 December 31, 2022, 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.
(3) During the second quarter of 2022, we received a $3 million dividend payment from Mekonomen.
(4) In June 2022, we sold an investment in our Self Service segment resulting in a decrease to the carrying value of $22 million, recognizing an insignificant gain upon sale.
Note 11. Government Assistance
During the years ended December 31, 2022, 2021 and 2020, we recorded financial statements.assistance from foreign governments, primarily in the form of grants, as credits in the following amounts (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cost of goods sold | $ | — | | | $ | 1 | | | $ | 1 | |
| Selling, general and administrative expenses | — | | | 15 | | | 51 | |
| Total government assistance | $ | — | | | $ | 16 | | | $ | 52 | |
During the years ended December 31, 2021 and 2020 we received grants from European governments of $11 million and $43 million, respectively, with the remaining amounts relating to Canada. We did not receive material grants for the year ended December 31, 2022.
Note 12. 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 January 1, 2021 | $ | 28 | |
| Warranty expense | 74 | |
| Warranty claims | (72) | |
| Balance as of December 31, 2021 | $ | 30 | |
| Warranty expense | 77 | |
| Warranty claims | (75) | |
| |
| |
| Balance as of December 31, 2022 | $ | 32 | |
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5.13. Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue when the products are shipped to, delivered to or picked up by customers, which is the point when title has transferred and risk of ownership has passed.
Sources ofDisaggregated Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, with our parts and services revenue further disaggregated by reportable segment (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| North America | $ | 4,600,903 |
| | $ | 4,558,220 |
| | $ | 4,278,531 |
|
| Europe | 5,817,547 |
| | 5,202,231 |
| | 3,628,906 |
|
| Specialty | 1,459,396 |
| | 1,472,956 |
| | 1,301,197 |
|
| Parts and services | 11,877,846 |
| | 11,233,407 |
| | 9,208,634 |
|
| Other | 628,263 |
| | 643,267 |
| | 528,275 |
|
| Total revenue | $ | 12,506,109 |
| | $ | 11,876,674 |
| | $ | 9,736,909 |
|
Parts and Services
Our parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories 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.
In
For Wholesale - North America ourand Self Service, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; automotive glass products such as windshields; mirrors andmirrors; grilles; wheels; and large mechanical items such as engines and transmissions. InFor Europe, ourvehicle 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. InFor our Specialty operations, we serve sixseven product segments: truck and off-road; speed and performance; RV;recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories.
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Under FASB Accounting Standards Codification Topic ASC 606 ("ASC 606"), proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in thousands):
|
| | | |
| Balance as of January 1, 2018 | $ | 19,465 |
|
| Additional warranty revenue deferred | 38,736 |
|
| Warranty revenue recognized | (34,195 | ) |
| Balance as of December 31, 2018 | 24,006 |
|
| Additional warranty revenue deferred | 43,381 |
|
| Warranty revenue recognized | (40,320 | ) |
| Balance as of December 31, 2019 | $ | 27,067 |
|
Other Revenue
Revenue from other sourcesrevenue 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 our 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 both our wholesale and self service recycling operations and vehicles from OEMs and other entities that contract with us for secure disposal of "crush only" vehicles. TheRevenue from the sale of hulks in our wholesaleWholesale - North America and self service recycling operations represents one performance obligation, and revenueSelf Service segments is recognized based on a price per weightton of delivered material when the customer (processor) collects the scrap. Some adjustments may occur when
The following table sets forth our revenue disaggregated by category and reportable segment (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Wholesale - North America | $ | 4,207 | | | $ | 4,037 | | | $ | 3,786 | |
| Europe | 5,711 | | | 6,033 | | | 5,470 | |
| Specialty | 1,788 | | | 1,864 | | | 1,505 | |
| Self Service | 227 | | | 207 | | | 203 | |
| Parts and services | 11,933 | | | 12,141 | | | 10,964 | |
| Wholesale - North America | 349 | | | 339 | | | 253 | |
| Europe | 24 | | | 29 | | | 22 | |
| | | | | |
| Self Service | 488 | | | 580 | | | 390 | |
| Other revenue | 861 | | | 948 | | | 665 | |
| Total revenue | $ | 12,794 | | | $ | 13,089 | | | $ | 11,629 | |
Contract Liabilities
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the customer weighscontract period. The current portion of deferred service-type warranties are included in Other current liabilities on the scrap at their location,Consolidated Balance Sheets and revenue is adjusted accordingly.the noncurrent portion of deferred service-type warranties are included in Other noncurrent liabilities on the Consolidated Balance Sheets based on the length of the underlying service period. The balances for deferred service-type warranties are as follows (in millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Deferred service-type warranties | $ | 33 | | | $ | 32 | |
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenue by Geographic Area
See Note 16,24, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration
The amount of revenue ultimately received from the customer can vary due
Amounts related to variable consideration including returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. Under ASC 606we are required to select the “expected value method” or the “most likely amount” method in order to estimate
variable consideration. We utilize both methods in practice depending on the type of variable consideration, with contemplation of any expected reversals in revenue. We recorded a refund liability and return asset for expected returns of $97 million and $52 million, respectively, as of December 31, 2019, and $105 million and $56 million, respectively, as of December 31, 2018. The refund liability is presented separately on the balance sheet within current liabilities while the return asset is presented within Prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives which are recorded in Receivables, net on the Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $108 million and $103 million as of December 31, 2019 and December 31, 2018, respectively. While other customer incentive programs exist, we characterize them as material rights in the context of our sales transactions. We consider these programs to be immaterial to our consolidated financial statements.
Contract Costs
Under ASC 340, "Other Assets and Deferred Costs," we have elected to recognize incremental costs of obtaining a contract (commissions earned by our sales representatives on product sales) as an expense when incurred, as we believe the amortization period of the asset would be one year or less due to the short-term nature of our contracts.
Sales Taxes
We present taxes assessed by governmental authorities collected from customers on a net basis. Therefore, the taxes are excluded from revenue in our Consolidated Statements of Income and are shown as a current liability on our Consolidated Balance Sheets until remitted. are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | | Classification | | 2022 | | 2021 |
| Return asset | | Prepaid expenses and other current assets | | $ | 58 | | | $ | 58 | |
| Refund liability | | Refund liability | | 109 | | | 107 | |
| Variable consideration reserve | | Receivables, net | | 136 | | | 144 | |
Note 6.14. Restructuring and AcquisitionTransaction Related Expenses
Acquisition 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:
Acquisition related expenses, which include external costs such as legal, accounting and advisory fees, were $2 million for the year ended December 31, 2019.
Acquisition related expenses for the year ended December 31, 2018 were $18 million, which included external costs primarily related to our May 2018 acquisition of Stahlgruber.
Acquisition related expenses totaled $15 million for the year ended December 31, 2017. Acquisition related expenses for 2017 included $5 million of costs for our acquisition of Andrew Page, primarily related to legal and other professional fees associated with the CMA review. The remaining acquisition related costs for the year ended December 31, 2017 consisted of external costs for (i) completed acquisitions, (ii) pending acquisitions as of December 31, 2017, including $4 million related to Stahlgruber, and (iii) potential acquisitions that were terminated.
20192022 Global Restructuring ProgramPlan
In the secondfourth 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 2024 with an estimated total incurred cost of between $30 million and $40 million.
1 LKQ Europe Plan
In 2019, we began implementingannounced 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 three 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,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.
During
Acquisition Integration Plans
As we complete the year ended December 31, 2019,acquisition of a business, we incurred $37 million of restructuring expenses primarilymay incur costs related to inventory write-downs, employee-relatedintegrating the acquired business into our current business structure and systems. These costs are typically incurred within a year from the acquisition date and facility exit costs. Of thesevary in magnitude depending on the size and complexity of the related integration activities. We expect to incur an insignificant amount of future expenses $17 million, primarilyto complete any open integration plans.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the expenses incurred related to branch consolidation and brand rationalization within our Andrew Page operations, was recorded withinrestructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
| Plan | | Expense Type | | 2022 | | 2021 | | 2020 |
| 2022 Global Plan | | Employee related costs | | $ | 6 | | | $ | — | | | $ | — | |
| | Facility exit costs | | 1 | | | — | | | — | |
| | | | | | | | |
| | Other costs | | 3 | | | — | | | — | |
| | Total | | $ | 10 | | | $ | — | | | $ | — | |
| | | | | | | | |
| 2019/2020 Global Plan | | Employee related costs | | $ | — | | | $ | 4 | | | $ | 19 | |
| | Facility exit costs | | 1 | | | 7 | | | 23 | |
| | Inventory related costs (1) | | — | | | — | | | 7 | |
| | Other costs | | — | | | — | | | 7 | |
| | Total | | $ | 1 | | | $ | 11 | | | $ | 56 | |
| | | | | | | | |
| 1 LKQ Europe Plan | | Employee related costs | | $ | 1 | | | $ | 6 | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | Total | | $ | 1 | | | $ | 6 | | | $ | — | |
| | | | | | | | |
| Acquisition Integration Plans | | Employee related costs | | $ | 2 | | | $ | — | | | $ | 7 | |
| | Facility exit costs | | 1 | | | — | | | — | |
| | Other costs | | — | | | — | | | 2 | |
| | Total | | $ | 3 | | | $ | — | | | $ | 9 | |
| | | | | | | | |
| Total restructuring expenses | | | | $ | 15 | | | $ | 17 | | | $ | 65 | |
(1) Recorded to Cost of goods sold in the Consolidated Statement of Income during
The following table sets forth the year ended December 31, 2019, and $20 million was recorded within Restructuring and acquisition related expenses. We currently expect to incur additional expenses of between $5 million and $10 million through the end of 2020 to complete the program.
Acquisition Integration Plans
During the year ended December 31, 2019, we incurred $18 million of restructuring expenses primarilycumulative plan costs by segment related to our acquisition integration effortsrestructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Program Costs |
| | Wholesale - North America | | Europe | | Specialty | | Self Service | | Total |
| 2022 Global Plan | | $ | — | | | $ | 10 | | | $ | — | | | $ | — | | | $ | 10 | |
| 2019/2020 Global Plan | | 43 | | | 59 | | | 2 | | | 2 | | | 106 | |
| 1 LKQ Europe Plan | | $ | — | | | $ | 7 | | | $ | — | | | $ | — | | | $ | 7 | |
The following table sets forth the liability recorded related to our restructuring plans (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 Global Plan | | 2019/20 Global Plan | | 1 LKQ Europe Plan |
| | December 31, | | December 31, | | December 31, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Employee related costs (1) | | $ | 3 | | | $ | — | | | $ | 1 | | | $ | 2 | | | $ | 1 | | | $ | 4 | |
Facility exit costs (2) | | 1 | | | — | | | 6 | | | 9 | | | — | | | — | |
| Other costs | | — | | | — | | | 2 | | | 3 | | | — | | | — | |
| Total | | $ | 4 | | | $ | — | | | $ | 9 | | | $ | 14 | | | $ | 1 | | | $ | 4 | |
(1) Reported in Accrued payroll-related liabilities on our Europe segment. TheseConsolidated Balance Sheets.
(2) Reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Consolidated Balance Sheets.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transaction Related Expenses
The following table sets forth the transaction related expenses included $14 millionincurred (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | 2021 | | 2020 | |
Professional fees (1) | | $ | 5 | | | $ | 3 | | | $ | — | | |
| Other expenses | | — | | | — | | | 8 | (2) |
| Transaction related expenses | | $ | 5 | | | $ | 3 | | | $ | 8 | | |
(1) Included external costs such as legal, accounting and advisory fees related to completed and potential transactions.
(2) Primarily resulted from the resolution of a purchase price matter related to the integration ofStahlgruber transaction for an amount above our acquisition of Andrew Page, including $4 million within Cost of goods sold in the Consolidated Statement of Income.prior estimate.
During the year ended December 31, 2018, we incurred $14 million of restructuring expenses. Expenses incurred during the year ended December 31, 2018 primarily consisted of $10 million related to the integration of our acquisition of Andrew Page and $3 million related to our Specialty segment. These integration activities included the closure of duplicate facilities and termination of employees.
During the year ended December 31, 2017, we incurred $5 million of restructuring expenses. Expenses incurred during the year ended December 31, 2017 were primarily a result of our ongoing integration activities in our North America and Specialty segments. Expenses incurred were primarily related to facility closure and the merger of existing facilities into larger distribution centers.
We expect to incur additional expenses related to the integration of certain of our acquisitions into our existing operations in 2020. These integration activities are expected to include the closure of duplicate facilities, rationalization of personnel in connection with the consolidation of overlapping facilities with our existing business, and moving expenses. Future expenses to complete these integration plans are expected to be less than $5 million.
1 LKQ Europe Program
In September 2019, we announced a multi-year program 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 program, we will reorganize 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 currently expect to incur between $45 million and $55 million in personnel and inventory related restructuring charges through 2024 as a result of executing the 1 LKQ Europe program. In future periods, we may identify additional initiatives and projects under the 1 LKQ Europe program that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects.
Note 7.15. Stock-Based Compensation
In order to attract and retain employees, non-employee directors, consultants, and other persons associated with us,the Company, we grant equity-based awards under the LKQ Corporation 1998 Equity Incentive Plan (the “Equity Incentive Plan”). The total number of shares approved by our stockholders for issuance under the Equity Incentive Plan is 70 million shares, subject to antidilutionanti-dilution and other adjustment provisions. We have granted restricted stock units ("RSUs"),RSUs, stock options, and restricted stock under the Equity Incentive Plan. Of the shares approved by our stockholders for issuance under the Equity Incentive Plan, 108.2 million shares remained available for issuance as of December 31, 2019.2022. We expect to issue new or treasury shares of common stock to cover past and future equity grants.
RSUs
RSUs
The RSUs we have issued vest over periods of up to five years,, subject to a continued service condition. Currently outstanding RSUs (other than PSUs, which are described below) contain either a time-based vesting condition or a combination of a performance-based vesting condition and a time-based vesting condition, in which case both conditions must be met before any RSUs vest. For all of the RSUs containing a performance-based vesting condition, the Companywe must report positive diluted earnings per share, subject to certain adjustments, during any fiscal year period within five years following the grant date. Each RSU converts into one share of LKQ common stock on the applicable vesting date. The grant date fair value of RSUs is based on the market price of LKQ stock on the grant date.
Starting with our 2019 grants, participants who are eligible for retirement (defined as a voluntary separation of service from the Company after the participant has attained at least 60 years of age and completed at least five years of service) will continue to vest in their awards following retirement; if retirement occurs during the first year of the vesting period (for RSUs subject to a time-based vesting condition) or the first year of the performance period (for RSUs with a performance-based vesting condition), the participant vests in a prorated amount of the RSU grant based on the portion of the year employed. For our RSU grants prior to 2019, participants forfeit their unvested shares upon retirement.
Outstanding unvested RSUs earn dividend equivalents at the same rate as dividends on LKQ’s common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award.
The Compensation and Human Capital Committee of our Board of Directors (the "Compensation Committee") approved the grant of 270,388; 189,204;169,605, 208,603, and 235,537230,360 RSUs to our executive officers that included both a performance-based vesting condition and a time-based vesting condition in 2019, 2018,2022, 2021, and 2017,2020, respectively. The performance-based vesting conditions for the 2019, 2018,2022, 2021, and 20172020 grants to our executive officers have been satisfied.
The fair value of RSUs that vested during the years ended December 31, 2019, 2018,2022, 2021, and 20172020 was $22$38 million, $27$37 million, and $28$27 million, respectively; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity related to our RSUs under the Equity Incentive Plan for the year ended December 31, 2019:2022 (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 (in thousands) (1) |
| Unvested as of January 1, 2019 | 1,475,682 |
| | $ | 34.94 |
| | | | |
Granted (2) | 1,021,535 |
| | $ | 27.82 |
| | | | |
| Vested | (796,936 | ) | | $ | 32.50 |
| | | | |
| Forfeited / Canceled | (88,255 | ) | | $ | 33.38 |
| | | | |
| Unvested as of December 31, 2019 | 1,612,026 |
| | $ | 31.72 |
| | | | |
| Expected to vest after December 31, 2019 | 1,458,089 |
| | $ | 31.75 |
| | 2.5 | | $ | 52,054 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Unvested as of January 1, 2022 | 1.4 | | | $ | 34.85 | | | | | |
Granted (2) | 0.7 | | | $ | 49.21 | | | | | |
| Vested | (0.7) | | | $ | 37.36 | | | | | |
| Forfeited / Canceled | (0.1) | | | $ | 43.01 | | | | | |
| Unvested as of December 31, 2022 | 1.3 | | | $ | 41.02 | | | | | |
| Expected to vest after December 31, 2022 | 1.1 | | | $ | 41.41 | | | 2.5 | | $ | 57 | |
(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of the Company'sLKQ's stock on the last day of eachthe 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 the Company’sLKQ’s common stock.
| |
(2) | The weighted average grant date fair value of RSUs granted during the years ended December 31, 2018 and 2017 was $42.58 and $32.15, respectively. |
In(2) The weighted average grant date fair value of RSUs granted during the years ended December 31, 2021 and 2020 was $39.22 and $31.68, respectively.
PSUs
Starting in 2019, we granted performance-basedPSUs with a three-year RSUs ("PSUs")performance period to certain employees, including our executive officers, under our Equity Incentive Plan. As these awards are performance-based, the exact number of shares to be paid out may be up to twice the grant amount, depending on the Company'sour performance and the achievement of certain performance metrics (adjusted earnings per share, average organic parts and services revenue growth, and average return on invested capital) over the applicable three year period endingperformance periods.
Outstanding unvested PSUs earn dividend equivalents at the same rate as dividends on LKQ's common stock. The dividend equivalents are subject to the same vesting requirements, restrictions and forfeiture provisions as the original award.
The fair value of PSUs that vested during the year ended December 31, 2021. In 2019, we also granted an immaterial amount2022 was $9 million; the fair value of performance-based RSUs to employees that have different performance metrics than those described above.PSUs vested is based on the market price of LKQ stock on the date vested.
The following table summarizes activity related to our PSUs under the Equity Incentive Plan for the year ended December 31, 2019:2022 (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, 2022 | 0.5 | | | $ | 31.96 | | | | | |
Granted (2) | 0.1 | | | $ | 48.95 | | | | | |
Performance-based adjustment (3) | 0.1 | | | $ | 32.53 | | | | | |
| Vested | (0.2) | | | $ | 27.74 | | | | | |
| | | | | | | |
| Unvested as of December 31, 2022 | 0.5 | | | $ | 37.87 | | | | | |
| Expected to vest after December 31, 2022 | 0.4 | | | $ | 37.55 | | | 0.8 | | $ | 24 | |
|
| | | | | | | | | | | | |
| | Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) (1) |
| Unvested as of January 1, 2019 | — |
| | $ | — |
| | | | |
Granted (2) | 136,170 |
| | $ | 27.69 |
| | | | |
| Unvested as of December 31, 2019 | 136,170 |
| | $ | 27.69 |
| | | | |
| Expected to vest after December 31, 2019 | 136,170 |
| | $ | 27.69 |
| | 2.3 | | $ | 4,861 |
|
| |
(1) | The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of the Company's stock on the last day of each period multiplied by the number of units at target) that would have been received by the holders had all PSUs vested. This amount changes based on the market price of the Company’s common stock and the achievement of the performance metrics relative to the established targets. |
| |
(2) | Represents the number of PSUs at target payout. |
Stock Options
Stock options vest over periods of up to five years, subject to a continued service condition. Stock options expire either six years or ten years from the date they are granted. NaN options were granted during 2019 and 2018. NaN options vested during the year ended December 31, 2019; all of our outstanding options are fully vested.
The following table summarizes activity related to our stock options under the Equity Incentive Plan for the year ended December 31, 2019:
|
| | | | | | | | | | | | |
| | Number Outstanding | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value (in thousands) (1) |
| Balance as of January 1, 2019 | 1,051,494 |
| | $ | 10.15 |
| | | | |
| Exercised | (926,809 | ) | | $ | 9.77 |
| | | | $ | 19,725 |
|
| Canceled | (10,091 | ) | | $ | 21.25 |
| | | | |
| Balance as of December 31, 2019 | 114,594 |
| | $ | 12.26 |
| | 0.1 | | $ | 2,686 |
|
| Exercisable as of December 31, 2019 | 114,594 |
| | $ | 12.26 |
| | 0.1 | | $ | 2,686 |
|
(1) The aggregate intrinsic value of outstanding and exercisable options represents the total pretax intrinsic value (the difference between the fair value of the Company'sLKQ's stock on the last day of each period and the exercise price, multiplied by the number of options where the fair value exceeds the exercise price)units) that would have been received by the option holders had all option holders exercised their options as of the last day of the period indicated.expected to vest PSUs vested. This amount changes based on the market price of LKQ’s common stock and the Company’s common stock.achievement of the performance metrics relative to the established targets.
(2) Represents the number of PSUs at target payout. The aggregate intrinsicweighted average grant date fair value of stock options exercisedPSUs granted during the years ended December 31, 20182021 and 2017December 31, 2020 was $18 million$38.31 and $21 million,$31.85, respectively.
(3) Represents the net adjustment to the number of shares issuable upon vesting of performance-based PSUs based on the Company's actual financial performance metrics for the three year performance period ended December 31, 2022.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation Expense
For the RSUs that contain both a performance-based vesting condition and a time-based vesting condition, we recognize
Stock-based compensation expense underand the accelerated attribution method, pursuant to which expense is recognized over the requisite service period for each separate vesting tranche of the award. During the years ended December 31, 2019, 2018, and 2017, we recognized $11 million, $8 million, and $7 million, respectively, of stock based compensation expense related to the RSUs containing a performance-based vesting condition. For all other awards, which are subject to only a time-based vesting condition, we recognize compensation expense on a straight-line basis over the requisite service period of the entire award. Forfeitures are recorded as they occur.
The components of pre-tax stock-based compensation expense for our continuing operations are as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| RSUs | $ | 27,695 |
| | $ | 22,760 |
| | $ | 22,826 |
|
| Stock options and other | — |
| | — |
| | 6 |
|
| Total stock-based compensation expense | $ | 27,695 |
| | $ | 22,760 |
| | $ | 22,832 |
|
The following table sets forth the classification of total stock-based compensation expenseresulting tax benefits included in ourthe Consolidated Statements of Income for our continuing operationswere as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Stock-based compensation expense | $ | 38 | | | $ | 34 | | | $ | 29 | |
| Income tax benefit | (9) | | | (8) | | | (7) | |
| Stock-based compensation expense, net of tax | $ | 29 | | | $ | 26 | | | $ | 22 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cost of goods sold | $ | 477 |
| | $ | 469 |
| | $ | 434 |
|
| Selling, general and administrative expenses | 27,218 |
| | 22,291 |
| | 22,398 |
|
| Total stock-based compensation expense | 27,695 |
| | 22,760 |
| | 22,832 |
|
| Income tax benefit | (6,227 | ) | | (5,220 | ) | | (5,459 | ) |
| Total stock-based compensation expense, net of tax | $ | 21,468 |
| | $ | 17,540 |
| | $ | 17,373 |
|
We havedid not capitalizedcapitalize any stock-based compensation costs during the years ended December 31, 2019, 2018,2022, 2021, and 2017.2020.
As of December 31, 2019,2022, unrecognized compensation expense related to unvested RSUs and PSUs is expected to be recognized as follows (in thousands)millions):
| | | | | | | |
| | | |
| Unrecognized Compensation Expense | | |
| 2023 | $ | 20 | | | |
| 2024 | 12 | | | |
| 2025 | 6 | | | |
| 2026 | 3 | | | |
| | | |
| Total unrecognized compensation expense | $ | 41 | | | |
|
| | | |
| 2020 | $ | 16,776 |
|
| 2021 | 10,863 |
|
| 2022 | 6,054 |
|
| 2023 | 2,641 |
|
| 2024 | 182 |
|
| Total unrecognized compensation expense | $ | 36,516 |
|
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 target.current achievement estimates.
Note 8.16. Earnings Per Share
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share incorporate the incremental shares issuable upon the assumed exercise of stock options and the assumed vesting of RSUs. Certain of our RSUs and stock options were excluded from the calculation of diluted earnings per share because they were antidilutive, but these equity instruments could be dilutive in the future.
The following chart sets forth the computation of earnings per share (in thousands,millions, except per share amounts):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Income from continuing operations | $ | 543,415 |
| | $ | 487,565 |
| | $ | 536,974 |
|
| Denominator for basic earnings per share—Weighted-average shares outstanding | 310,155 |
| | 314,428 |
| | 308,607 |
|
| Effect of dilutive securities: | | | | | |
| RSUs | 393 |
| | 409 |
| | 544 |
|
| PSUs | — |
| | — |
| | — |
|
| Stock options | 421 |
| | 1,012 |
| | 1,498 |
|
| Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 310,969 |
| | 315,849 |
| | 310,649 |
|
| Basic earnings per share from continuing operations | $ | 1.75 |
| | $ | 1.55 |
| | $ | 1.74 |
|
Diluted earnings per share from continuing operations (1) | $ | 1.75 |
| | $ | 1.54 |
| | $ | 1.73 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Income from continuing operations | $ | 1,144 | | | $ | 1,091 | | | $ | 640 | |
| Denominator for basic earnings per share—Weighted-average shares outstanding | 277.1 | | | 296.8 | | | 304.6 | |
| Effect of dilutive securities: | | | | | |
| RSUs | 0.6 | | | 0.7 | | | 0.4 | |
| PSUs | 0.3 | | | 0.2 | | | — | |
| | | | | |
| Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 278.0 | | 297.7 | | 305.0 |
| Basic earnings per share from continuing operations | $ | 4.13 | | | $ | 3.68 | | | $ | 2.10 | |
Diluted earnings per share from continuing operations (1) | $ | 4.12 | | | $ | 3.67 | | | $ | 2.10 | |
(1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities.
The following table sets forth the number of employee stock-based compensation awards outstanding but not included in the computation of diluted earnings per share because their effect would have been antidilutive securities was insignificant for the years ended December 31, 2019, 2018,2022 and 2017 (in thousands):2021 and was 0.7 million for the year ended December 31, 2020.
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Antidilutive securities: | | | | | |
| RSUs | 586 |
| | 410 |
| | 37 |
|
| Stock options | 24 |
| | 8 |
| | 39 |
|
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9.17. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Foreign
Currency
Translation | | Unrealized Gain (Loss) on Cash Flow Hedges | | Unrealized Gain (Loss) on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated
Other Comprehensive Loss |
| Balance as of January 1, 2020 | | $ | (171) | | | $ | 5 | | | $ | (32) | | | $ | (3) | | | $ | (201) | |
| Pretax income (loss) | | 113 | | | (48) | | | (9) | | | — | | | 56 | |
| Income tax effect | | — | | | 12 | | | 3 | | | — | | | 15 | |
| Reclassification of unrealized loss | | — | | | 40 | | | 7 | | | — | | | 47 | |
| Reclassification of deferred income taxes | | — | | | (10) | | | (2) | | | — | | | (12) | |
| Disposal of businesses | | 1 | | | — | | | — | | | — | | | 1 | |
| Other comprehensive loss from unconsolidated subsidiaries | | — | | | — | | | — | | | (5) | | | (5) | |
| Balance as of December 31, 2020 | | $ | (57) | | | $ | (1) | | | $ | (33) | | | $ | (8) | | | $ | (99) | |
| Pretax (loss) income | | (64) | | | 3 | | | 11 | | | — | | | (50) | |
| Income tax effect | | — | | | (1) | | | (3) | | | — | | | (4) | |
| Reclassification of unrealized (gain) loss | | — | | | (2) | | | 2 | | | — | | | — | |
| Reclassification of deferred income taxes | | — | | | 1 | | | (1) | | | — | | | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| Balance as of December 31, 2021 | | $ | (121) | | | $ | — | | | $ | (24) | | | $ | (8) | | | $ | (153) | |
| Pretax (loss) income | | (216) | | | — | | | 49 | | | — | | | (167) | |
| Income tax effect | | — | | | — | | | (14) | | | — | | | (14) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Disposal of business | | 4 | | | — | | | — | | | — | | | 4 | |
| Other comprehensive income from unconsolidated subsidiaries | | — | | | — | | | — | | | 7 | | | 7 | |
| Balance as of December 31, 2022 | | $ | (333) | | | $ | — | | | $ | 11 | | | $ | (1) | | | $ | (323) | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | Foreign
Currency
Translation | | Unrealized Gain (Loss)
on Cash Flow Hedges | | Unrealized (Loss) Gain
on Pension Plans | | Other Comprehensive (Loss) Income from Unconsolidated Subsidiaries | | Accumulated
Other
Comprehensive
(Loss) Income |
| Balance at January 1, 2017 | | $ | (272,529 | ) | | $ | 8,091 |
| | $ | (2,737 | ) | | $ | — |
| | $ | (267,175 | ) |
| Pretax income (loss) | | 206,451 |
| | (44,550 | ) | | 361 |
| | — |
| | 162,262 |
|
| Income tax effect | | (7,366 | ) | | 16,390 |
| | (100 | ) | | — |
| | 8,924 |
|
| Reclassification of unrealized loss (gain) | | — |
| | 50,090 |
| | (3,519 | ) | | — |
| | 46,571 |
|
| Reclassification of deferred income taxes | | — |
| | (18,483 | ) | | 659 |
| | — |
| | (17,824 | ) |
| Disposal of business, net | | 1,511 |
| | — |
| | (3,436 | ) | | — |
| | (1,925 | ) |
| Other comprehensive loss from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | (1,309 | ) | | (1,309 | ) |
| Balance at December 31, 2017 | | $ | (71,933 | ) | | $ | 11,538 |
| | $ | (8,772 | ) | | $ | (1,309 | ) | | $ | (70,476 | ) |
| Pretax (loss) income | | (113,030 | ) | | 37,552 |
| | 1,132 |
| | — |
| | (74,346 | ) |
| Income tax effect | | 4,507 |
| | (8,846 | ) | | (403 | ) | | — |
| | (4,742 | ) |
| Reclassification of unrealized gain | | — |
| | (37,009 | ) | | (54 | ) | | — |
| | (37,063 | ) |
| Reclassification of deferred income taxes | | — |
| | 8,653 |
| | 22 |
| | — |
| | 8,675 |
|
| Other comprehensive loss from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | (2,343 | ) | | (2,343 | ) |
| Adoption of ASU 2018-02 | | 2,859 |
| | 2,486 |
| | — |
| | — |
| | 5,345 |
|
| Balance at December 31, 2018 | | $ | (177,597 | ) | | $ | 14,374 |
| | $ | (8,075 | ) | | $ | (3,652 | ) | | $ | (174,950 | ) |
| Pretax income (loss) | | 7,083 |
| | 23,850 |
| | (31,801 | ) | | — |
| | (868 | ) |
| Income tax effect | | — |
| | (5,579 | ) | | 8,579 |
| | — |
| | 3,000 |
|
| Reclassification of unrealized gain | | — |
| | (35,686 | ) | | (782 | ) | | — |
| | (36,468 | ) |
| Reclassification of deferred income taxes | | — |
| | 8,399 |
| | 145 |
| | — |
| | 8,544 |
|
| Disposal of business | | (379 | ) | | — |
| | — |
| | — |
| | (379 | ) |
| Other comprehensive income from unconsolidated subsidiaries | | — |
| | — |
| | — |
| | 236 |
| | 236 |
|
| Balance at December 31, 2019 | | $ | (170,893 | ) |
| $ | 5,358 |
|
| $ | (31,934 | ) |
| $ | (3,416 | ) |
| $ | (200,885 | ) |
The amounts of unrealized gains and losses on ourthe Cash Flow Hedges reclassified to ourthe Consolidated Statements of Income are as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | Classification | | 2022 | | 2021 | | 2020 |
| Unrealized (losses) gains on interest rate swaps | Interest expense | | $ | — | | | $ | (1) | | | $ | (3) | |
| Unrealized gains on cross currency swaps | Interest expense | | — | | | 1 | | | 10 | |
Unrealized gains (losses) on cross currency swaps (1) | Interest income and other income, net | | — | | | 2 | | | (38) | |
Unrealized gains (losses) on foreign currency forward contracts (1) | Interest income and other income, net | | — | | | — | | | (9) | |
| Total | | | $ | — | | | $ | 2 | | | $ | (40) | |
|
| | | | | | | | | | | | | | |
| | | | | Year Ended |
| | | | | December 31 |
| | | Classification | | 2019 | | 2018 | | 2017 |
| Unrealized gains on interest rate swaps | | Interest expense | | $ | 5,872 |
| | $ | 5,482 |
| | $ | 373 |
|
| Unrealized gains on cross currency swaps | | Interest expense | | 15,794 |
| | 11,105 |
| | 6,835 |
|
Unrealized gains (losses) on cross currency swaps (1) | | Interest income and other income, net | | 14,020 |
| | 20,422 |
| | (57,298 | ) |
| Total | | | | $ | 35,686 |
| | $ | 37,009 |
| | $ | (50,090 | ) |
| |
(1) | The amounts reclassified to Interest income and other income, net in our Consolidated Statements of Income offset the impact of the remeasurement of the underlying transactions. |
Net unrealized losses and gains related to our pension plans were reclassified to Interest income and other income, net in ourthe Consolidated Statements of Income during each of the years ended December 31, 20192022, 2021, and 2018.2020.
Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss)loss to the Provision for income taxes when the related gains and losses are released to the Consolidated Statements of Income.
LKQ CORPORATION AND SUBSIDIARIES
During the first quarter of 2018, we adopted ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which allowed a reclassification from Accumulated other comprehensive income (loss) to Retained earnings for stranded tax effects resulting from the reduction of the U.S. federal statutory income tax rate to 21% from 35% due to the enactment of the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). As a result of the adoption of ASU 2018-02 in the first quarter of 2018, we recorded a $5 million reclassification to increase Accumulated other comprehensive income (loss) and decrease Retained earnings.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10.18. Long-Term Obligations
Long-term obligations consist of the following (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 | | December 31, 2021 |
| | Maturity Date | | Interest Rate | | Amount | | Interest Rate | | Amount |
| Senior Secured Credit Agreement: | | | | | | | | | | |
| | | | | | | | | | |
| Revolving credit facilities | | January 2024 | | 4.24 | % | (1) | $ | 1,786 | | | 1.10 | % | (1) | $ | 1,887 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Senior Notes: | | | | | | | | | | |
| Euro Notes (2024) | | April 2024 | | 3.88 | % | | 535 | | | 3.88 | % | | 569 | |
| Euro Notes (2028) | | April 2028 | | 4.13 | % | | 268 | | | 4.13 | % | | 284 | |
| | | | | | | | | | |
| Notes payable | | Various through October 2030 | | 3.25 | % | (1) | 16 | | | 2.80 | % | (1) | 23 | |
| Finance lease obligations | | | | 3.69 | % | (1) | 48 | | | 3.50 | % | (1) | 52 | |
| Other debt | | | | 2.28 | % | (1) | 9 | | | 1.10 | % | (1) | 9 | |
| Total debt | | | | | | 2,662 | | | | | 2,824 | |
| Less: long-term debt issuance costs | | | | | | (6) | | | | | (12) | |
| | | | | | | | | | |
| Total debt, net of debt issuance costs | | | | | | 2,656 | | | | | 2,812 | |
| Less: current maturities, net of debt issuance costs | | | | | | (34) | | | | | (35) | |
| Long term debt, net of debt issuance costs | | | | | | $ | 2,622 | | | | | $ | 2,777 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Senior secured credit agreement: | | | |
| Term loans payable | $ | 341,250 |
| | $ | 350,000 |
|
| Revolving credit facilities | 1,268,008 |
| | 1,387,177 |
|
| U.S. Notes (2023) | 600,000 |
| | 600,000 |
|
| Euro Notes (2024) | 560,650 |
| | 573,350 |
|
| Euro Notes (2026/28) | 1,121,300 |
| | 1,146,700 |
|
| Receivables securitization facility | — |
| | 110,000 |
|
| Notes payable through October 2030 at weighted average interest rates of 3.2% and 2.0%, respectively | 26,971 |
| | 23,056 |
|
| Finance lease obligations at weighted average interest rates of 4.1% and 4.5%, respectively | 40,837 |
| | 39,966 |
|
| Other debt at weighted average interest rates of 1.8% and 1.8%, respectively | 113,010 |
| | 117,448 |
|
| Total debt | 4,072,026 |
| | 4,347,697 |
|
| Less: long-term debt issuance costs | (29,990 | ) | | (36,906 | ) |
| Less: current debt issuance costs | (280 | ) | | (291 | ) |
| Total debt, net of debt issuance costs | 4,041,756 |
| | 4,310,500 |
|
| Less: current maturities, net of debt issuance costs | (326,367 | ) | | (121,826 | ) |
| Long term debt, net of debt issuance costs | $ | 3,715,389 |
| | $ | 4,188,674 |
|
The scheduled maturities of long-term obligations outstanding at December 31, 20192022 are as follows (in thousands)millions):
| | | | | |
| Amount |
| |
| |
2023 (1) | $ | 34 | |
| 2024 | 2,334 | |
| 2025 | 10 | |
| 2026 | 3 | |
| 2027 | 3 | |
| Thereafter | 278 | |
Total debt (2) | $ | 2,662 | |
|
| | | |
2020 (1) | $ | 326,648 |
|
2021 (1) | 133,951 |
|
| 2022 | 25,912 |
|
| 2023 | 21,650 |
|
2024 (1) | 2,427,714 |
|
| Thereafter | 1,136,151 |
|
Total debt (2) | $ | 4,072,026 |
|
(2)The total debt amounts presented above reflect the gross values to be repaid (excluding debt issuance costs of $6 million as of December 31, 2022).
| |
(1) | Of the $600 million U.S. Notes (2023) that were redeemed in January 2020, in the table above $185 million is included in 2020 (reflecting the amount repaid with cash on hand), $105 million is included in 2021 (reflecting the amount repaid using borrowings under the receivables securitization facility), and $310 million is included in 2024 (reflecting the amount repaid using borrowings under the revolving credit facility). |
| |
(2) | The total debt amounts presented above exclude debt issuance costs totaling $30 million as of December 31, 2019. |
Senior Secured Credit Agreement
On January 5, 2023, we entered into a new credit agreement and terminated the senior secured credit agreement. See Note 25, "Subsequent Events" for further information related to the senior secured credit agreement and new credit agreement.
On November 20, 2018,23, 2021, LKQ Corporation LKQ Delaware LLP, and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 36 to the Fourth Amended and Restated Credit Agreement ("Credit Agreement"), which amended the Fourth Amended and Restated Credit Agreement dated January 29, 2016 by modifying(the "Prior Credit Agreement"), which modified certain termsinterest rates to provide that (1) increase the total availability under the revolving credit facility's multicurrency component from $2.75 billion to $3.15 billion; (2) reduce the margin on borrowings by 25 basis points at the September 30, 2018 leverage ratio, and reduce the number of leverage pricing tiers; (3) extend the maturity date by one year to January 29, 2024; (4) reduce the unused facility fee depending on leverage category; (5) increase the capacity for incurring additional indebtedness under our receivables securitization facility; (6) increase the maximum borrowing limit of swingline loans and add the ability to borrowLoans denominated in British Pounds and Euros; and (7) make other immaterial or clarifying modifications and amendments to the terms of the Credit Agreement. Borrowings will continue toeuros shall bear interest at variable rates.a rate per annum equal to the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the Applicable Rate, (2) Swingline Loans denominated in pounds sterling shall bear interest at a rate per annum equal to the Sterling Overnight Index Average as administered by the Bank of England (or any successor administrator of the Sterling Overnight Index Average) (“SONIA”) plus the Applicable Rate, (3) Revolving Loans denominated in pounds sterling shall bear interest at a rate per annum equal to SONIA plus an adjustment equal to 0.0326% per annum plus the Applicable Rate, and (4) Loans denominated in Swiss francs
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
shall bear interest at a rate per annum equal to the Swiss Average Rate Overnight as administered by SIX Swiss Exchange AG (or any successor administrator of the Swiss Average Rate Overnight) plus the Applicable Rate. All other interest rates remain the same.
We also had the option to prepay outstanding amounts under the revolving credit facility are due and payable upon maturity of thePrior Credit Agreement on January 29, 2024. Term loan borrowings, which totaled $341 million as of December 31, 2019, are due and payable in quarterly installments equal to approximately $4 million on the last day of each fiscal quarter, with the remaining balance due and payable on January 29, 2024. The increase in the revolving credit facility's multicurrency component of $400 million was used in part to pay down $240 million of the term loan (to the new $350 million amount that was outstanding as of the date of the amendment); the remainder was used for general corporate purposes.
without penalty. We arewere required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds arewere not reinvested within twelve months. We also haveDuring the second quarter of 2021, we exercised our option to prepay the outstanding amounts underamount on the term loan, and thus did not have any term loan borrowings as of December 31, 2021.
The Prior Credit Agreement without penalty.
The Credit Agreement containscontained customary representations and warranties and customary covenants that provideprovided limitations and conditions on our ability to enter into certain transactions. The Prior Credit Agreement also containscontained financial and affirmativenegative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
On April 18, 2022, S&P Global Ratings assigned LKQ an issuer credit rating of 'BBB-' with a stable outlook. This rating upgrade triggered the banks in our credit facility to release all collateral required under the Prior Credit Agreement and suspend all collateral requirements.
Borrowings under the Prior Credit Agreement bearbore interest at variable rates, which dependdepended on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin iswas subject to change in increments of 0.25% depending on ourthe net leverage ratio. Interest payments arewere due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. Including the effect of the interest rate swap agreements described in Note 11, "Derivative Instruments and Hedging Activities," the weighted average interest rates on borrowings outstanding under the Credit Agreement at December 31, 2019 and 2018 were 1.6% and 1.9%, respectively. We also paypaid a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee iswas subject to change in increments of 0.05% depending on our net leverage ratio. In addition, we paypaid a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which arewere due quarterly in arrears.
The total capacity under the revolving credit facility's multicurrency component was $3,150 million. Amounts outstanding under the revolving credit facility were due and payable upon maturity of the Prior Credit Agreement on January 29, 2024. Of the total borrowings outstanding under the Credit Agreement, therethere were $18 million classified asno current maturities atas of December 31, 2019 compared to $9 million at2022 or December 31, 2018.2021. As of December 31, 2019,2022, there were letters of credit outstanding in the aggregate amount of $69 million.$69 million. The amounts available under the revolving credit facilities arewere reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at December 31, 20192022 was $1.8 billion.$1,295 million.
Related to the execution of Amendment No. 3 to the Fourth Amended and Restated Credit Agreement in November 2018, we incurred $4 million of fees, the majority of which were capitalized as an offset to Long-Term Obligations and are amortized over the term of the agreement. The amounts recorded as a loss on debt extinguishment in the Consolidated Statements of Income for the years ended December 31, 2018 and 2017 were primarily related to the write-off of capitalized debt issuance costs related to various amendments to our Fourth Amended and Restated Credit Agreement.
U.S. Notes (2023)
In 2013, we issued $600 million aggregate principal amount of 4.75% senior notes due 2023 (the "U.S. Notes (2023)"). The U.S. Notes (2023) were governed by the Indenture dated as of May 9, 2013 (the "U.S. Notes (2023) Indenture") among LKQ Corporation, certain of our subsidiaries (the "Guarantors"), the trustee, paying agent, transfer agent and registrar. The U.S. Notes (2023) were registered under the Securities Act of 1933.
The U.S. Notes (2023) bore interest at a rate of 4.75% per year from the most recent payment date on which interest had been paid or provided for. Interest on the U.S. Notes (2023) was payable in arrears on May 15 and November 15 of each year. The U.S. Notes (2023) were fully and unconditionally guaranteed, jointly and severally, by the Guarantors.
The U.S. Notes (2023) and the related guarantees were, respectively, LKQ Corporation's and each Guarantor's senior unsecured obligations and were subordinated to all of the Guarantors' existing and future secured debt to the extent of the assets
securing that secured debt. In addition, the U.S. Notes (2023) were effectively subordinated to all of the liabilities of our subsidiaries that were not guaranteeing the U.S. Notes (2023) to the extent of the assets of those subsidiaries.
On January 10, 2020, we redeemed the U.SU.S. Notes (2023) at a redemption price equal to 101.583% of the principal amount of the U.S. Notes (2023) plus accrued and unpaid interest thereon to, but not including, January 10, 2020. The total redemption payment was $614 million, including an early-redemption premium of $9 million and accrued and unpaid interest of $4 million. In the first quarter of 2020, we will recordrecorded a loss on debt extinguishment of $13 million on the Consolidated Statement of Income related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs.
Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. ("LKQ Italia"), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the "Euro Notes (2024)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the "Euro Notes (2024) Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the "Euro Notes (2024) Subsidiaries"), the trustee, and the paying agent, transfer agent, and registrar.
The Euro Notes (2024) bear interest at a rate of 3.875% per year from the date of original issuance or from the most recent payment date on which interest has been paid or provided for.
Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors").
The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia's and each Euro Notes (2024) Guarantor’sGuarantor's senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of Euronext Dublin.
The Euro Notes (2024) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after January 1, 2024, we may redeem some or all of the Euro Notes (2024) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. We may be required to make an offer to purchase the Euro Notes (2024) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2024) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Italia's senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the upgrade to BBB- by S&P Global Ratings in April 2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to comply with certain restrictive covenants.
Euro Notes (2026/28)2028)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1.0 billion€1,000 million aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "2026 notes""Euro Notes (2026)") and €250 million senior notes due 2028 (the "2028 notes""Euro Notes (2028)" and, together with the 2026 notes,Euro Notes (2026), the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were or will be used (i) to (i) finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
The 2026 notes and 2028 notes bear interestOn April 1, 2021, we redeemed the 3.625% Euro Notes (2026) at a rateredemption price equal to 101.813% of 3.625%the principal amount of the Euro Notes (2026) plus accrued and 4.125%unpaid interest thereon to, but not including, April 1, 2021. The total redemption payment was $915 million (€777 million), respectively, per year fromincluding an early redemption premium of $16 million (€14 million) and accrued and unpaid interest of $16 million (€14 million). In the datesecond quarter of original2021, we recorded a loss on debt extinguishment of $24 million related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance or from the most recent payment date on which interest has been paid or provided for. costs.
Interest on the Euro Notes (2026/28)(2028) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2026/28)(2028) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2026/28)(2028) Subsidiaries (the "Euro Notes (2026/28)(2028) Guarantors").
The Euro Notes (2026/28)(2028) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2026/28) Guarantor’s(2028) Guarantor's senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes
(2026/28) Guarantors’ (2028) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2026/28)(2028) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2026/28)(2028) to the extent of the assets of those subsidiaries. The Euro Notes (2026/28)(2028) have been listed on the Global Exchange Market of Euronext Dublin.
The Euro Notes (2026/28)(2028) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2021, we may redeem some or all of the 2026 notes at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. On or after April 1, 2023, we may redeem some or all of the 2028 notesEuro Notes (2028) at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We also may redeem up to 35% of the 2026 notes and up to 35% of the 2028 notes before April 1, 2021 with the net cash proceeds from certain equity offerings. We may be required to make an offer to purchase the Euro Notes (2026/28)(2028) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2026/28)(2028) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
Related
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Euro Holdings' senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the execution of the Euro Notes (2026/28)upgrade to BBB- by S&P Global Ratings in April 2018, we incurred $16 million of fees, which were capitalized as an offset2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to Long-Term Obligations and are amortized over the term of the Euro Notes (2026/28).comply with certain restrictive covenants.
Restricted Payments
Our senior secured credit agreement and our senior notes indentures contain limitations on payment of cash dividends or other distributions of assets. Based on limitations in effect under our senior secured credit agreement and senior notes indentures, the maximum amount of dividends we could pay as of December 31, 2019 was approximately $1.9 billion. The limit on the payment of dividends is calculated using historical financial information and will change from period to period.
Receivables Securitization Facility
On December 20, 2018, we amended the terms of our receivables securitization facility with MUFGMitsubishi UFJ Financial Group, Inc. ("MUFG") to: (i) extend the term of the facility to November 8, 2021; (ii) increase the maximum amount available to $110 million; and (iii) make other clarifying and updating changes. Under the facility, LKQ sellssold an ownership interest in certain receivables, related collections and security interests to MUFG for the benefit of conduit investors and/or financial institutions for cash proceeds. Upon payment ofEffective July 30, 2021, we terminated the receivables by customers, rather than remitting to MUFG the amounts collected, LKQ retains such collections as proceeds for the sale of new receivables generated by certain of the ongoing operations of the Company.securitization facility.
The sale of the ownership interest in the receivables is accounted for as a secured borrowing on our Consolidated Balance Sheets, under which the receivables included in the program collateralize the amounts invested by MUFG, the conduit investors and/or financial institutions (the "Purchasers"). The receivables are held by LKQ Receivables Finance Company, LLC ("LRFC"), a wholly owned bankruptcy-remote special purpose subsidiary of LKQ, and therefore, the receivables are available first to satisfy the creditors of LRFC, including the Purchasers. While there were no borrowings on our receivables securitization facility as of December 31, 2019, $132 million of net receivables were available as collateral for the investment under the receivables facility as of December 31, 2019; there were also $132 million of net receivables available as collateral as of December 31, 2018.
Under the receivables facility, we pay variable interest rates plus a margin on the outstanding amounts invested by the Purchasers. The variable rates are based on (i) commercial paper rates, (ii) LIBOR, or (iii) base rates, and are payable monthly in arrears. The commercial paper rate is the applicable variable rate unless conduit investors are not available to invest in the receivables at commercial paper rates. In such case, financial institutions will invest at the LIBOR rate or at base rates. We also pay a commitment fee on the excess of the investment maximum over the average daily outstanding investment, payable monthly in arrears. The outstanding balance was $110 million as of December 31, 2018, and there was 0 outstanding balance as of December 31, 2019. At December 31, 2018, we classified the outstanding balance as long-term on the Consolidated Balance Sheets because we have the ability and intent to refinance these borrowings on a long-term basis.
Note 11.19. 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 our current policies, we use derivatives to manage our exposure to variable interest rates on our senior secured debt and changing foreign exchange rates for certain foreign currency denominated transactions. We do not hold or issue derivatives for trading purposes.
Cash Flow Hedges
We hold
Through June 30, 2021, we held interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement with the objective of minimizing the impact of interest rate fluctuations and stabilizing cash flows. Under the terms of the interest rate swap agreements, we pay the fixed interest rate and receive payment at a variable rate of interest based on LIBOR for the respective currency of each interest rate swap agreement’s notional amount. Changes in the fair value of the interest rate swap agreements are recorded in Accumulated Other Comprehensive Income (Loss) and are reclassified to Interest expense when the underlying interest payment has an impact on earnings. Our interest rate swap contracts have maturity dates ranging from January to June 2021. In December 2018, we sold two interest rate swap contracts with a notional amount of $110 million.
From time to time, we may hold foreign currency forward contracts related to certain foreign currency denominated intercompany transactions, with the objective of minimizing the impact of fluctuating exchange rates on these future cash flows. Under the terms of the foreign currency forward contracts, we will sell the foreign currency in exchange for U.S. dollars at a fixed rate on the maturity dates of the contracts. Changes in the fair value of the foreign currency forward contracts are recorded in Accumulated Other Comprehensive Income (Loss) and reclassified to Interest income and other income, net when the underlying transaction has an impact on earnings.
We hold cross currency swaps, which containcontained an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively convertconverted variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The interest rate swap agreements and cross currency swaps are intended to minimize the impactwere settled as of fluctuating exchange ratesJune 2021 and interest rates on theno cash flows resulting from the related intercompany financing arrangements.flow hedges remained outstanding as of December 31, 2022 and 2021. Changes in the fair value of the derivative instruments arewere recorded in Accumulated Other Comprehensive Income (Loss)other comprehensive income (loss) and arewere reclassified to Interest expense and Interest income and other income,Other (income) expense, net when the underlying transactions havehad an impact on earnings. For certain of the swaps, the notional amount steps down by €4 million quarterly, with the balance maturing at the end of the contract. Our cross currency swaps have maturity dates in October 2020 and January 2021. In October 2019, one of our cross currency swaps matured with a notional amount of $92 million (€80 million).
The activity related to our previously matured cash flow hedges is included in Note 17, "Accumulated Other Comprehensive Income (Loss)" and presented in either operating activities or financing activities in our Consolidated Statements of Cash Flows.
The following tables summarize the notional amounts and fair values of our designated cash flow hedges as of December 31, 2019 and 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | | |
| | | Notional Amount | | Fair Value at December 31, 2019 (USD) |
| | | December 31, 2019 | | Other Current Assets | | Other Noncurrent Assets | | Other Accrued Expenses | | Other Noncurrent Liabilities |
| Interest rate swap agreements | | | | | | | | |
| USD denominated | | $ | 480,000 |
| | $ | — |
| | $ | 3,262 |
| | $ | — |
| | $ | — |
|
| Cross currency swap agreements | | | | | | | | |
| USD/euro | | $ | 466,621 |
| | 2,975 |
| | 181 |
| | 970 |
| | 23,349 |
|
| Total cash flow hedges | | $ | 2,975 |
| | $ | 3,443 |
| | $ | 970 |
| | $ | 23,349 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Notional Amount | | Fair Value at December 31, 2018 (USD) |
| | | December 31, 2018 | | Other Current Assets | | Other Noncurrent Assets | | Other Accrued Expenses | | Other Noncurrent Liabilities |
| Interest rate swap agreements | | | | | | | | |
| USD denominated | | $ | 480,000 |
| | $ | — |
| | $ | 14,967 |
| | $ | — |
| | $ | — |
|
| Cross currency swap agreements | | | | | | | | |
| USD/euro | | $ | 574,315 |
| | 211 |
| | 7,669 |
| | 127 |
| | 40,870 |
|
| Total cash flow hedges | | $ | 211 |
| | $ | 22,636 |
| | $ | 127 |
| | $ | 40,870 |
|
While certain derivative instruments executed with the same counterparty are subject to master netting arrangements, we present our cash flow hedge derivative instruments on a gross basis on our 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 Consolidated Balance Sheets of $1 million at December 31, 2019. The impact of netting the fair values of these contracts would result in a decrease to Other noncurrent assets and Other noncurrent liabilities on our Consolidated Balance Sheets of $1 million and $14 million at December 31, 2019 and 2018, respectively.
The activity related to our cash flow hedges is included in Note 9, "Accumulated Other Comprehensive Income (Loss)." As of December 31, 2019, we estimate that we will reclassify $12 million of derivative gains (net of tax) from Accumulated Other Comprehensive Income (Loss) to Interest expense in our Consolidated Statements of Income within the next 12 months. We estimate that we will also reclassify $8 million of derivative losses (net of tax) from Accumulated Other Comprehensive Income (Loss) to Interest income and other income, net in our Consolidated Statements of Income within the next 12 months; the reclassification of derivative losses to Interest income and other income, net offsets the projected impact of the remeasurement of the underlying transactions.
Other Derivative Instruments Not Designated as Hedges
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, and therefore the contracts are adjusted to fair value through our results of operations as of each balance sheet date, which could result in volatility in our earnings.transactions. The notional amount and fair value of these contracts at December 31, 20192022 and 2018,2021, along with the effect on our results of operations in 2019, 2018during the years ended December 31, 2022, 2021, and 2017,2020, were immaterial.not material.
Note 12.20. 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 year ended December 31, 2019,2022, 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.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 as of December 31, 20192022 and December 31, 20182021 (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of December 31, 2022 | | Fair Value Measurements as of December 31, 2022 |
| Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 7 | | | $ | — | | | $ | — | | | $ | 7 | |
| | | | | | | |
| Deferred compensation liabilities | 73 | | | — | | | 73 | | | — | |
| | | | | | | |
| | | | | | | |
| Total Liabilities | $ | 80 | | | $ | — | | | $ | 73 | | | $ | 7 | |
|
| | | | | | | | | | | | | | | |
| | Balance as of December 31, 2019 | | Fair Value Measurements as of December 31, 2019 |
| Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash surrender value of life insurance | $ | 60,637 |
| | $ | — |
| | $ | 60,637 |
| | $ | — |
|
| Interest rate swaps | 3,262 |
| | — |
| | 3,262 |
| | — |
|
| Cross currency swap agreements | 3,156 |
| | — |
| | 3,156 |
| | — |
|
| Total Assets | $ | 67,055 |
| | $ | — |
| | $ | 67,055 |
| | $ | — |
|
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 11,539 |
| | $ | — |
| | $ | — |
| | $ | 11,539 |
|
| Deferred compensation liabilities | 63,981 |
| | — |
| | 63,981 |
| | — |
|
| Cross currency swap agreements | 24,319 |
| | — |
| | 24,319 |
| | — |
|
| Total Liabilities | $ | 99,839 |
| | $ | — |
| | $ | 88,300 |
| | $ | 11,539 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of December 31, 2021 | | Fair Value Measurements as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 18 | | | $ | — | | | $ | — | | | $ | 18 | |
| Deferred compensation liabilities | 89 | | | — | | | 89 | | | — | |
| Total Liabilities | $ | 107 | | | $ | — | | | $ | 89 | | | $ | 18 | |
|
| | | | | | | | | | | | | | | |
| | Balance as of December 31, 2018 | | Fair Value Measurements as of December 31, 2018 |
| Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | |
| Cash surrender value of life insurance | $ | 47,649 |
| | $ | — |
| | $ | 47,649 |
| | $ | — |
|
| Interest rate swaps | 14,967 |
| | — |
| | 14,967 |
| | — |
|
| Cross currency swap agreements | 7,880 |
| | — |
| | 7,880 |
| | — |
|
| Total Assets | $ | 70,496 |
| | $ | — |
| | $ | 70,496 |
| | $ | — |
|
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 5,209 |
| | $ | — |
| | $ | — |
| | $ | 5,209 |
|
| Deferred compensation liabilities | 48,984 |
| | — |
| | 48,984 |
| | — |
|
| Cross currency swap agreements | 40,997 |
| | — |
| | 40,997 |
| | — |
|
| Total Liabilities | $ | 95,190 |
| | $ | — |
| | $ | 89,981 |
| | $ | 5,209 |
|
The cash surrender value of life insurance is included in Other noncurrent assets on our Consolidated Balance Sheets. The current portion of deferred compensation is included in Accrued payroll-related liabilities and the current portion of contingent consideration liabilities is included in Other current liabilities on ourthe Consolidated Balance Sheets; deferred compensation liabilities and the noncurrent portion of these amounts iscontingent consideration liabilities are included in Other noncurrent liabilities on ourthe Consolidated Balance Sheets based on the expected timing of the related payments. The balance sheet classification of the interest rate swaps and cross currency swap agreements is presented in Note 11, "Derivative Instruments and Hedging Activities."
Our Level 2 assets and liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the cash surrender value of life insurance and deferred compensation liabilities from third party sources, which determine the net asset values for our accounts usinguse quoted market prices, investment allocations and reportable trades. We value our other derivative instruments using a third party valuation model that performs a 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.
We also have equity investments recorded in Other noncurrent assets that are reported at fair value. We have used net asset value as a practical expedient to value these equity investments and thus they are excluded from the fair value hierarchy disclosure.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Consolidated Balance Sheets at cost. Based on market conditions as of both December 31, 20192022 and 2018,2021, the fair value of our credit agreementthe Prior Credit Agreement borrowings reasonably approximated the carrying values of $1.6 billion$1,786 million and $1.7 billion,$1,887 million, respectively. In addition, based on market conditions, the fair value of the outstanding borrowings under the receivables facility reasonably approximated the carrying value of $110 million at December 31, 2018; as of December 31, 2019, there were 0 outstanding borrowings under the receivables facility. As of December 31, 20192022 and December 31, 2018, the fair values of the U.S. Notes (2023) were approximately $609 million and $574 million, respectively, compared to a carrying value of $600 million at each date. As of December 31, 2019 and December 31, 2018,2021, the fair values of the Euro Notes (2024) were approximately $632$535 million and $586$605 million, respectively, compared to carrying values of $561$535 million and $573$569 million, respectively. As of December 31, 2019,2022 and 2021, the fair valuevalues of the Euro Notes (2026/28) was $1.2 billion(2028) were $254 million and $301 million, respectively, compared to a carrying valuevalues of $1.1 billion; as of December 31, 2018, the fair value of the Euro Notes (2026/28) approximated the carrying value of $1.1 billion.$268 million and $284 million, respectively.
The fair value measurements of the borrowings under ourthe credit agreement and receivables facility 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 December 31, 20192022 and 2021 to assume these obligations. The fair value of our U.S. Notes (2023) is classified as Level 1 within the fair value hierarchy since it is determined based upon observable market inputs including quoted market prices in an active market. The fair values of ourthe Euro Notes (2024) and Euro Notes (2026/28)(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.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 13.21. Leases
We lease certain warehouses, distribution centers, retail stores, office space, land, vehicles and equipment. We determine if an arrangement is a lease at inception. Operating lease right-of-use ("ROU") assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. As the implicit rate for most of our leases is not readily determinable, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of future payments. Upon adoption of the new lease standard, we utilized our incremental borrowing rate as of the date of adoption. We determine our incremental borrowing rate by analyzing yield curves with consideration of lease term, and country and company specific factors. The operating lease ROU asset also includes any lease prepayments and excludes lease incentives.
Many of our leases include one or more options to renew, with renewal terms that can extend the lease term from 1 to 40 years or more. For each lease, we consider whether we are reasonably certain to exercise these options to extend. Other contracts may contain termination options that we assess to determine whether we are reasonably certain not to exercise those options. Certain leases also include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Some of our lease agreements include rental payments adjusted periodically for inflation. Most of these adjustments are considered variable lease costs. Other variable lease costs consist of certain non-lease components that are disclosed as lease costs due to our election of the practical expedient to combine lease and non-lease components and include items such as variable payments for utilities, property taxes, common area maintenance, sales taxes, and insurance.
For leases with an initial term of 12 months or less, we have not recognized an operating lease ROU asset or operating lease liability on the Consolidated Balance Sheets; we recognize lease expense for these leases on a straight-line basis over the lease terms.
We guarantee the residual values for the majority of our leased vehicles. The residual values decline over the lease termsterm to a defined percentage of original cost. In the event the lessor does not realize the residual value when a vehicle is sold, we would be responsible for a portion of the shortfall. Similarly, if the lessor realizes more than the residual value when a vehicle is sold, we would be paid the amount realized over the residual value. Had we terminated all of our operating leases subject to these guarantees at December 31, 2019, our portion of the guaranteed residual value would have totaled approximately $67 million. Other than the residual value guarantees associated with our vehicles discussed above, we do not have any other material residual value guarantees or restrictive covenants.
The amounts recorded on the Consolidated Balance SheetSheets as of December 31, 20192022 and 2021 related to our lease agreements are as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| Leases | | Classification | | 2022 | | 2021 |
| Assets | | | | | | |
| Operating lease ROU assets, net | | Operating lease assets, net | | $ | 1,227 | | | $ | 1,361 | |
| Finance lease assets, net | | Property, plant and equipment, net | | 52 | | | 53 | |
| Total leased assets | | | | $ | 1,279 | | | $ | 1,414 | |
| Liabilities | | | | | | |
| Current | | | | | | |
| Operating | | Current portion of operating lease liabilities | | $ | 188 | | | $ | 203 | |
| Finance | | Current portion of long-term obligations | | 17 | | | 15 | |
| Noncurrent | | | | | | |
| Operating | | Long-term operating lease liabilities, excluding current portion | | 1,091 | | | 1,209 | |
| Finance | | Long-term obligations, excluding current portion | | 31 | | | 37 | |
| Total lease liabilities | | | | $ | 1,327 | | | $ | 1,464 | |
|
| | | | | | |
| Leases | | Classification | | December 31, 2019 |
| | | | | |
| Assets | | | | |
| Operating lease assets, net | | Operating lease assets, net | | $ | 1,308,511 |
|
| Finance lease assets, net | | Property, plant and equipment, net | | 39,077 |
|
| Total leased assets | | | | $ | 1,347,588 |
|
| Liabilities | | | | |
| Current | | | | |
| Operating | | Current portion of operating lease liabilities | | $ | 221,527 |
|
| Finance | | Current portion of long-term obligations | | 9,409 |
|
| Noncurrent | | | | |
| Operating | | Long-term operating lease liabilities, excluding current portion | | 1,137,597 |
|
| Finance | | Long-term obligations, excluding current portion | | 31,428 |
|
| Total lease liabilities | | | | $ | 1,399,961 |
|
The components of lease expense are as follows (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Lease Cost | | 2022 | | 2021 | | 2020 |
| Operating lease cost | | $ | 282 | | | $ | 314 | | | $ | 308 | |
| Short-term lease cost | | 16 | | | 9 | | | 7 | |
| Variable lease cost | | 96 | | | 97 | | | 98 | |
| Finance lease cost | | | | | | |
| Amortization of leased assets | | 12 | | | 10 | | | 10 | |
| Interest on lease liabilities | | 2 | | | 2 | | | 2 | |
| Sublease income | | (5) | | | (3) | | | (2) | |
| Net lease cost | | $ | 403 | | | $ | 429 | | | $ | 423 | |
|
| | | | | | |
| | | | | Year Ended |
| Lease Cost | | Classification | | December 31, 2019 |
| | | | | |
| Operating lease cost | | Cost of goods sold | | $ | 13,416 |
|
| Operating lease cost | | Selling, general and administrative expenses | | 303,619 |
|
| Short-term lease cost | | Selling, general and administrative expenses | | 9,392 |
|
| Variable lease cost | | Selling, general and administrative expenses | | 95,899 |
|
| Finance lease cost | | | | |
| Amortization of leased assets | | Depreciation and amortization | | 10,277 |
|
| Interest on lease liabilities | | Interest expense | | 1,546 |
|
| Sublease income | | Selling, general and administrative expenses | | (1,640 | ) |
| Net lease cost | | | | $ | 432,509 |
|
The future minimum lease commitments under our noncancelable operating leases at December 31, 2018 were as follows (in thousands):
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | | |
| Years ending December 31: | |
| 2019 | $ | 294,269 |
|
| 2020 | 256,172 |
|
| 2021 | 210,632 |
|
| 2022 | 158,763 |
|
| 2023 | 131,518 |
|
| Thereafter | 777,165 |
|
| Future Minimum Lease Payments | $ | 1,828,519 |
|
The future minimum lease commitments under our leases at December 31, 20192022 are as follows (in thousands)millions):
|
| | | | | | | | | | | |
| | Operating leases | | Finance leases (1) | | Total |
| Years ending December 31: | | | | | |
| 2020 | $ | 288,726 |
| | $ | 10,121 |
| | $ | 298,847 |
|
| 2021 | 249,168 |
| | 8,743 |
| | 257,911 |
|
| 2022 | 200,546 |
| | 7,166 |
| | 207,712 |
|
| 2023 | 167,858 |
| | 3,591 |
| | 171,449 |
|
| 2024 | 138,502 |
| | 3,138 |
| | 141,640 |
|
| Thereafter | 760,030 |
| | 19,381 |
| | 779,411 |
|
| Future minimum lease payments | 1,804,830 |
| | 52,140 |
| | 1,856,970 |
|
| Less: Interest | 445,706 |
| | 11,303 |
| | 457,009 |
|
| Present value of lease liabilities | $ | 1,359,124 |
| | $ | 40,837 |
| | $ | 1,399,961 |
|
| |
(1) | Amounts are included in the scheduled maturities of long-term obligations in "Note 10, "Long-Term Obligations" and in the “Liquidity and Capital Resources” section of Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of this Annual Report on Form 10-K. |
| | | | | | | | | | | | | | | | | |
| Years Ending December 31, | Operating leases | | Finance leases (1) | | Total |
| 2023 | $ | 269 | | | $ | 18 | | | $ | 287 | |
| 2024 | 233 | | | 10 | | | 243 | |
| 2025 | 203 | | | 8 | | | 211 | |
| 2026 | 173 | | | 4 | | | 177 | |
| 2027 | 143 | | | 3 | | | 146 | |
| Thereafter | 652 | | | 16 | | | 668 | |
| Future minimum lease payments | 1,673 | | | 59 | | | 1,732 | |
| Less: Interest | 394 | | | 11 | | | 405 | |
| Present value of lease liabilities | $ | 1,279 | | | $ | 48 | | | $ | 1,327 | |
(1) Amounts are included in the scheduled maturities of long-term obligations in Note 18, "Long-Term Obligations".
As of December 31, 2019, we have additional2022, minimum operating lease payments for leases that have not yet commenced of $144 million.commenced totaled $73 million. These operating leases will commence in the nextnext 18 months with lease termsterms of 1 3to 25 years.15 years. Most of these leases have not commenced asbecause the assets are in the process of being constructed. The amount includes payments expected to be made under the Benelux region central distribution center lease commencing in early 2021 after construction is completed. The lease has a term of 15 years with two renewal options of 5 years each.
Other information related to leases wasis as follows:
| | | | | | | | | | | | | | |
| | December 31, |
| Lease Term and Discount Rate | | 2022 | | 2021 |
| Weighted-average remaining lease term (years) | | | | |
| Operating leases | | 9.1 | | 9.4 |
| Finance leases | | 8.5 | | 8.9 |
| Weighted-average discount rate | | | | |
| Operating leases | | 5.75 | % | | 5.20 | % |
| Finance leases | | 3.69 | % | | 3.50 | % |
|
| | | |
Lease Term and Discount Rate | | December 31, 2019 |
| | |
Weighted-average remaining lease term (years) | | |
Operating leases | | 9.5 |
|
Finance leases | | 9.2 |
|
Weighted-average discount rate | | |
Operating leases | | 5.2 | % |
Finance leases | | 4.1 | % |
|
| | | | |
| | | Year Ended |
| Supplemental cash flows information (in thousands) | | December 31, 2019 |
| | | |
| Cash paid for amounts included in the measurement of lease liabilities | | |
| Operating cash outflows from operating leases | | $ | 297,712 |
|
| Financing cash outflows from finance leases | | 11,744 |
|
| Leased assets obtained in exchange for new finance lease liabilities | | 13,326 |
|
| Leased assets obtained in exchange for new operating lease liabilities | | 144,142 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| Supplemental cash flows information (in millions) | | 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
| Operating cash outflows from operating leases | | $ | 284 | | | $ | 286 | | | $ | 299 | |
| Financing cash outflows from finance leases | | 14 | | | 13 | | | 12 | |
| Leased assets obtained in exchange for finance lease liabilities | | 15 | | | 10 | | | 25 | |
| Leased assets obtained in exchange for operating lease liabilities | | 159 | | | 248 | | | 244 | |
Note 14.22. Employee Benefit Plans
Defined Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and 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.
On June 28, 2019, we approved an amendment to terminate our primary defined benefit plan in the U.S. (the "U.S. Plan") and freeze all related benefit accruals, effective June 30, 2019. The distribution of the U.S. Plan assets pursuant to the termination will not be made until the plan termination satisfies all regulatory requirements, which is expected to be completed in 2020. U.S. Plan participants will receive their full accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third party annuity provider. The resulting settlement effect of the U.S. Plan termination will be determined based on prevailing market conditions, the lump sum offer participation rate of eligible participants, the actual lump sum distributions, and annuity purchase rates at the date of distribution. As a result, we are currently unable to reasonably estimate either the timing or the final amount of such settlement charges. Based on the valuation performed as of December 31, 2019, the U.S. Plan has an underfunded status of $8 million.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Funded Status
The table below summarizes the funded status of ourthe defined benefit plans (in thousands)millions):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Change in projected benefit obligation: | | | |
| Projected benefit obligation - beginning of year | $ | 201,492 |
| | $ | 126,031 |
|
Acquisitions (1) | 2,071 |
| | 79,211 |
|
| Service cost | 3,592 |
| | 3,215 |
|
| Interest cost | 4,077 |
| | 3,476 |
|
| Participant contributions | 408 |
| | 415 |
|
| Actuarial (gain) / loss | 32,018 |
| | (989 | ) |
Benefits paid (2) | (6,849 | ) | | (4,447 | ) |
| Curtailment | (6 | ) | | — |
|
Settlement (3) | (8,493 | ) | | (756 | ) |
| Currency impact | (2,922 | ) | | (4,664 | ) |
| Projected benefit obligation - end of year | $ | 225,388 |
| | $ | 201,492 |
|
| Change in fair value of plan assets: | | | |
| Fair value - beginning of year | $ | 91,672 |
| | $ | 82,852 |
|
Acquisitions (1) | — |
| | 251 |
|
| Actual return on plan assets | 2,558 |
| | 3,018 |
|
| Employer contributions | 4,740 |
| | 9,975 |
|
| Participant contributions | 408 |
| | 415 |
|
| Benefits paid | (6,770 | ) | | (2,788 | ) |
Settlement (3) | (8,493 | ) | | — |
|
| Currency impact | (810 | ) | | (2,051 | ) |
| Fair value - end of year | $ | 83,305 |
| | $ | 91,672 |
|
| Funded status at end of year (liability) | $ | (142,083 | ) | | $ | (109,820 | ) |
| | | | |
| Accumulated benefit obligation | $ | 222,607 |
| | $ | 199,337 |
|
| |
(1) | 2018 amounts relate primarily to the addition of plans in connection with our acquisition of Stahlgruber. |
| |
(2) | Includes amounts paid from plan assets as well as amounts paid from Company assets. |
| |
(3) | During 2019, settlement accounting was triggered for three of our European pension plans resulting in a net gain of less than $1 million recognized in Interest income and other income, net in our Consolidated Statements of Income. |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Change in projected benefit obligation: | | | |
| Projected benefit obligation - beginning of year | $ | 194 | | | $ | 212 | |
| Acquisitions and divestitures | (2) | | | 1 | |
| Service cost | 5 | | | 5 | |
| Interest cost | 2 | | | 1 | |
| Participant contributions | 1 | | | — | |
| Actuarial (gain) / loss | (49) | | | (11) | |
Benefits paid (1) | (5) | | | (5) | |
| Settlement | (1) | | | (2) | |
| Transfers | — | | | 6 | |
| Currency impact | (12) | | | (13) | |
| Projected benefit obligation - end of year | $ | 133 | | | $ | 194 | |
| Change in fair value of plan assets: | | | |
| Fair value - beginning of year | $ | 63 | | | $ | 59 | |
| Actual return on plan assets | — | | | 2 | |
| Employer contributions | 5 | | | 5 | |
| Participant contributions | 1 | | | — | |
| Benefits paid | (4) | | | (5) | |
| Settlement | (1) | | | (2) | |
| Transfers | — | | | 6 | |
| Currency impact | (3) | | | (2) | |
| Fair value - end of year | $ | 61 | | | $ | 63 | |
| Funded status at end of year (liability) | $ | (72) | | | $ | (131) | |
| | | |
| Accumulated benefit obligation | $ | 131 | | | $ | 191 | |
(1) Includes amounts paid from plan assets as well as amounts paid from Company assets.
The net amounts recognized for defined benefit plans in the Consolidated Balance Sheets were as follows (in thousands)millions):
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Non-current assets | $ | — |
| | $ | 377 |
|
| Current liabilities | (11,754 | ) | | (3,280 | ) |
| Non-current liabilities | (130,329 | ) | | (106,917 | ) |
| | $ | (142,083 | ) | | $ | (109,820 | ) |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Noncurrent assets | $ | 3 | | | $ | — | |
| Current liabilities | (5) | | | (5) | |
| Noncurrent liabilities | (70) | | | (126) | |
| $ | (72) | | | $ | (131) | |
The following table summarizes the accumulated benefit obligation and aggregate fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets (in thousands)millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accumulated benefit obligation | $ | 94 | | | $ | 191 | |
| Aggregate fair value of plan assets | 21 | | | 63 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Accumulated benefit obligation | $ | 222,607 |
| | $ | 169,097 |
|
| Aggregate fair value of plan assets | 83,305 |
| | 60,988 |
|
93
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes the projected benefit obligation and aggregate fair value of plan assets for pension plans with projected benefit obligations in excess of plan assets (in thousands)millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Projected benefit obligation | $ | 96 | | | $ | 194 | |
| Aggregate fair value of plan assets | 21 | | | 63 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Projected benefit obligation | $ | 225,388 |
| | $ | 171,185 |
|
| Aggregate fair value of plan assets | 83,305 |
| | 60,988 |
|
The table below summarizes the weighted-average assumptions used to calculate the year-end benefit obligations:
| | | | | | | December 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Discount rate used to determine benefit obligation | 1.4 | % | | 2.1 | % | Discount rate used to determine benefit obligation | 3.4 | % | | 1.0 | % |
| Rate of future compensation increase | 1.7 | % | | 0.9 | % | Rate of future compensation increase | 1.9 | % | | 1.7 | % |
Net Periodic Benefit Cost
The table below summarizes the components of net periodic benefit cost for ourthe defined benefit plans (in thousands)millions):
|
| | | | | | | | | | | |
| | Year Ended |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
| Service cost | $ | 3,592 |
| | $ | 3,215 |
| | $ | 4,525 |
|
| Interest cost | 4,077 |
| | 3,476 |
| | 3,670 |
|
Expected return on plan assets (1) | (2,337 | ) | | (2,949 | ) | | (2,467 | ) |
| Amortization of prior service credit | — |
| | — |
| | (181 | ) |
Amortization of actuarial (gain) loss (2) | (404 | ) | | (54 | ) | | 473 |
|
| Curtailment gain | — |
| | — |
| | (3,811 | ) |
| Settlement (gain) / loss | (378 | ) | | 74 |
| | (4 | ) |
| Net periodic benefit cost | $ | 4,550 |
| | $ | 3,762 |
| | $ | 2,205 |
|
| |
(1) | We use the fair value of our plan assets to calculate the expected return on plan assets. |
| |
(2) | Actuarial gains and losses are amortized using a corridor approach. | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | 2022 | | 2021 | | 2020 | | Service cost | $ | 5 | | | $ | 5 | | | $ | 4 | | | Interest cost | 2 | | | 1 | | | 3 | | Expected return on plan assets (1) | (2) | | | (2) | | | (3) | | | | | | | | Amortization of actuarial loss (2) | — | | | 2 | | | 1 | | | | | | | | Settlement loss (3) | — | | | — | | | 6 | | | Net periodic benefit cost | $ | 5 | | | $ | 6 | | | $ | 11 | |
(1) We use the fair value of our plan assets to calculate the expected return on plan assets. (2) Actuarial gains and losses are amortized using a corridor approach for our pension plans. Gains and losses are amortized if, as of the beginning of the year, the cumulative net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the fair value of the plan assets. Gains and losses in excess of the corridor are amortized over the average remaining service period of active members expected to receive benefits under the plan or, in the case of closed plans, the expected future lifetime of the employees participating in the plan. (3) In June 2019, we approved an amendment to terminate our U.S. Plan. As a result of the final settlement of this plan, we reclassified $6 million of unrealized loss from Accumulated other comprehensive loss to Interest income and other income, net in our Consolidated Statements of Income during the year the cumulative net gain or loss exceeds 10 percent of the greater of the projected benefit obligation or the fair value of the plan assets. Gains and losses in excess of the corridor are amortized over the average remaining service period of active members expected to receive benefits under the plan or, in the case of closed plans, the expected future lifetime of the employees participating in the plan. |
For the years ended December 31, 2019, 2018 and 2017, the2020.
The service cost component of net periodic benefit cost was classified in Selling, general and administrative expenses, while the other components of net periodic benefit cost were classified in Interest income and other income, net in ourthe Consolidated Statements of Income.
The table below summarizes the weighted-average assumptions used to calculate the net periodic benefit cost in the table above:
| | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
| Discount rate used to determine service cost | 1.0 | % | | 0.4 | % | | 0.7 | % |
| Discount rate used to determine interest cost | 1.2 | % | | 0.8 | % | | 1.8 | % |
| Rate of future compensation increase | 1.7 | % | | 2.0 | % | | 2.1 | % |
Expected long-term return on plan assets (1) | 2.8 | % | | 3.2 | % | | 2.9 | % |
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| Discount rate used to determine service cost | 1.3 | % | | 1.3 | % | | 1.5 | % |
| Discount rate used to determine interest cost | 2.5 | % | | 2.5 | % | | 3.0 | % |
| Rate of future compensation increase | 1.8 | % | | 1.9 | % | | 1.3 | % |
Expected long-term return on plan assets (1) | 3.1 | % | | 4.8 | % | | 5.0 | % |
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| |
(1) | Our expected long-term return on plan assets is determined based on our asset allocation and estimate of future long-term returns by asset class. |
Assumed mortality is also a key assumption in determining benefit obligations and net periodic benefit cost. In some of ourthe European plans, a price inflation index is also an assumption in determining benefit obligations and net periodic benefit cost.
As of December 31, 2019,2022, the pre-taxpretax amounts recognized in Accumulated other comprehensive incomeloss consisted of $42$16 million of net actuarial lossesgains for our defined benefit plans that have not yet been recognized in net periodic benefit cost. Of this amount, we expect $1 millionto be recognized as a component of net periodic benefit cost during the year ending December 31, 2020.2023.
Fair Value of Plan Assets
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. 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 in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Investments that are valued using net asset value ("NAV") (or its equivalent) as a practical expedient are excluded from the fair value hierarchy disclosure.
The following is a description of the valuation methodologies used for assets reported at fair value. The methodologies used at December 31, 20192022 and December 31, 20182021 are the same.
Level 1 investments: Cash and cash equivalents are valued based on cost, which approximates fair value. Short-term investments are valued initially at cost and adjusted for amortization of any discount or premium. U.S. Bond funds are priced by industry vendors such as Intercontinental Exchange (ICE) Data Services using benchmark yields, reported trades, issuer spreads, and broker/dealer quotes.
Level 3 investments: Investments in insurance contracts represent the cash surrender value of the insurance policy. These amounts are actuarially determined amountsby an actuary based on projections of future benefit payments, discount rates, and expected long-term rate of return on assets.
The remaining pension assets are valued at net asset value based on the underlying assets owned by the fund administrator, minus liabilities, divided by the number of units outstanding and are included in the table below to reconcile the total investment fair value of our plan assets.
For ourthe unfunded pension plans, the Company payswe pay the defined benefit plan obligations when they become due. The table below summarizes the fair value of our defined benefit plan assets by asset category within the fair value hierarchy for ourthe funded defined benefit pension plans (in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Insurance contracts | $ | — | | | $ | — | | | $ | 40 | | | $ | — | | | $ | 40 | | | $ | — | | | $ | — | | | $ | 42 | | | $ | — | | | $ | 42 | |
Mutual fund (1) | — | | | — | | | — | | | 21 | | | 21 | | | — | | | — | | | — | | | 21 | | | 21 | |
| Total investments at fair value | $ | — | | | $ | — | | | $ | 40 | | | $ | 21 | | | $ | 61 | | | $ | — | | | $ | — | | | $ | 42 | | | $ | 21 | | | $ | 63 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
Cash and cash-equivalents (1) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 30,684 |
| | $ | — |
| | $ | — |
| | $ | 30,684 |
|
| Short-term investments | 433 |
| | — |
| | — |
| | — |
| | 433 |
| | — |
| | — |
| | — |
| | — |
|
U.S. Bonds (2) | 29,035 |
| | — |
| | — |
| | — |
| | 29,035 |
| | — |
| | — |
| | — |
| | — |
|
| Insurance contracts | — |
| | — |
| | 40,676 |
| | — |
| | 40,676 |
| | — |
| | — |
| | 60,988 |
| | 60,988 |
|
Mutual fund (3) | — |
| | — |
| | — |
| | 13,161 |
| | 13,161 |
| | $ | — |
| | $ | — |
| | $ | — |
| | — |
|
| Total investments at fair value | $ | 29,468 |
| | $ | — |
| | $ | 40,676 |
| | $ | 13,161 |
| | $ | 83,305 |
| | $ | 30,684 |
| | $ | — |
| | $ | 60,988 |
| | $ | 91,672 |
|
| |
(1) | Consists of institutional short-term investment funds. |
| |
(2) | Consists primarily of U.S. Treasury notes with readily available pricing data. |
| |
(3) | The underlying assets of the mutual fund valued at NAV consist of international bonds, equity, real estate and other investments. |
The following table summarizes the changes in fair value measurements of Level 3 investments for ourthe defined benefit plans (in thousands)millions):
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Balance at beginning of year | $ | 42 | | | $ | 45 | |
| Actual return on plan assets: | | | |
| Relating to assets held at the reporting date | 1 | | | 1 | |
| Purchases, sales and settlements | (1) | | | (1) | |
| | | |
| Currency impact | (2) | | | (3) | |
| Balance at end of year | $ | 40 | | | $ | 42 | |
|
| | | | | | | |
| | December 31, |
| | 2019 | | 2018 |
| Balance at beginning of year | $ | 60,988 |
| | $ | 60,774 |
|
| Actual return on plan assets: | | | |
| Relating to assets held at the reporting date | 1,424 |
| | 2,556 |
|
| Purchases, sales and settlements | (1,181 | ) | | (541 | ) |
| Transfers in and/or out of Level 3 | (19,640 | ) | | 255 |
|
| Currency impact | (915 | ) | | (2,056 | ) |
| Balance at end of year | $ | 40,676 |
| | $ | 60,988 |
|
Assets for ourthe defined benefit pension plans in Europe are invested primarily in insurance policies. Under these contracts, we pay premiums to the insurance company, which are based on an internal actuarial analysis performed by the insurance company; the insurance company then funds the pension payments to the plan participants upon retirement. In 2019, we changed our funding for one of our European plans from insurance contracts to a direct investment in a mutual fund which is invested in various international bond, equity, real estate and other investments. The assets for our U.S. plan are managed by a master trust, with oversight responsibility by our Benefits Committee. During 2019, we engaged an investment advisor to help minimize the volatility in our funded status as we began the process of terminating our U.S. Plan. As a result, we updated our investment strategy such that as of December 31, 2019 our U.S. Plan assets reside primarily in U.S. Bonds, with a smaller allocation of assets in short-term investments. The new investment policy and allocation of the assets was approved by our Benefits Committee.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employer Contributions and Estimated Future Benefit Payments
During the year ended December 31, 2019,2022, we contributed $5 million to our pension plans. We estimate that contributions to our pension plans during 20202023 will be $13$6 million.
The following table summarizes estimated future benefit payments as of December 31, 20192022 (in thousands)millions):
|
| | | | |
| Year Ended December 31, | | Amount |
2020 (1) | | $ | 43,446 |
|
| 2021 | | 4,357 |
|
| 2022 | | 4,890 |
|
| 2023 | | 5,003 |
|
| 2024 | | 5,474 |
|
| 2025 - 2029 | | 29,946 |
|
(1) This amount includes the gross benefit payments expected to be paid to settle the U.S. Plan, exclusive of plan assets. | | | | | |
| Years Ending December 31, | Amount |
| 2023 | $ | 5 | |
| 2024 | 5 | |
| 2025 | 5 | |
| 2026 | 6 | |
| 2027 | 7 | |
| 2028 - 2032 | 35 | |
Note 15.23. Income Taxes
The provision for income taxes consists of the following components (in thousands)millions):
| | | | Year Ended December 31, | | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
| Current: | | | | | | Current: | | | | | |
| Federal | $ | 101,839 |
| | $ | 90,216 |
| | $ | 196,825 |
| Federal | $ | 212 | | | $ | 195 | | | $ | 156 | |
| State | 24,925 |
| | 25,851 |
| | 27,149 |
| State | 60 | | | 47 | | | 38 | |
| Foreign | 81,081 |
| | 77,508 |
| | 58,123 |
| Foreign | 107 | | | 116 | | | 90 | |
| Total current provision for income taxes | $ | 207,845 |
| | $ | 193,575 |
| | $ | 282,097 |
| Total current provision for income taxes | $ | 379 | | | $ | 358 | | | $ | 284 | |
| Deferred: | | | | | | Deferred: | | | | | |
| Federal | $ | 22,173 |
| | $ | 14,977 |
| | $ | (37,486 | ) | Federal | $ | — | | | $ | (3) | | | $ | (7) | |
| State | 6,376 |
| | 4,386 |
| | 4,044 |
| State | (2) | | | — | | | (6) | |
| Foreign | (21,064 | ) | | (21,543 | ) | | (13,095 | ) | Foreign | 8 | | | (24) | | | (21) | |
| Total deferred provision (benefit) for income taxes | $ | 7,485 |
| | $ | (2,180 | ) | | $ | (46,537 | ) | |
| Total deferred (benefit) provision for income taxes | | Total deferred (benefit) provision for income taxes | $ | 6 | | | $ | (27) | | | $ | (34) | |
| Provision for income taxes | $ | 215,330 |
| | $ | 191,395 |
| | $ | 235,560 |
| Provision for income taxes | $ | 385 | | | $ | 331 | | | $ | 250 | |
Income taxes have been based on the following components of income from continuing operations before provision for income taxes (in thousands)millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Domestic | $ | 1,078 | | | $ | 978 | | | $ | 713 | |
| Foreign | 440 | | | 421 | | | 172 | |
| Income from continuing operations before provision for income taxes | $ | 1,518 | | | $ | 1,399 | | | $ | 885 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Domestic | $ | 616,842 |
| | $ | 562,758 |
| | $ | 575,148 |
|
| Foreign | 174,180 |
| | 180,673 |
| | 191,479 |
|
| Income from continuing operations before provision for income taxes | $ | 791,022 |
| | $ | 743,431 |
| | $ | 766,627 |
|
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The U.S. federal statutory rate is reconciled to the effective tax rate as follows:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| U.S. federal statutory rate | 21.0 | % | | 21.0 | % | | 35.0 | % |
| U.S. federal tax reform - federal deferred tax rate change | — | % | | — | % | | (9.5 | )% |
| U.S. federal tax reform - transition tax on foreign earnings | 0.1 | % | | (1.3 | )% | | 6.6 | % |
| State income taxes, net of state credits and federal tax impact | 3.2 | % | | 3.5 | % | | 2.8 | % |
| Impact of rates on international operations | 1.4 | % | | 0.9 | % | | (3.2 | )% |
| Excess tax benefits from stock-based compensation | (0.3 | )% | | (0.6 | )% | | (1.0 | )% |
| Non-deductible expenses | 0.9 | % | | 1.6 | % | | 1.1 | % |
| Other, net | 0.9 | % | | 0.6 | % | | (1.1 | )% |
| Effective tax rate | 27.2 | % | | 25.7 | % | | 30.7 | % |
On December 22, 2017, the U.S. government enacted the Tax Act. The Tax Act introduced broad and complex changes to U.S. income tax laws that impact us, most notably a reduction of the U.S. statutory corporate tax rate from 35% to 21% for tax years beginning after December 31, 2017. Additionally, beginning | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. federal statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State income taxes, net of state credits and federal tax impact | 3.0 | % | | 2.7 | % | | 3.2 | % |
| Impact of rates on international operations | 1.1 | % | | 1.2 | % | | 1.9 | % |
| Change in valuation allowances | 0.4 | % | | (0.8) | % | | 1.7 | % |
| Non-deductible expenses | 1.0 | % | | 0.4 | % | | 0.8 | % |
| Excess tax benefits from stock-based compensation | (0.2) | % | | (0.1) | % | | — | % |
| Other, net | (1.0) | % | | (0.8) | % | | (0.4) | % |
| Effective tax rate | 25.3 | % | | 23.6 | % | | 28.2 | % |
Beginning in 2018, the Tax Cuts and Jobs Act ("Tax Act") imposed a new regime of taxation on foreign subsidiary earnings referred to as GILTI. We have elected to account for GILTI and on certain related party payments, BEAT.in the year the tax is incurred. As part of the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system, the Tax Act imposed a one-time transition tax on the deemed repatriation of historical earnings of foreign subsidiaries as of December 31, 2017.
On December 22, 2017, the U.S. Securities and Exchange Commission Staff issued SAB 118, which provided guidance on accounting for the tax effects of the Tax Act. SAB 118 provided a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting required under ASC 740, Income Taxes. In accordance with SAB 118, a company was required to reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 was complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act was incomplete but the company was able to determine a reasonable estimate, it was required to record a provisional estimate in the financial statements.
Transition Tax on Foreign Earnings: In the fourth quarter of 2017, we recognized a provisional income tax expense of $51 million related to the one-time Our transition tax on foreign earnings. During the third quarterliability was $42 million payable in eight installments from 2018 through 2025. The next required installment of 2018, we$6 million is recorded a $10 million favorable adjustment to the provisional amount. As of December 31, 2018, we substantially completed our analysis of the transition tax,in Other current liabilities and the liability was no longer considered provisional. In the third quarter of 2019, we amended our 2017 transition tax calculation and recorded an additional expense of $1 million. As permitted by the Tax Act, we elected to pay the final $42remaining $19 million liability in installments over 8 years. This liability has been reduced by the first two installments and other payment credits to $33 million and is recorded in Other noncurrent liabilities on ourthe Consolidated Balance Sheets.
Revaluation of Deferred Tax Assets and Liabilities: As a result of the Tax Act reduction in the U.S. federal statutory rate from 35% to 21%, at December 31, 2017, we recorded a provisional decrease to net deferred tax liabilities and a corresponding provisional U.S. federal deferred tax benefit of $73 million. There were no subsequent adjustments recognized with regard to the revaluation of deferred taxes, and the accounting for this impact of the Tax Act is complete.
GILTI: While the Tax Act provides for a modified territorial tax system, under a highly complex provision commonly known as GILTI, the Tax Act subjects a U.S. shareholder to current tax on certain earnings of foreign subsidiaries, subject to relief for available foreign tax credits. The FASB Staff Q&A, Topic 740, No. 5, "Accounting for GILTI," provides that an accounting policy election can be made either to recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for GILTI in the year the tax is incurred. For the years ended December 31, 2019 and 2018, the impact of GILTI increased our effective tax rate by approximately 0.6% and 0.3%, respectively.
Indefinite Reinvestment Assertion: Undistributed earnings of our foreign subsidiaries amounted to approximately $743$1,487 million at December 31, 2019. Through December 31, 2017, it was our practice and intention to permanently reinvest the undistributed earnings of our foreign subsidiaries, and no U.S. deferred income taxes or foreign withholding taxes were recorded.2022. Beginning in 2018, the Tax Act generally provided a 100% participation exemption from further U.S. taxation of dividends received from 10-percent or more owned foreign corporations held by U.S. corporate shareholders. Although futureforeign dividend income is generally exempt from U.S. federal tax in the hands of the U.S. corporate shareholders, either as a result of the participation exemption, or due to the previous taxation of such earnings under the transition tax and GILTI regime,regimes, companies must still apply the guidance of ASC 740740: Income Taxes to account for the tax consequences of outside basis differences and other tax impacts of their investments in non-U.S. subsidiaries. Further, the 2017 transition tax reduced a majority of the previous outside basis differences in our foreign subsidiaries, and most of any new differences arising have extensive interaction with the GILTI regime discussed above.
Based on a review of our global financing and capital expenditure requirements as of December 31, 2019,2022, we have made no changescontinue to our assertion that we plan to permanently reinvest the undistributed earnings of our international subsidiaries. Thus, no deferred U.S. income taxes or potential foreign withholding taxes have been recorded. Due to the complexity of the new U.S. tax regime, it remains impractical to estimate the amount of deferred taxes potentially payable were such earnings to be repatriated.
Although
On August 16, 2022, the SAB 118 measurement period has closed, further technical guidance related toInflation Reduction Act of 2022 (“IRA”) was signed into law in the Tax Act, including final regulationsUnited 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 a broad rangethe repurchase of topics, is expected to be issued. In accordance with ASC 740,corporate stock after December 31, 2022. We do not currently expect the Company will recognize any effectscorporate minimum tax provisions of the guidance inIRA to have a material impact on our financial results. The impact of the period that such guidance is issued.excise tax provisions will be dependent upon the volume of any future stock repurchases.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of ourthe deferred tax assets and liabilities are as follows (in thousands)millions):
| | | | December 31, | | December 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Deferred Tax Assets: | | | | Deferred Tax Assets: | | | |
| Accrued expenses and reserves | $ | 51,869 |
| | $ | 60,337 |
| Accrued expenses and reserves | $ | 71 | | | $ | 76 | |
| Qualified and nonqualified retirement plans | 31,053 |
| | 20,525 |
| Qualified and nonqualified retirement plans | 11 | | | 31 | |
| Inventory | 12,679 |
| | 15,474 |
| Inventory | 15 | | | 11 | |
| Accounts receivable | 14,025 |
| | 16,208 |
| Accounts receivable | 19 | | | 18 | |
| Interest deduction carryforwards | 25,448 |
| | 20,392 |
| Interest deduction carryforwards | 28 | | | 32 | |
| Stock-based compensation | 4,755 |
| | 4,859 |
| Stock-based compensation | 9 | | | 7 | |
| Operating lease assets, net | 303,705 |
| | — |
| |
| Operating lease liabilities | | Operating lease liabilities | 307 | | | 338 | |
| Net operating loss carryforwards | 16,287 |
| | 13,222 |
| Net operating loss carryforwards | 19 | | | 25 | |
| Other | 11,777 |
| | 12,370 |
| Other | 17 | | | 25 | |
| Total deferred tax assets, gross | 471,598 |
| | 163,387 |
| Total deferred tax assets, gross | 496 | | | 563 | |
| Less: valuation allowance | (41,815 | ) | | (34,779 | ) | Less: valuation allowance | (44) | | | (45) | |
| Total deferred tax assets | $ | 429,783 |
| | $ | 128,608 |
| Total deferred tax assets | $ | 452 | | | $ | 518 | |
| Deferred Tax Liabilities: | | | | Deferred Tax Liabilities: | | | |
| Goodwill and other intangible assets | $ | 219,879 |
| | $ | 216,699 |
| Goodwill and other intangible assets | $ | 236 | | | $ | 238 | |
| Property, plant and equipment | 100,461 |
| | 87,839 |
| Property, plant and equipment | 86 | | | 93 | |
| Trade name | 108,039 |
| | 116,615 |
| Trade name | 82 | | | 91 | |
| Operating lease liabilities | 292,498 |
| | — |
| |
| Operating lease assets, net | | Operating lease assets, net | 291 | | | 323 | |
| Other | 8,916 |
| | 15,511 |
| Other | 12 | | | 20 | |
| Total deferred tax liabilities | $ | 729,793 |
| | $ | 436,664 |
| Total deferred tax liabilities | $ | 707 | | | $ | 765 | |
| Net deferred tax liability | $ | (300,010 | ) | | $ | (308,056 | ) | Net deferred tax liability | $ | (255) | | | $ | (247) | |
Deferred tax assets and liabilities are reflected on ourthe Consolidated Balance Sheets as follows (in thousands)millions):
| | | | December 31, | | December 31, |
| | 2019 | | 2018 | | 2022 | | 2021 |
| Noncurrent deferred tax assets | $ | 10,119 |
| | $ | 3,378 |
| Noncurrent deferred tax assets | $ | 25 | | | $ | 32 | |
| Noncurrent deferred tax liabilities | 310,129 |
| | 311,434 |
| Noncurrent deferred tax liabilities | 280 | | | 279 | |
Noncurrent deferred tax assets and noncurrent deferred tax liabilities are included in Other noncurrent assets and Deferred income taxes, respectively, on ourthe Consolidated Balance Sheets.
We hadhave net operating loss carryforwards, primarily for certain international tax jurisdictions, the tax benefits of which were $16totaled approximately $19 million and $13$25 million at December 31, 20192022 and 2018,2021, respectively. At December 31, 20192022 and 2018,2021, we had tax credit carryforwards for certain U.S. state jurisdictions, the tax benefits of which totaltotaled less than $1 million and $1 million, respectively.at both dates. As of December 31, 20192022 and 2018,2021, we had interest deduction carryforwards primarily in Italy and Germany, the tax benefits of which were $25totaled $28 million and $20$32 million, respectively. As of December 31, 20192022 and 2018,2021, we had a U.S. capital loss carryforward,carryforwards, the tax benefit of which was $5 million.totaled an insignificant amount and $4 million, respectively. As of December 31, 20192022 and 2018,2021, valuation allowances of $42$44 million and $35$45 million, respectively, were recorded for deferred tax assets related to the Italy and Germanyforeign interest deduction carryforwards, the U.S. capital loss carryforward, and for certain foreign and U.S. net operating loss carryforwards and capital loss carryforwards. The $7$1 million net increasedecrease in valuation allowances was primarily attributable to a $5 millionutilization of net operating loss carryforwards and U.S. capital loss carryforward valuation allowance provided on the interest deduction carryforwards generated in 2019 due to thin capitalization constraints in Italy and Germany. activity.
The net operating losses generally carry forward for an indefinite period.a period of five years to indefinitely. The interest deduction carryforwards in Italy and Germany do not expire. U.S. capital losses carry forward for five years. Realization of these deferred tax assets is dependent on the generation of sufficient taxable income prior to the expiration dates, where applicable, or in the case of interest carryforwardsdeduction carryforward, subject to legislative thin capitalization constraints, typically growth in EBITDA.based on profitability. Based on historical and projected operating results, we believe
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
that it is more likely than not that earnings will be sufficient to realize the deferred tax assets for which valuation allowances have not been provided. While we expect to realize the deferred tax assets, net of valuation allowances, changes in tax laws or in estimates of future taxable income may alter this expectation.
A reconciliation of the beginning and ending amount of gross unrecognized tax benefits is as follows (in thousands)millions):
| | | | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
| Balance at January 1 | $ | 1,237 |
| | $ | 1,690 |
| | $ | 2,146 |
| Balance at January 1 | $ | 5 | | | $ | 2 | | | $ | 2 | |
| Additions for acquired tax positions | 1,376 |
| | — |
| | 73 |
| |
| | Additions based on tax positions related to the current year | 50 |
| | 5 |
| | 5 |
| Additions based on tax positions related to the current year | — | | | — | | | 1 | |
| Lapse of statutes of limitations | (297 | ) | | (458 | ) | | (534 | ) | |
| Cumulative translation adjustment | (49 | ) | | — |
| | — |
| |
| Additions based on tax positions related to prior years | | Additions based on tax positions related to prior years | 2 | | | 5 | | | — | |
| Reductions for tax positions of prior year | | Reductions for tax positions of prior year | — | | | (2) | | | — | |
| | Settlements with taxing authorities | | Settlements with taxing authorities | (2) | | | — | | | (1) | |
| | Balance at December 31 | $ | 2,317 |
| | $ | 1,237 |
| | $ | 1,690 |
| Balance at December 31 | $ | 5 | | | $ | 5 | | | $ | 2 | |
Included in the balance of unrecognized tax benefits above as of December 31, 20192022, 2021 and 2020, are approximately $5 million, $4 million and $2 million, and as of December 31, 2018 and 2017, approximately $1 million,respectively, of tax benefits that, if recognized, would affect the effective tax rate. The balance of unrecognized tax benefits at December 31, 2019, 20182022, 2021 and 20172020, includes approximately $1 millionan insignificant amount of tax benefits that, if recognized, would result in adjustments to deferred taxes.
The Company recognizes
We recognize interest and penalties accrued related to unrecognized tax benefits as income tax expense. Attributable to the unrecognized tax benefits noted above, the Companywe had accumulated interest and penalties of $1 million, $1 million, and less than $1 million at December 31, 2019, 20182022, 2021 and 2017.2020, respectively. During each of the years ended December 31, 2019, 20182022, 2021 and 2017, an immaterial amount2020, we recorded $1 million or less of interest and penalties were recorded through the income tax provision, prior to any reversals for lapses in the statutes of limitations.
During the twelve months beginning January 1, 2020,2023, it is reasonably possible that we will reduce unrecognized tax benefits by less than $1 million, an immaterial amountmost of which would impact our effective tax rate, primarily as a result of the expiration of certain statutes of limitations.rate.
The companyCompany and/or its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various U.S. state and international jurisdictions. With few exceptions, the company iswe are no longer subject to U.S. federal, state and local, or international income tax examinations by tax authorities for years before 2015. Adjustments from examinations, if any, are not expected to have a material effect on our consolidated financial statements.Consolidated Financial Statements.
Note 16.24. Segment and Geographic Information
We have 4four operating segments: Wholesale –- North America, Europe, Specialty and Self Service. OurService, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale –- North America and Self Service operating segments are aggregated into 1segment results were separated from the previous reportable segment, North America, because they possess similar economic characteristics and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have common products and services, customers, and methods of distribution. Our reportablebeen adjusted retrospectively to reflect this change.
The segments are organized based on a combination of geographic areas served and type of product lines offered. The reportable segments are managed separately as each business servesthe businesses serve different customers (i.e. geographic in the case of North America and Europe and product type in the case of Specialty) and isare affected by different economic conditions. Therefore, we present 3 reportable segments:Wholesale - North America Europe and Specialty.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.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present our financial performance by reportable segment for the periods indicated (in thousands)millions):
|
| | | | | | | | | | | | | | | | | | | |
| | North America | | Europe | | Specialty | | Eliminations | | Consolidated |
| Year Ended December 31, 2019 | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Third Party | $ | 5,208,589 |
|
| $ | 5,838,124 |
|
| $ | 1,459,396 |
| | $ | — |
| | $ | 12,506,109 |
|
| Intersegment | 705 |
| | — |
| | 4,646 |
| | (5,351 | ) | | — |
|
| Total segment revenue | $ | 5,209,294 |
|
| $ | 5,838,124 |
|
| $ | 1,464,042 |
|
| $ | (5,351 | ) | | $ | 12,506,109 |
|
| Segment EBITDA | $ | 712,957 |
|
| $ | 454,220 |
|
| $ | 161,184 |
| | $ | — |
| | $ | 1,328,361 |
|
Depreciation and amortization (1) | 93,747 |
| | 191,195 |
| | 29,464 |
| | — |
| | 314,406 |
|
| Year Ended December 31, 2018 | | | | | | | | | |
| Revenue: | | | | | | | | | |
| Third Party | $ | 5,181,964 |
| | $ | 5,221,754 |
| | $ | 1,472,956 |
| | $ | — |
| | $ | 11,876,674 |
|
| Intersegment | 645 |
| | — |
| | 4,724 |
| | (5,369 | ) | | — |
|
| Total segment revenue | $ | 5,182,609 |
| | $ | 5,221,754 |
| | $ | 1,477,680 |
| | $ | (5,369 | ) | | $ | 11,876,674 |
|
| Segment EBITDA | $ | 660,153 |
| | $ | 422,721 |
| | $ | 168,525 |
| | $ | — |
| | $ | 1,251,399 |
|
Depreciation and amortization (1) | 87,348 |
| | 178,473 |
| | 28,256 |
| | — |
| | 294,077 |
|
| Year Ended December 31, 2017 | | | | | | | | | |
| Revenue: | | | | | | | | �� | |
| Third Party | $ | 4,798,901 |
| | $ | 3,636,811 |
| | $ | 1,301,197 |
| | $ | — |
| | $ | 9,736,909 |
|
| Intersegment | 750 |
| | — |
| | 4,319 |
| | (5,069 | ) | | — |
|
| Total segment revenue | $ | 4,799,651 |
| | $ | 3,636,811 |
| | $ | 1,305,516 |
| | $ | (5,069 | ) | | $ | 9,736,909 |
|
| Segment EBITDA | $ | 655,275 |
| | $ | 319,156 |
| | $ | 142,159 |
| | $ | — |
| | $ | 1,116,590 |
|
Depreciation and amortization (1) | 86,303 |
| | 120,805 |
| | 23,095 |
| | — |
| | 230,203 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Wholesale - North America | | Europe | | Specialty | | Self Service | | Eliminations | | Consolidated |
| Year Ended December 31, 2022 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 4,556 | | | $ | 5,735 | | | $ | 1,788 | | | $ | 715 | | | $ | — | | | $ | 12,794 | |
| Intersegment | — | | | — | | | 3 | | | — | | | (3) | | | — | |
| Total segment revenue | $ | 4,556 | | | $ | 5,735 | | | $ | 1,791 | | | $ | 715 | | | $ | (3) | | | $ | 12,794 | |
| Segment EBITDA | $ | 852 | | | $ | 585 | | | $ | 199 | | | $ | 83 | | | $ | — | | | $ | 1,719 | |
Total depreciation and amortization (1) | 75 | | | 145 | | | 30 | | | 14 | | | — | | | 264 | |
| Year Ended December 31, 2021 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 4,376 | | | $ | 6,062 | | | $ | 1,864 | | | $ | 787 | | | $ | — | | | $ | 13,089 | |
| Intersegment | 3 | | | — | | | 3 | | | — | | | (6) | | | — | |
| Total segment revenue | $ | 4,379 | | | $ | 6,062 | | | $ | 1,867 | | | $ | 787 | | | $ | (6) | | | $ | 13,089 | |
| Segment EBITDA | $ | 769 | | | $ | 618 | | | $ | 223 | | | $ | 175 | | | $ | — | | | $ | 1,785 | |
Total depreciation and amortization (1) | 80 | | | 157 | | | 30 | | | 17 | | | — | | | 284 | |
| Year Ended December 31, 2020 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 4,039 | | | $ | 5,492 | | | $ | 1,505 | | | $ | 593 | | | $ | — | | | $ | 11,629 | |
| Intersegment | 1 | | | — | | | 4 | | | — | | | (5) | | | — | |
| Total segment revenue | $ | 4,040 | | | $ | 5,492 | | | $ | 1,509 | | | $ | 593 | | | $ | (5) | | | $ | 11,629 | |
| Segment EBITDA | $ | 665 | | | $ | 428 | | | $ | 163 | | | $ | 113 | | | $ | — | | | $ | 1,369 | |
Total depreciation and amortization (1) | 83 | | | 173 | | | 29 | | | 14 | | | — | | | 299 | |
(1) Amounts presented include depreciation and amortization expense recorded within costCost of goods sold.sold, Selling, general & administrative expenses and Restructuring and transaction related expenses.
The key measure of segment profit or loss reviewed by our chief operating decision maker, who is 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 EBITDA excluding restructuring and acquisitiontransaction related expenses (which includes restructuring expenses recorded in Cost of goods sold),; change in fair value of contingent consideration liabilities,liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures,divestitures; equity in losses and earnings of unconsolidated subsidiaries,subsidiaries; equity investment fair value adjustments; impairment charges; and impairment charges.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). EBITDA, which is the basis for Segment EBITDA, is calculated as net income less net income (loss) attributable to continuing and discontinued noncontrolling interest, excluding discontinued operations, and discontinued noncontrolling interest, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below provides a reconciliation of Net Income to EBITDA and Segment EBITDA (in thousands)millions):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Net income | $ | 545,034 |
| | $ | 483,168 |
| | $ | 530,228 |
|
| Less: net income attributable to continuing noncontrolling interest | 2,800 |
| | 3,050 |
| | (3,516 | ) |
| Less: net income attributable to discontinued noncontrolling interest | 974 |
| | — |
| | — |
|
| Net income attributable to LKQ stockholders | 541,260 |
| | 480,118 |
| | 533,744 |
|
| Subtract: | | | | | |
| Net income (loss) from discontinued operations | 1,619 |
| | (4,397 | ) | | (6,746 | ) |
| Net income attributable to discontinued noncontrolling interest | (974 | ) | | — |
| | — |
|
| Net income from continuing operations attributable to LKQ stockholders | 540,615 |
| | 484,515 |
| | 540,490 |
|
| Add: | | | | | |
| Depreciation and amortization | 290,770 |
| | 274,213 |
| | 219,546 |
|
| Depreciation and amortization - cost of goods sold | 21,007 |
| | 19,864 |
| | 10,657 |
|
| Depreciation and amortization - restructuring expenses - cost of goods sold | 305 |
| | — |
| | — |
|
| Depreciation and amortization - restructuring expenses | 2,324 |
| | — |
| | — |
|
| Interest expense, net of interest income | 136,274 |
| | 144,536 |
| | 100,620 |
|
| (Gain) loss on debt extinguishment | (128 | ) | | 1,350 |
| | 456 |
|
| Provision for income taxes | 215,330 |
| | 191,395 |
| | 235,560 |
|
| EBITDA | 1,206,497 |
| | 1,115,873 |
| | 1,107,329 |
|
| Subtract: | | | | | |
Equity in (losses) earnings of unconsolidated subsidiaries (1) | (32,277 | ) | | (64,471 | ) | | 5,907 |
|
Fair value loss on Mekonomen derivative instrument (1) | — |
| | (5,168 | ) | | — |
|
| Gain due to resolution of acquisition related matter | 12,063 |
| | — |
| | — |
|
Gains on bargain purchases and previously held equity interests (2) | 1,157 |
| | 2,418 |
| | 3,870 |
|
| Add: | | | | | |
Restructuring and acquisition related expenses (3) | 34,658 |
| | 32,428 |
| | 19,672 |
|
Restructuring expenses - cost of goods sold (4) | 20,654 |
| | — |
| | — |
|
| Inventory step-up adjustment - acquisition related | — |
| | 403 |
| | 3,584 |
|
Impairment of net assets held for sale and goodwill (5) (6) | 47,102 |
| | 35,682 |
| | — |
|
| Change in fair value of contingent consideration liabilities | 393 |
| | (208 | ) | | (4,218 | ) |
| Segment EBITDA | $ | 1,328,361 |
| | $ | 1,251,399 |
| | $ | 1,116,590 |
|
| |
(1) | Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information. |
| |
(2) | Reflects the gains on bargain purchases and previously held equity interests related to our acquisitions of wholesale businesses in Europe and Andrew Page. See Note 2, "Business Combinations," for further information on bargain purchases. |
| |
(3) | Excludes $2 million of depreciation expense that is reported in Restructuring and acquisition related expenses in our Consolidated Statements of Income. Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information. |
| |
(4) | Refer to Note 6, "Restructuring and Acquisition Related Expenses," for further information. |
| |
(5) | Refer to "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information on the impairment of goodwill recorded in 2018. |
| |
(6) | Refer to "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies," for further information on the impairment charges recorded during 2019. In 2018, amounts were recorded in Interest income and other income, net in our Consolidated Statements of Income. |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net income | $ | 1,150 | | | $ | 1,092 | | | $ | 640 | |
| Less: net income attributable to continuing noncontrolling interest | 1 | | | 1 | | | 2 | |
| Net income attributable to LKQ stockholders | 1,149 | | | 1,091 | | | 638 | |
| Subtract: | | | | | |
| Net income from discontinued operations | 6 | | | 1 | | | — | |
| Net income from continuing operations attributable to LKQ stockholders | 1,143 | | | 1,090 | | | 638 |
| Add: | | | | | |
| Depreciation and amortization - SG&A | 237 | | | 260 | | | 272 | |
| Depreciation and amortization - cost of goods sold | 27 | | | 23 | | | 22 | |
Depreciation and amortization - restructuring expenses (1) | — | | | 1 | | | 5 | |
| Interest expense, net of interest income | 70 | | | 70 | | | 102 | |
| Loss on debt extinguishment | — | | | 24 | | | 13 | |
| Provision for income taxes | 385 | | | 331 | | | 250 | |
| EBITDA | 1,862 | | | 1,799 | | | 1,302 | |
| Subtract: | | | | | |
Equity in earnings of unconsolidated subsidiaries (2) | 11 | | | 23 | | | 5 | |
| Equity investment fair value adjustments | (5) | | | 11 | | | — | |
| | | | | |
| Add: | | | | | |
Restructuring and transaction related expenses (1) | 20 | | | 19 | | | 61 | |
| Restructuring expenses - cost of goods sold | — | | | — | | | 7 | |
| | | | | |
| | | | | |
| | | | | |
(Gain) on disposal of businesses and impairment of net assets held for sale (3) | (159) | | | — | | | 3 | |
| Change in fair value of contingent consideration liabilities | — | | | 1 | | | 1 | |
| Gains on previously held equity interests | (1) | | | — | | | — | |
Direct impacts of Ukraine/Russia conflict (4) | 3 | | | — | | | — | |
| Segment EBITDA | $ | 1,719 | | | $ | 1,785 | | | $ | 1,369 | |
(1) The sum of these two captions represents the total amount that is reported in Restructuring and transaction related expenses in our Consolidated Statements of Income. Refer to Note 14, "Restructuring and Transaction Related Expenses," for further information.
(2) Refer to Note 10, "Equity Method Investments," for further information.
(3) Refer to "Other Divestitures (Not Classified in Discontinued Operations)" in Note 2, "Discontinued Operations and Divestitures," 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 thousands)millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Capital Expenditures | | | | | |
| Wholesale - North America | $ | 84 | | | $ | 113 | | | $ | 58 | |
| Europe | 105 | | | 141 | | | 85 | |
| Specialty | 19 | | | 23 | | | 11 | |
| Self Service | 14 | | | 16 | | | 19 | |
| Total capital expenditures | $ | 222 | | | $ | 293 | | | $ | 173 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Capital Expenditures | | | | | |
| North America | $ | 131,643 |
| | $ | 129,391 |
| | $ | 95,823 |
|
| Europe | 121,596 |
| | 99,885 |
| | 71,494 |
|
| Specialty | 12,491 |
| | 20,751 |
| | 8,175 |
|
| Discontinued operations | — |
| | — |
| | 3,598 |
|
| Total capital expenditures | $ | 265,730 |
| | $ | 250,027 |
| | $ | 179,090 |
|
101
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents assets by reportable segment (in thousands)millions):
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Receivables, net | | | |
| Wholesale - North America | $ | 351 | | | $ | 367 | |
| Europe | 547 | | | 586 | |
| Specialty | 92 | | | 102 | |
| Self Service | 8 | | | 18 | |
| Total receivables, net | 998 | | | 1,073 | |
| Inventories | | | |
| Wholesale - North America | 822 | | | 776 | |
| Europe | 1,418 | | | 1,327 | |
| Specialty | 469 | | | 458 | |
| Self Service | 43 | | | 50 | |
| Total inventories | 2,752 | | | 2,611 | |
| Property, plant and equipment, net | | | |
| Wholesale - North America | 505 | | | 526 | |
| Europe | 547 | | | 577 | |
| Specialty | 94 | | | 93 | |
| Self Service | 90 | | | 103 | |
| Total property, plant and equipment, net | 1,236 | | | 1,299 | |
| Operating lease assets, net | | | |
| Wholesale - North America | 541 | | | 611 | |
| Europe | 466 | | | 515 | |
| Specialty | 85 | | | 83 | |
| Self Service | 135 | | | 152 | |
| Total operating lease assets, net | 1,227 | | | 1,361 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other unallocated assets | 5,825 | | | 6,262 | |
| Total assets | $ | 12,038 | | | $ | 12,606 | |
|
| | | | | | | | | | | |
| | December 31, |
| 2019 | | 2018 | | 2017 |
| Receivables, net | | | | | |
| North America | $ | 419,452 |
| | $ | 411,818 |
| | $ | 379,666 |
|
| Europe | 636,216 |
| | 649,174 |
| | 555,372 |
|
| Specialty | 75,464 |
| | 93,091 |
| | 92,068 |
|
| Total receivables, net | 1,131,132 |
| | 1,154,083 |
| | 1,027,106 |
|
| Inventories | | | | | |
| North America | 991,062 |
| | 1,076,306 |
| | 1,076,393 |
|
| Europe | 1,401,801 |
| | 1,410,264 |
| | 964,068 |
|
| Specialty | 379,914 |
| | 349,505 |
| | 340,322 |
|
| Total inventories | 2,772,777 |
| | 2,836,075 |
| | 2,380,783 |
|
| Property, plant and equipment, net | | | | | |
| North America | 610,573 |
| | 570,508 |
| | 537,286 |
|
| Europe | 538,951 |
| | 562,600 |
| | 293,539 |
|
| Specialty | 84,876 |
| | 87,054 |
| | 82,264 |
|
| Total property, plant and equipment, net | 1,234,400 |
| | 1,220,162 |
| | 913,089 |
|
Operating lease assets, net (1) | | | | | |
| North America | 768,164 |
| | — |
| | — |
|
| Europe | 457,035 |
| | — |
| | — |
|
| Specialty | 83,312 |
| | — |
| | — |
|
| Total operating lease assets, net | 1,308,511 |
| | — |
| | — |
|
| Equity method investments | | | | | |
| North America | 17,624 |
| | 16,404 |
| | 336 |
|
Europe (2) | 121,619 |
| | 162,765 |
| | 208,068 |
|
| Total equity method investments | 139,243 |
| | 179,169 |
| | 208,404 |
|
| Other unallocated assets | 6,193,893 |
| | 6,003,913 |
| | 4,837,490 |
|
| Total assets | $ | 12,779,956 |
| | $ | 11,393,402 |
| | $ | 9,366,872 |
|
| |
(1) | Refer to Note 13, "Leases," for further information. |
| |
(2) | Refer to "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information on the decrease in the balance from December 31, 2018 to December 31, 2019. |
We report net receivables; inventories; net property,, plant and equipment; and net operating lease assets; and equity method investmentsassets 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 other intangibles.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, Poland,Austria, Slovakia, Austria,Poland, and other European countries. Our
operations in other countries include wholesale operations in Canada, engine remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth our revenue by geographic area (in thousands)millions):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenue | | | | | |
| United States | $ | 6,220,267 |
| | $ | 6,192,636 |
| | $ | 5,662,016 |
|
| United Kingdom | 1,599,074 |
| | 1,665,317 |
| | 1,548,212 |
|
| Germany | 1,578,543 |
| | 974,514 |
| | 1,744 |
|
| Other countries | 3,108,225 |
| | 3,044,207 |
| | 2,524,937 |
|
| Total revenue | $ | 12,506,109 |
| | $ | 11,876,674 |
| | $ | 9,736,909 |
|
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenue | | | | | |
| United States | $ | 6,632 | | | $ | 6,626 | | | $ | 5,755 | |
| United Kingdom | 1,550 | | | 1,648 | | | 1,461 | |
| Germany | 1,523 | | | 1,622 | | | 1,523 | |
| Other countries | 3,089 | | | 3,193 | | | 2,890 | |
| Total revenue | $ | 12,794 | | | $ | 13,089 | | | $ | 11,629 | |
The following table sets forth our tangible long-lived assets by geographic area (in thousands)millions):
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2018 | | 2017 |
Long-lived assets (1) | | | | | |
| United States | $ | 1,467,701 |
| | $ | 620,125 |
| | $ | 583,236 |
|
| Germany | 340,995 |
| | 217,476 |
| | 41 |
|
| United Kingdom | 330,113 |
| | 165,145 |
| | 178,021 |
|
| Other countries | 404,102 |
| | 217,416 |
| | 151,791 |
|
| Total long-lived assets | $ | 2,542,911 |
| | $ | 1,220,162 |
| | $ | 913,089 |
|
| |
(1) | The increase in long-lived assets is primarily related to the net operating lease assets added as a result of the adoption of the new lease accounting standard. Refer to Note 13, "Leases," for further information. |
Note 17.Selected Quarterly Data (unaudited)
The following table presents unaudited selected quarterly financial data for the two years ended December 31, 2019. The operating results for any quarter are not necessarily indicative of the results for any future period. |
| | | | | | | | | | | | | | | |
| | Quarter Ended (1) |
| (In thousands, except per share data) | Dec. 31 | | Sep. 30 | | Jun. 30 | | Mar. 31 (2) |
| 2019 | | | | | | | |
| Revenue | $ | 3,009,860 |
| | $ | 3,147,773 |
| | $ | 3,248,173 |
| | $ | 3,100,303 |
|
| Gross margin | 1,196,014 |
| | 1,200,329 |
| | 1,247,187 |
| | 1,208,264 |
|
Operating income (1) | 206,768 |
| | 231,364 |
| | 236,111 |
| | 222,400 |
|
Income from continuing operations (2) | 140,833 |
| | 151,812 |
| | 151,707 |
| | 99,063 |
|
Net income from discontinued operations (5) (6) | 440 |
| | 781 |
| | 398 |
| | — |
|
| Net income | 141,273 |
| | 152,593 |
| | 152,105 |
| | 99,063 |
|
| Net income (loss) attributable to continuing noncontrolling interest | 479 |
| | (46 | ) | | 1,352 |
| | 1,015 |
|
| Net income attributable to discontinued noncontrolling interest | 406 |
| | 376 |
| | 192 |
| | — |
|
| Net income attributable to LKQ stockholders | 140,388 |
| | 152,263 |
| | 150,561 |
| | 98,048 |
|
| | | | | | | | |
Basic earnings per share from continuing operations (7) | $ | 0.46 |
| | $ | 0.49 |
| | $ | 0.49 |
| | $ | 0.31 |
|
Diluted earnings per share from continuing operations (7) | $ | 0.46 |
| | $ | 0.49 |
| | $ | 0.49 |
| | $ | 0.31 |
|
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Long-lived assets | | | |
| United States | $ | 1,371 | | | $ | 1,487 | |
| Germany | 290 | | | 329 | |
| United Kingdom | 256 | | | 305 | |
| Other countries | 546 | | | 539 | |
| Total long-lived assets | $ | 2,463 | | | $ | 2,660 | |
|
| | | | | | | | | | | | | | | |
| | Quarter Ended (3) |
| (In thousands, except per share data) | Dec. 31 (2) (4) (5) | | Sep. 30 (2) | | Jun. 30 | | Mar. 31 |
| 2018 | | | | | | | |
| Revenue | $ | 3,002,781 |
| | $ | 3,122,378 |
| | $ | 3,030,751 |
| | $ | 2,720,764 |
|
| Gross margin | 1,161,809 |
| | 1,197,198 |
| | 1,161,879 |
| | 1,053,971 |
|
Operating income (4) | 164,146 |
| | 234,733 |
| | 256,794 |
| | 226,568 |
|
Income from continuing operations (2) | 42,456 |
| | 134,480 |
| | 157,866 |
| | 152,763 |
|
Net loss from discontinued operations (5) | (4,397 | ) | | — |
| | — |
| | — |
|
| Net income | 38,059 |
| | 134,480 |
| | 157,866 |
| | 152,763 |
|
| Net income (loss) attributable to continuing noncontrolling interest | 2,010 |
| | 378 |
| | 859 |
| | (197 | ) |
| Net income attributable to LKQ stockholders | 36,049 |
| | 134,102 |
| | 157,007 |
| | 152,960 |
|
| | | | | | | | |
Basic earnings per share from continuing operations (7) | $ | 0.13 |
| | $ | 0.42 |
| | $ | 0.51 |
| | $ | 0.49 |
|
Diluted earnings per share from continuing operations (7) | $ | 0.13 |
| | $ | 0.42 |
| | $ | 0.50 |
| | $ | 0.49 |
|
| |
(1) | Reflects impairment charges of $15 million, $33 million, and $2 million to net assets held for sale recorded in the first, second, and fourth quarters of 2019, respectively, and a $4 million net reversal of impairment in the third quarter of 2019. See "Net Assets Held for Sale" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
| |
(2) | Reflects impairment charges of $40 million in the first quarter of 2019, and charges of $48 million and $23 million in the fourth and third quarters of 2018, respectively, related to the Mekonomen equity investment. See "Investments in Unconsolidated Subsidiaries" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
(3) The 2018 amounts presented above include the results of operations of Stahlgruber, from its acquisition effective May 30, 2018.
| |
(4) | Reflects a $33 million goodwill impairment charge on the Aviation reporting unit recorded in the fourth quarter of 2018. See "Intangible Assets" in Note 4, "Summary of Significant Accounting Policies," for further information.
|
| |
(5) | In the first quarter of 2017, LKQ completed the sale of the glass manufacturing business of its PGW subsidiary. During the fourth quarter of 2019, we incurred costs related to the disposal of the glass manufacturing business of PGW and settled certain tax matters. During the fourth quarter of 2018, we recorded a final tax expense adjustment of $4 million to the loss on sale of the glass manufacturing business of PGW. See "Glass Manufacturing Business" in Note 3, "Discontinued Operations" for further information regarding the disposal of the glass manufacturing business. |
| |
(6) | In the second quarter of 2019, we classified the acquired Stahlgruber Czech Republic wholesale business as discontinued operations. See "Czech Republic" in Note 3, "Discontinued Operations" for further information regarding the planned disposal of the Czech Republic business. |
| |
(7) | The sum of the quarters may not equal the total of the respective year's earnings per share on either a basic or diluted basis due to changes in weighted average shares outstanding throughout the year. |
Note 18. Condensed Consolidating Financial Information25. Subsequent Events
LKQ Corporation (the "Parent") issued, and the Guarantors have fully and unconditionally guaranteed, jointly and severally, the U.S. Notes (2023) due on May 15, 2023. A Guarantor's guarantee will be unconditionally and automatically released and discharged upon the occurrence of any of the following events: (i) a transfer (including as a result of consolidation or merger) by the Guarantor to any person that is not a Guarantor of all or substantially all assets and properties of such Guarantor, provided the Guarantor is also released from its obligations with respect to indebtedness under the
New Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (ii) a transfer (including as a result of consolidation or merger) to any person that is not a Guarantor of the equity interests of a Guarantor or issuance by a Guarantor of its equity interests such that the Guarantor ceases to be a subsidiary, as defined in the U.S. Notes (2023) Indenture, provided the Guarantor is also released from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); (iii) the release of the Guarantor from its obligations with respect to indebtedness under the Credit Agreement or other indebtedness of ours, which obligation gave rise to the guarantee of the U.S. Notes (2023); and (iv) upon legal defeasance, covenant defeasance or satisfaction and discharge of the U.S. Notes (2023) Indenture, as defined in the U.S. Notes (2023) Indenture.
Presented below are the condensed consolidating financial statements of the Parent, the Guarantors, the non-guarantor subsidiaries (the "Non-Guarantors"), and the elimination entries necessary to present our financial statements on a consolidated basis as required by Rule 3-10 of Regulation S-X of the Securities Exchange Act of 1934 resulting from the guarantees of the U.S. Notes (2023). Investments in consolidated subsidiaries have been presented under the equity method of accounting. The principal elimination entries eliminate investments in subsidiaries, intercompany balances, and intercompany revenue and expenses. The condensed consolidating financial statements below have been prepared from our financial information on the same basis of accounting as the consolidated financial statements, and may not necessarily be indicative of the financial position, results of operations or cash flows had the Parent, Guarantors and Non-Guarantors operated as independent entities.
On January 10, 2020,5, 2023, we redeemedand certain other subsidiaries of ours (collectively, the U.S Notes (2023) at which point the guarantees were released. Refer to "U.S. Notes (2023)""Borrowers") entered into a new Credit Agreement (the “New Credit Agreement”) with several lenders; Wells Fargo Bank, National Association (“Wells Fargo Bank”), as administrative agent; Bank of America, N.A. (“Bank of America”), as syndication agent; PNC Bank, National Association, Truist Bank and MUFG Bank, Ltd. (“MUFG”), as Documentation Agents; Wells Fargo Bank and Bank of America, as Sustainability Structuring Agents; Wells Fargo Securities, LLC, BofA Securities, Inc., PNC Capital Markets LLC, Truist Securities, Inc. and MUFG, as joint bookrunners and joint lead arrangers. The New Credit Agreement replaced our Prior Credit Agreement (as described in Note 1018, "Long-Term Obligations,"Obligations").
The New Credit Agreement 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 further informationthe issuance of letters of credit and a $150 million sublimit for swing line loans (the “Revolving Loans”) and; (ii) an unsecured term loan facility of up to $500 million (the “Term Loan” and collectively with the Revolving Loans, the “Loans”). The Revolving Loans have a maturity date of January 5, 2028 and the Term Loan has a maturity date of January 5, 2026, each of which may be extended by one additional year. The Term Loan has no required amortization payments prior to its maturity date. Proceeds from the Loans may be used (i) to refinance certain existing indebtedness of LKQ and its subsidiaries and (ii) for general corporate purposes of LKQ and its subsidiaries in the ordinary course of business, including acquisitions and capital expenditures.
Under the New Credit Agreement, our borrowings will 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 New 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 New Credit Agreement, and limits on the redemption.Company’s and its subsidiaries’ ability to incur liens and indebtedness.
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenue | $ | — |
| | $ | 6,269,185 |
| | $ | 6,384,822 |
| | $ | (147,898 | ) | | $ | 12,506,109 |
|
| Cost of goods sold | — |
| | 3,711,074 |
| | 4,091,139 |
| | (147,898 | ) | | 7,654,315 |
|
| Gross margin | — |
|
| 2,558,111 |
|
| 2,293,683 |
|
| — |
|
| 4,851,794 |
|
| Selling, general and administrative expenses | 45,914 |
| | 1,732,282 |
| | 1,802,104 |
| | — |
| | 3,580,300 |
|
| Restructuring and acquisition related expenses | — |
| | 8,644 |
| | 28,335 |
| | — |
| | 36,979 |
|
| Impairment of net assets held for sale and goodwill | — |
| | 39,355 |
| | 7,747 |
| | — |
| | 47,102 |
|
| Depreciation and amortization | 479 |
| | 105,288 |
| | 185,003 |
| | — |
| | 290,770 |
|
| Operating (loss) income | (46,393 | ) |
| 672,542 |
|
| 270,494 |
|
| — |
|
| 896,643 |
|
| Other expense (income): | | | | | | | | |
|
| Interest expense | 52,376 |
| | 299 |
| | 85,829 |
| | — |
| | 138,504 |
|
Intercompany interest (income) expense, net
| (58,762 | ) | | 32,899 |
| | 25,863 |
| | — |
| | — |
|
| Gain on debt extinguishment | — |
| | (128 | ) | | — |
| | — |
| | (128 | ) |
| Interest income and other (income) expense, net | (13,269 | ) | | (20,376 | ) | | 890 |
| | — |
| | (32,755 | ) |
| Total other (income) expense, net | (19,655 | ) |
| 12,694 |
|
| 112,582 |
|
| — |
|
| 105,621 |
|
| (Loss) income from continuing operations before (benefit) provision for income taxes | (26,738 | ) |
| 659,848 |
|
| 157,912 |
|
| — |
| | 791,022 |
|
| (Benefit) provision for income taxes | (7,062 | ) | | 169,173 |
| | 53,219 |
| | — |
| | 215,330 |
|
| Equity in earnings (losses) of unconsolidated subsidiaries | — |
| | 1,220 |
| | (33,497 | ) | | — |
| | (32,277 | ) |
| Equity in earnings of subsidiaries | 559,317 |
| | 10,824 |
| | — |
| | (570,141 | ) | | — |
|
| Income from continuing operations | 539,641 |
|
| 502,719 |
|
| 71,196 |
|
| (570,141 | ) | | 543,415 |
|
| Net income (loss) from discontinued operations | 1,619 |
| | (1,253 | ) | | 1,673 |
| | (420 | ) | | 1,619 |
|
| Net income | 541,260 |
| | 501,466 |
| | 72,869 |
| | (570,561 | ) | | 545,034 |
|
| Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,800 |
| | — |
| | 2,800 |
|
| Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 974 |
| | — |
| | 974 |
|
| Net income attributable to LKQ stockholders | $ | 541,260 |
| | $ | 501,466 |
| | $ | 69,095 |
| | $ | (570,561 | ) | | $ | 541,260 |
|
Under the terms of the New Credit Agreement, the Borrowers withdrew initial borrowings totaling a U.S. Dollar equivalent $1.8 billion at closing. Amounts borrowed under the New Credit Agreement were used by the Borrowers to repay the outstanding principal amount and related fees and expenses under the Prior Credit Agreement and for other corporate purposes.
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenue | $ | — |
| | $ | 6,276,951 |
| | $ | 5,766,958 |
| | $ | (167,235 | ) | | $ | 11,876,674 |
|
| Cost of goods sold | — |
| | 3,783,376 |
| | 3,685,676 |
| | (167,235 | ) | | 7,301,817 |
|
| Gross margin | — |
|
| 2,493,575 |
|
| 2,081,282 |
|
| — |
| | 4,574,857 |
|
| Selling, general and administrative expenses | 27,394 |
| | 1,713,118 |
| | 1,612,219 |
| | — |
| | 3,352,731 |
|
| Restructuring and acquisition related expenses | — |
| | 3,140 |
| | 29,288 |
| | — |
| | 32,428 |
|
| Impairment of net assets held for sale and goodwill | — |
| | 33,244 |
| | — |
| | — |
| | 33,244 |
|
| Depreciation and amortization | 137 |
| | 99,665 |
| | 174,411 |
| | — |
| | 274,213 |
|
| Operating (loss) income | (27,531 | ) |
| 644,408 |
|
| 265,364 |
|
| — |
| | 882,241 |
|
| Other expense (income): | | | | | | | | | |
| Interest expense | 66,794 |
| | 640 |
| | 78,943 |
| | — |
| | 146,377 |
|
| Intercompany interest (income) expense, net | (65,072 | ) | | 40,756 |
| | 24,316 |
| | — |
| | — |
|
| Loss on debt extinguishment | 1,350 |
| | — |
| | — |
| | — |
| | 1,350 |
|
| Interest income and other (income) expense, net | (1,082 | ) |
| (15,586 | ) |
| 7,751 |
|
| — |
| | (8,917 | ) |
| Total other expense, net | 1,990 |
| | 25,810 |
| | 111,010 |
|
| — |
| | 138,810 |
|
| (Loss) income from continuing operations before (benefit) provision for income taxes | (29,521 | ) | | 618,598 |
| | 154,354 |
| | — |
| | 743,431 |
|
| (Benefit) provision for income taxes | (18,600 | ) | | 163,937 |
| | 46,058 |
| | — |
| | 191,395 |
|
| Equity in earnings (losses) of unconsolidated subsidiaries | — |
| | 173 |
| | (64,644 | ) | | — |
| | (64,471 | ) |
| Equity in earnings of subsidiaries | 495,436 |
|
| 16,598 |
|
| — |
|
| (512,034 | ) | | — |
|
| Income from continuing operations | 484,515 |
| | 471,432 |
| | 43,652 |
| | (512,034 | ) | | 487,565 |
|
| Net loss from discontinued operations | (4,397 | ) |
| (4,397 | ) |
| — |
|
| 4,397 |
| | (4,397 | ) |
| Net income | 480,118 |
| | 467,035 |
| | 43,652 |
| | (507,637 | ) | | 483,168 |
|
| Less: net income attributable to noncontrolling interest | — |
| | — |
| | 3,050 |
| | — |
| | 3,050 |
|
| Net income attributable to LKQ stockholders | $ | 480,118 |
| | $ | 467,035 |
| | $ | 40,602 |
| | $ | (507,637 | ) | | $ | 480,118 |
|
LKQ CORPORATION AND SUBSIDIARIES
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Revenue | $ | — |
| | $ | 5,780,904 |
| | $ | 4,116,161 |
| | $ | (160,156 | ) | | $ | 9,736,909 |
|
| Cost of goods sold | — |
| | 3,458,304 |
| | 2,639,138 |
| | (160,156 | ) | | 5,937,286 |
|
| Gross margin | — |
|
| 2,322,600 |
|
| 1,477,023 |
|
| — |
| | 3,799,623 |
|
| Selling, general and administrative expenses | 29,884 |
| | 1,557,883 |
| | 1,127,640 |
| | — |
| | 2,715,407 |
|
| Restructuring and acquisition related expenses | — |
| | 7,352 |
| | 12,320 |
| | — |
| | 19,672 |
|
| Depreciation and amortization | 118 |
| | 96,717 |
| | 122,711 |
| | — |
| | 219,546 |
|
| Operating (loss) income | (30,002 | ) |
| 660,648 |
|
| 214,352 |
|
| — |
| | 844,998 |
|
| Other expense (income): | | | | | | | | | |
| Interest expense | 66,030 |
| | 546 |
| | 35,064 |
| | — |
| | 101,640 |
|
| Intercompany interest (income) expense, net | (17,873 | ) | | (2,383 | ) | | 20,256 |
| | — |
| | — |
|
| Loss on debt extinguishment | 456 |
| | — |
| | — |
| | — |
| | 456 |
|
| Interest income and other expense (income), net | 242 |
| | (14,323 | ) | | (9,644 | ) | | — |
| | (23,725 | ) |
| Total other expense (income), net | 48,855 |
| | (16,160 | ) | | 45,676 |
| | — |
| | 78,371 |
|
| (Loss) income from continuing operations before provision for income taxes | (78,857 | ) | | 676,808 |
| | 168,676 |
| | — |
| | 766,627 |
|
| Provision for income taxes | 28,684 |
| | 168,288 |
| | 38,588 |
| | — |
| | 235,560 |
|
| Equity in earnings of unconsolidated subsidiaries | — |
| | — |
| | 5,907 |
| | — |
| | 5,907 |
|
| Equity in earnings of subsidiaries | 648,031 |
| | 21,836 |
| | — |
| | (669,867 | ) | | — |
|
| Income from continuing operations | 540,490 |
| | 530,356 |
| | 135,995 |
| | (669,867 | ) | | 536,974 |
|
| Net (loss) income from discontinued operations | (6,746 | ) | | (6,746 | ) | | 2,050 |
| | 4,696 |
| | (6,746 | ) |
| Net income | 533,744 |
|
| 523,610 |
|
| 138,045 |
|
| (665,171 | ) |
| 530,228 |
|
| Less: net loss attributable to noncontrolling interest | — |
| | — |
| | (3,516 | ) | | — |
| | (3,516 | ) |
| Net income attributable to LKQ stockholders | $ | 533,744 |
| | $ | 523,610 |
| | $ | 141,561 |
| | $ | (665,171 | ) | | $ | 533,744 |
|
In connection with entering into the New Credit Agreement noted above, Wells Fargo and the various lending parties terminated the existing Senior Secured Credit Agreement and each amendment thereto resulting in an immaterial loss on extinguishment of debt.
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Net income | $ | 541,260 |
| | $ | 501,466 |
| | $ | 72,869 |
| | $ | (570,561 | ) | | $ | 545,034 |
|
| Less: net income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,800 |
| | — |
| | 2,800 |
|
| Less: net income attributable to discontinued noncontrolling interest | — |
| | — |
| | 974 |
| | — |
| | 974 |
|
| Net income attributable to LKQ stockholders | 541,260 |
| | 501,466 |
| | 69,095 |
| | (570,561 | ) | | 541,260 |
|
| | | | | | | | | | |
| Other comprehensive (loss) income: | | | | | | | | | |
| Foreign currency translation, net of tax | 6,704 |
| | 5,477 |
| | 5,360 |
| | (10,837 | ) | | 6,704 |
|
| Net change in unrealized gains/losses on cash flow hedges, net of tax | (9,016 | ) | | — |
| | — |
| | — |
| | (9,016 | ) |
| Net change in unrealized gains/losses on pension plans, net of tax | (23,859 | ) | | (6,088 | ) | | (17,771 | ) | | 23,859 |
| | (23,859 | ) |
| Net change in other comprehensive income from unconsolidated subsidiaries | 236 |
| | — |
| | 236 |
| | (236 | ) | | 236 |
|
| Other comprehensive loss | (25,935 | ) | | (611 | ) | | (12,175 | ) | | 12,786 |
| | (25,935 | ) |
| | | | | | | | | | |
| Comprehensive income | 515,325 |
| | 500,855 |
| | 60,694 |
| | (557,775 | ) | | 519,099 |
|
| Less: comprehensive income attributable to continuing noncontrolling interest | — |
| | — |
| | 2,800 |
| | — |
| | 2,800 |
|
| Less: comprehensive income attributable to discontinued noncontrolling interest | — |
| | — |
| | 974 |
| | — |
| | 974 |
|
| Comprehensive income attributable to LKQ stockholders | $ | 515,325 |
| | $ | 500,855 |
| | $ | 56,920 |
| | $ | (557,775 | ) | | $ | 515,325 |
|
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Net income | $ | 480,118 |
| | $ | 467,035 |
| | $ | 43,652 |
| | $ | (507,637 | ) | | $ | 483,168 |
|
| Less: net income attributable to noncontrolling interest | — |
| | — |
| | 3,050 |
| | — |
| | 3,050 |
|
| Net income attributable to LKQ stockholders | 480,118 |
| | 467,035 |
| | 40,602 |
| | (507,637 | ) | | 480,118 |
|
| | | | | | | | | | |
| Other comprehensive (loss) income: | | | | | | | | | |
| Foreign currency translation, net of tax | (108,523 | ) | | (8,628 | ) | | (75,462 | ) | | 84,090 |
| | (108,523 | ) |
| Net change in unrealized gains/losses on cash flow hedges, net of tax | 350 |
| | — |
| | — |
| | — |
| | 350 |
|
| Net change in unrealized gains/losses on pension plans, net of tax | 697 |
| | 1,266 |
| | (569 | ) | | (697 | ) | | 697 |
|
| Net change in other comprehensive loss from unconsolidated subsidiaries | (2,343 | ) | | — |
| | (2,343 | ) | | 2,343 |
| | (2,343 | ) |
| Other comprehensive loss | (109,819 | ) | | (7,362 | ) | | (78,374 | ) | | 85,736 |
| | (109,819 | ) |
| | | | | | | | | | |
| Comprehensive income (loss) | 370,299 |
| | 459,673 |
| | (34,722 | ) | | (421,901 | ) | | 373,349 |
|
| Less: comprehensive income attributable to noncontrolling interest | — |
| | — |
| | 3,050 |
| | — |
| | 3,050 |
|
| Comprehensive income (loss) attributable to LKQ stockholders | $ | 370,299 |
| | $ | 459,673 |
| | $ | (37,772 | ) | | $ | (421,901 | ) | | $ | 370,299 |
|
Interest Rate Swaps
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Comprehensive Income (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Net income | $ | 533,744 |
| | $ | 523,610 |
| | $ | 138,045 |
| | $ | (665,171 | ) | | $ | 530,228 |
|
| Less: net loss attributable to noncontrolling interest | — |
| | — |
| | (3,516 | ) | | — |
| | (3,516 | ) |
| Net income attributable to LKQ stockholders | 533,744 |
| | 523,610 |
| | 141,561 |
| | (665,171 | ) | | 533,744 |
|
| | | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | |
| Foreign currency translation, net of tax | 200,596 |
| | 16,743 |
| | 206,049 |
| | (222,792 | ) | | 200,596 |
|
| Net change in unrealized gains/losses on cash flow hedges, net of tax | 3,447 |
| | (133 | ) | | — |
| | 133 |
| | 3,447 |
|
| Net change in unrealized gains/losses on pension plans, net of tax | (6,035 | ) | | (3,254 | ) | | (2,781 | ) | | 6,035 |
| | (6,035 | ) |
| Net change in other comprehensive loss from unconsolidated subsidiaries | (1,309 | ) | | — |
| | (1,309 | ) | | 1,309 |
| | (1,309 | ) |
| Other comprehensive income | 196,699 |
| | 13,356 |
| | 201,959 |
| | (215,315 | ) | | 196,699 |
|
| | | | | | | | | | |
| Comprehensive income | 730,443 |
| | 536,966 |
| | 340,004 |
| | (880,486 | ) | | 726,927 |
|
| Less: comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | (3,516 | ) | | — |
| | (3,516 | ) |
| Comprehensive income attributable to LKQ stockholders | $ | 730,443 |
| | $ | 536,966 |
| | $ | 343,520 |
| | $ | (880,486 | ) | | $ | 730,443 |
|
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 240,476 |
| | $ | 44,326 |
| | $ | 238,218 |
| | $ | — |
| | $ | 523,020 |
|
| Receivables, net | — |
| | 304,416 |
| | 826,716 |
| | — |
| | 1,131,132 |
|
| Intercompany receivables, net | 9,822 |
| | — |
| | 18,261 |
| | (28,083 | ) | | — |
|
| Inventories | — |
| | 1,289,389 |
| | 1,483,388 |
| | — |
| | 2,772,777 |
|
| Prepaid expenses and other current assets | 11,606 |
| | 94,146 |
| | 155,138 |
| | — |
| | 260,890 |
|
| Total current assets | 261,904 |
| | 1,732,277 |
| | 2,721,721 |
| | (28,083 | ) | | 4,687,819 |
|
| Property, plant and equipment, net | 423 |
| | 640,648 |
| | 593,329 |
| | — |
| | 1,234,400 |
|
| Operating lease assets, net | 3,701 |
| | 808,726 |
| | 496,084 |
| | — |
| | 1,308,511 |
|
| Intangible assets: | | | | | | | | | |
| Goodwill | — |
| | 2,012,282 |
| | 2,394,253 |
| | — |
| | 4,406,535 |
|
| Other intangibles, net | 564 |
| | 249,497 |
| | 600,277 |
| | — |
| | 850,338 |
|
| Investment in subsidiaries | 5,345,724 |
| | 127,551 |
| | — |
| | (5,473,275 | ) | | — |
|
| Intercompany notes receivable | 1,021,380 |
| | 120,099 |
| | — |
| | (1,141,479 | ) | | — |
|
| Equity method investments | — |
| | 17,624 |
| | 121,619 |
| | — |
| | 139,243 |
|
| Other noncurrent assets | 64,080 |
| | 39,204 |
| | 49,826 |
| | — |
| | 153,110 |
|
| Total assets | $ | 6,697,776 |
| | $ | 5,747,908 |
| | $ | 6,977,109 |
| | $ | (6,642,837 | ) | | $ | 12,779,956 |
|
| Liabilities and Stockholders’ Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 2,883 |
| | $ | 397,647 |
| | $ | 542,265 |
| | $ | — |
| | $ | 942,795 |
|
| Intercompany payables, net | — |
| | 18,261 |
| | 9,822 |
| | (28,083 | ) | | — |
|
| Accrued expenses: | | | | | | | | |
|
| Accrued payroll-related liabilities | 8,837 |
| | 66,877 |
| | 103,489 |
| | — |
| | 179,203 |
|
| Refund liability | — |
| | 46,789 |
| | 50,525 |
| | — |
| | 97,314 |
|
| Other accrued expenses | 8,895 |
| | 119,352 |
| | 161,436 |
| | — |
| | 289,683 |
|
| Other current liabilities | 282 |
| | 23,641 |
| | 97,700 |
| |
|
| | 121,623 |
|
| Current portion of operating lease liabilities | 224 |
| | 119,538 |
| | 101,765 |
| | — |
| | 221,527 |
|
| Current portion of long-term obligations | 202,220 |
| | 3,124 |
| | 121,023 |
| | — |
| | 326,367 |
|
| Total current liabilities | 223,341 |
| | 795,229 |
| | 1,188,025 |
| | (28,083 | ) | | 2,178,512 |
|
| Long-term operating lease liabilities, excluding current portion | 3,883 |
| | 721,584 |
| | 412,130 |
| | — |
| | 1,137,597 |
|
| Long-term obligations, excluding current portion | 1,331,015 |
| | 14,268 |
| | 2,370,106 |
| | — |
| | 3,715,389 |
|
| Intercompany notes payable | — |
| | 517,361 |
| | 624,118 |
| | (1,141,479 | ) | | — |
|
| Deferred income taxes | 5,229 |
| | 161,574 |
| | 143,326 |
| | — |
| | 310,129 |
|
| Other noncurrent liabilities | 125,432 |
| | 80,611 |
| | 159,629 |
| | — |
| | 365,672 |
|
| Redeemable noncontrolling interest | — |
| | — |
| | 24,077 |
| | — |
| | 24,077 |
|
| Stockholders' equity: | | | | | | | | |
|
| Total Company stockholders’ equity | 5,008,876 |
| | 3,457,281 |
| | 2,015,994 |
| | (5,473,275 | ) | | 5,008,876 |
|
| Noncontrolling interest | — |
| | — |
| | 39,704 |
| | — |
| | 39,704 |
|
| Total stockholders’ equity | 5,008,876 |
| | 3,457,281 |
| | 2,055,698 |
| | (5,473,275 | ) | | 5,048,580 |
|
| Total liabilities and stockholders' equity | $ | 6,697,776 |
| | $ | 5,747,908 |
| | $ | 6,977,109 |
| | $ | (6,642,837 | ) | | $ | 12,779,956 |
|
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Balance Sheets (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| Assets | | | | | | | | | |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 25,633 |
| | $ | 29,285 |
| | $ | 276,843 |
| | $ | — |
| | $ | 331,761 |
|
| Receivables, net | 310 |
| | 316,726 |
| | 837,047 |
| | — |
| | 1,154,083 |
|
| Intercompany receivables, net | 6,978 |
| | — |
| | 12,880 |
| | (19,858 | ) | | — |
|
| Inventories | — |
| | 1,343,612 |
| | 1,492,463 |
| | — |
| | 2,836,075 |
|
| Prepaid expenses and other current assets | 18,611 |
| | 99,356 |
| | 81,063 |
| | — |
| | 199,030 |
|
| Total current assets | 51,532 |
| | 1,788,979 |
| | 2,700,296 |
| | (19,858 | ) | | 4,520,949 |
|
| Property, plant and equipment, net | 1,547 |
| | 600,054 |
| | 618,561 |
| | — |
| | 1,220,162 |
|
| Intangible assets: | | | | | | | | | |
| Goodwill | — |
| | 1,973,364 |
| | 2,408,094 |
| | — |
| | 4,381,458 |
|
| Other intangibles, net | 260 |
| | 272,451 |
| | 656,041 |
| | — |
| | 928,752 |
|
| Investment in subsidiaries | 5,224,006 |
| | 111,826 |
| | — |
| | (5,335,832 | ) | | — |
|
| Intercompany notes receivable | 1,220,582 |
| | 10,515 |
| | — |
| | (1,231,097 | ) | | — |
|
| Equity method investments | — |
| | 16,404 |
| | 162,765 |
| | — |
| | 179,169 |
|
| Other noncurrent assets | 70,283 |
| | 40,548 |
| | 52,081 |
| | — |
| | 162,912 |
|
| Total assets | $ | 6,568,210 |
| | $ | 4,814,141 |
| | $ | 6,597,838 |
| | $ | (6,586,787 | ) | | $ | 11,393,402 |
|
| Liabilities and Stockholders’ Equity | | | | | | | | | |
| Current liabilities: | | | | | | | | | |
| Accounts payable | $ | 2,454 |
| | $ | 343,116 |
| | $ | 596,828 |
| | $ | — |
| | $ | 942,398 |
|
| Intercompany payables, net | — |
| | 12,880 |
| | 6,978 |
| | (19,858 | ) | | — |
|
| Accrued expenses: | | | | | | | | | |
| Accrued payroll-related liabilities | 6,652 |
| | 70,267 |
| | 95,086 |
| | — |
| | 172,005 |
|
| Refund liability | — |
| | 50,899 |
| | 53,686 |
| | — |
| | 104,585 |
|
| Other accrued expenses | 5,454 |
| | 105,672 |
| | 177,299 |
| | — |
| | 288,425 |
|
| Other current liabilities | 283 |
| | 17,860 |
| | 42,966 |
| | — |
| | 61,109 |
|
| Current portion of long-term obligations | 8,459 |
| | 2,932 |
| | 110,435 |
| | — |
| | 121,826 |
|
| Total current liabilities | 23,302 |
| | 603,626 |
| | 1,083,278 |
| | (19,858 | ) | | 1,690,348 |
|
| Long-term obligations, excluding current portion | 1,628,677 |
| | 13,532 |
| | 2,546,465 |
| | — |
| | 4,188,674 |
|
| Intercompany notes payable | — |
| | 597,283 |
| | 633,814 |
| | (1,231,097 | ) | | — |
|
| Deferred income taxes | 8,045 |
| | 135,355 |
| | 168,034 |
| | — |
| | 311,434 |
|
| Other noncurrent liabilities | 125,888 |
| | 99,147 |
| | 139,159 |
| | — |
| | 364,194 |
|
| Total Company stockholders’ equity | 4,782,298 |
| | 3,365,198 |
| | 1,970,634 |
| | (5,335,832 | ) | | 4,782,298 |
|
| Noncontrolling interest | — |
| | — |
| | 56,454 |
| | — |
| | 56,454 |
|
| Total stockholders’ equity | 4,782,298 |
| | 3,365,198 |
| | 2,027,088 |
| | (5,335,832 | ) | | 4,838,752 |
|
| Total liabilities and stockholders' equity | $ | 6,568,210 |
| | $ | 4,814,141 |
| | $ | 6,597,838 |
| | $ | (6,586,787 | ) | | $ | 11,393,402 |
|
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
| | Parent | | Guarantors | | Non-Guarantors (1) | | Eliminations | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net cash provided by operating activities | $ | 500,658 |
| | $ | 275,443 |
| | $ | 378,100 |
| | $ | (90,168 | ) | | $ | 1,064,033 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
| Purchases of property, plant and equipment | (564 | ) | | (134,992 | ) | | (130,174 | ) | | — |
| | (265,730 | ) |
| Proceeds from disposals of property, plant and equipment | — |
| | 6,821 |
| | 9,224 |
| | — |
| | 16,045 |
|
| Investment and intercompany note activity with subsidiaries | 130,600 |
| | — |
| | — |
| | (130,600 | ) | | — |
|
| Acquisitions, net of cash and restricted cash acquired | — |
| | (23,643 | ) | | (3,653 | ) | | — |
| | (27,296 | ) |
| Proceeds from disposal of businesses | — |
| | 19,682 |
| | (1,213 | ) | | — |
| | 18,469 |
|
| Investments in unconsolidated subsidiaries | — |
| | (3,250 | ) | | (4,344 | ) | | — |
| | (7,594 | ) |
| Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 358,995 |
| | — |
| | (358,995 | ) | | — |
|
| Other investing activities, net | 967 |
| | 286 |
| | — |
| | — |
| | 1,253 |
|
| Net cash provided by (used in) investing activities | 131,003 |
| | 223,899 |
| | (130,160 | ) | | (489,595 | ) | | (264,853 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
| Purchase of treasury stock | (291,813 | ) | | — |
| | — |
| | — |
| | (291,813 | ) |
| Borrowings under revolving credit facilities | 218,000 |
| | — |
| | 387,708 |
| | — |
| | 605,708 |
|
| Repayments under revolving credit facilities | (316,692 | ) | | — |
| | (417,779 | ) | | — |
| | (734,471 | ) |
| Repayments under term loans | (8,750 | ) | | — |
| | — |
| | — |
| | (8,750 | ) |
| Borrowings under receivables securitization facility | — |
| | — |
| | 36,600 |
| | — |
| | 36,600 |
|
| Repayments under receivables securitization facility | — |
| | — |
| | (146,600 | ) | | — |
| | (146,600 | ) |
| Payment of notes issued and assumed debt from acquisitions | (19,123 | ) | | — |
| | — |
| | — |
| | (19,123 | ) |
| Repayments of other debt, net | (749 | ) | | (2,185 | ) | | (30,988 | ) | | — |
| | (33,922 | ) |
| Other financing activities, net | 2,309 |
| | — |
| | (10,607 | ) | | — |
| | (8,298 | ) |
| Investment and intercompany note activity with parent | — |
| | (34,026 | ) | | (96,574 | ) | | 130,600 |
| | — |
|
| Dividends | — |
| | (449,163 | ) | | — |
| | 449,163 |
| | — |
|
| Net cash used in financing activities | (416,818 | ) | | (485,374 | ) | | (278,240 | ) | | 579,763 |
| | (600,669 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 1,073 |
| | (1,977 | ) | | — |
| | (904 | ) |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 214,843 |
| | 15,041 |
| | (32,277 | ) | | — |
| | 197,607 |
|
| Cash, cash equivalents and restricted cash of continuing operations, beginning of period | 25,633 |
| | 29,285 |
| | 282,332 |
| | — |
| | 337,250 |
|
| Cash, cash equivalents and restricted cash of continuing and discontinued operations, end of period | 240,476 |
|
| 44,326 |
|
| 250,055 |
|
| — |
|
| 534,857 |
|
| Less: Cash and cash equivalents of discontinued operations, end of period | — |
| | — |
| | 6,470 |
| | — |
| | 6,470 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 240,476 |
| | $ | 44,326 |
| | $ | 243,585 |
| | $ | — |
| | $ | 528,387 |
|
(1) Restricted cash is only included in the condensed consolidating financial information of the Non-Guarantors
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Parent | | Guarantors | | Non-Guarantors (1) | | Eliminations | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net cash provided by operating activities | $ | 481,138 |
| | $ | 277,595 |
| | $ | 111,213 |
| | $ | (159,207 | ) | | $ | 710,739 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
| Purchases of property, plant and equipment | (848 | ) | | (136,033 | ) | | (113,146 | ) | | — |
| | (250,027 | ) |
| Proceeds from disposals of property, plant and equipment | — |
| | 22,393 |
| | 5,266 |
| | — |
| | 27,659 |
|
| Investment and intercompany note activity with subsidiaries | (97,261 | ) | | — |
| | — |
| | 97,261 |
| | — |
|
| Return of investment in subsidiaries | 143,524 |
| | — |
| | — |
| | (143,524 | ) | | — |
|
| Acquisitions, net of cash and restricted cash acquired | — |
| | (8,217 | ) | | (1,206,778 | ) | | — |
| | (1,214,995 | ) |
| Investments in unconsolidated subsidiaries | — |
| | (12,216 | ) | | (48,084 | ) | | — |
| | (60,300 | ) |
| Receipts of deferred purchase price on receivables under factoring arrangements | — |
| | 317,091 |
| | 36,991 |
| | (317,091 | ) | | 36,991 |
|
| Other investing activities, net | 887 |
| | 180 |
| | 666 |
| | — |
| | 1,733 |
|
| Net cash provided by (used in) investing activities | 46,302 |
| | 183,198 |
| | (1,325,085 | ) | | (363,354 | ) | | (1,458,939 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
| Debt issuance costs | (5,434 | ) | | — |
| | (15,694 | ) | | — |
| | (21,128 | ) |
| Proceeds from issuance of Euro Notes (2026/28) | — |
| | — |
| | 1,232,100 |
| | — |
| | 1,232,100 |
|
| Purchase of treasury stock | (60,000 | ) | | — |
| | — |
| | — |
| | (60,000 | ) |
| Borrowings under revolving credit facilities | 765,632 |
| | — |
| | 901,693 |
| | — |
| | 1,667,325 |
|
| Repayments under revolving credit facilities | (884,863 | ) | | — |
| | (644,107 | ) | | — |
| | (1,528,970 | ) |
| Repayments under term loans | (354,800 | ) | | — |
| | — |
| | — |
| | (354,800 | ) |
| Borrowings under receivables securitization facility | — |
| | — |
| | 10,120 |
| | — |
| | 10,120 |
|
| Repayments under receivables securitization facility | — |
| | — |
| | (120 | ) | | — |
| | (120 | ) |
| Payment of notes issued and assumed debt from acquisitions | — |
| | — |
| | (54,888 | ) | | — |
| | (54,888 | ) |
| Repayments of other debt, net | (385 | ) | | (3,636 | ) | | (7,709 | ) | | — |
| | (11,730 | ) |
| Other financing activities, net | 3,683 |
| | — |
| | 1,403 |
| | — |
| | 5,086 |
|
| Investment and intercompany note activity with parent | — |
| | (68,435 | ) | | 165,696 |
| | (97,261 | ) | | — |
|
| Dividends | — |
| | (392,883 | ) | | (226,939 | ) | | 619,822 |
| | — |
|
| Net cash (used in) provided by financing activities | (536,167 | ) | | (464,954 | ) | | 1,361,555 |
| | 522,561 |
| | 882,995 |
|
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | (1,685 | ) | | (75,626 | ) | | — |
| | (77,311 | ) |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (8,727 | ) | | (5,846 | ) | | 72,057 |
| | — |
| | 57,484 |
|
| Cash, cash equivalents and restricted cash, beginning of period | 34,360 |
| | 35,131 |
| | 210,275 |
| | — |
| | 279,766 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 25,633 |
|
| $ | 29,285 |
|
| $ | 282,332 |
|
| $ | — |
|
| $ | 337,250 |
|
(1) Restricted cash is only included in the condensed consolidating financial information of the Non-Guarantors
LKQ CORPORATION AND SUBSIDIARIES Condensed Consolidating Statements of Cash Flows (In thousands) |
| | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
| | Parent | | Guarantors | | Non-Guarantors | | Eliminations | | Consolidated |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net cash provided by operating activities | $ | 243,011 |
| | $ | 186,459 |
| | $ | 95,617 |
| | $ | (6,187 | ) | | $ | 518,900 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
| Purchases of property, plant and equipment | (648 | ) | | (87,102 | ) | | (91,340 | ) | | — |
| | (179,090 | ) |
| Proceeds from disposals of property, plant and equipment | — |
| | 6,490 |
| | 2,217 |
| | — |
| | 8,707 |
|
| Investment and intercompany note activity with subsidiaries | 57,735 |
| | — |
| | — |
| | (57,735 | ) | | — |
|
| Acquisitions, net of cash and restricted cash acquired | — |
| | (335,582 | ) | | (177,506 | ) | | — |
| | (513,088 | ) |
| Proceeds from disposals of businesses | — |
| | 305,740 |
| | (4,443 | ) | | — |
| | 301,297 |
|
| Investments in unconsolidated subsidiaries | — |
| | (2,750 | ) | | (4,914 | ) | | — |
| | (7,664 | ) |
Receipts of deferred purchase price on receivables under factoring arrangements (1) | — |
| | 294,925 |
| | — |
| | (294,925 | ) | | — |
|
| Other investing activities, net | — |
| | — |
| | 5,243 |
| | — |
| | 5,243 |
|
| Net cash provided by (used in) investing activities | 57,087 |
| | 181,721 |
| | (270,743 | ) | | (352,660 | ) | | (384,595 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
| Debt issuance costs | (4,267 | ) | | — |
| | — |
| | — |
| | (4,267 | ) |
| Borrowings under revolving credit facilities | 558,000 |
| | — |
| | 281,171 |
| | — |
| | 839,171 |
|
| Repayments under revolving credit facilities | (824,862 | ) | | — |
| | (121,615 | ) | | — |
| | (946,477 | ) |
| Repayments under term loans | (27,884 | ) | | — |
| | — |
| | — |
| | (27,884 | ) |
| Borrowings under receivables securitization facility | — |
| | — |
| | 11,245 |
| | — |
| | 11,245 |
|
| Repayments under receivables securitization facility | — |
| | — |
| | (11,245 | ) | | — |
| | (11,245 | ) |
| (Repayments) borrowings of other debt, net | (1,700 | ) | | (1,318 | ) | | 22,724 |
| | — |
| | 19,706 |
|
| Other financing activities, net | 1,945 |
| | (1,336 | ) | | 6,575 |
| | — |
| | 7,184 |
|
| Investment and intercompany note activity with parent | — |
| | (65,498 | ) | | 7,763 |
| | 57,735 |
| | — |
|
| Dividends | — |
| | (301,112 | ) | | — |
| | 301,112 |
| | — |
|
| Net cash (used in) provided by financing activities | (298,768 | ) | | (369,264 | ) | | 196,618 |
| | 358,847 |
| | (112,567 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | — |
| | 706 |
| | 22,806 |
| | — |
| | 23,512 |
|
| Net increase (decrease) in cash, cash equivalents and restricted cash | 1,330 |
| | (378 | ) | | 44,298 |
| | — |
| | 45,250 |
|
| Cash, cash equivalents and restricted cash of continuing operations, beginning of period | 33,030 |
| | 35,360 |
| | 159,010 |
| | — |
| | 227,400 |
|
| Add: Cash, cash equivalents and restricted cash of discontinued operations, beginning of period | — |
| | 149 |
| | 6,967 |
| | — |
| | 7,116 |
|
| Cash, cash equivalents and restricted cash of continuing and discontinued operations, beginning of period | 33,030 |
| | 35,509 |
| | 165,977 |
| | — |
| | 234,516 |
|
| Cash, cash equivalents and restricted cash, end of period | $ | 34,360 |
| | $ | 35,131 |
| | $ | 210,275 |
| | $ | — |
| | $ | 279,766 |
|
(1) Reflects the impact of adopting ASU 2016-15
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019,2022, the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of LKQ Corporation's management, including our Chief Executive Officer and our Chief Financial Officer, of our "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company'sLKQ Corporation and subsidiaries' (the "Company") disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file with the Securities and Exchange Commission ("SEC")SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed is accumulated and communicated to the Company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Report of Management on Internal Control over Financial Reporting dated February 27, 202023, 2023
Management of LKQ Corporation and subsidiaries (the "Company")the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the Company's financial statements.
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing practices, and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2019.2022. Management based this assessment on criteria for effective internal control over financial reporting described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting. Management reviewed the results of its assessment with the Audit Committee of the Company's Board of Directors.
LKQ CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on this assessment, management determined that, as of December 31, 2019,2022, the Company maintained effective internal control over financial reporting. Deloitte & Touche LLP, independent registered public accounting firm, who audited and reported on the consolidated financial statementsConsolidated Financial Statements of the Company included in this report, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2019.2022.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of LKQ Corporation:
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of LKQ Corporation and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 27, 2020, expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph regarding the Company's adoption of ASC Topic 842, Leases.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
|
|
/s/ DELOITTE & TOUCHE LLP |
Chicago, Illinois
February 27, 2020
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
The information appearing under the caption "Election of our Board of Directors" in our Proxy Statement for the Annual Meeting of Stockholders to be held May 12, 20209, 2023 (the "Proxy Statement") is incorporated herein by reference.
Executive Officers
Our executive officers, their ages at December 31, 2019,2022, and their positions with us are set forth below. Our executive officers are elected by and serve at the discretion of our Board of Directors.
|
| | | | | | | | | | | | | |
| Name | | Age | | Position |
| Dominick Zarcone | | 6164 | | President, Chief Executive Officer and Director |
Varun LaroyiaRick Galloway | | 4844 | | ExecutiveSenior Vice President and Chief Financial Officer |
Arnd FranzVarun Laroyia | | 5451 | | Chief Executive Officer and Managing Director, LKQ Europe |
Victor M. Casini | | 57 | | Senior Vice President, General Counsel and Corporate Secretary |
| Walter P. Hanley | | 5356 | | Senior Vice President - Development |
| Justin L. Jude | | 4347 | | Senior Vice President of Operations - Wholesale Parts Division |
| Michael T. Brooks | | 5053 | | Senior Vice President and Chief Information Officer |
| Matthew J. McKay | | 4245 | | Senior Vice President - General Counsel & Corporate Secretary |
| Genevieve L. Dombrowski | | 46 | | Senior Vice President - Human Resources |
| Michael S. Clark | | 4548 | | Vice President - Finance and Controller |
Dominick Zarcone became our President and Chief Executive Officer in May 2017. Mr. Zarcone was our Executive Vice President and Chief Financial Officer from March 2015 to May 2017. Prior to joining our Company, he was the Managing Director and Chief Financial Officer of Baird Financial Group, a capital markets and wealth management company, and certain of its affiliates from April 2011 to March 2015. He also served from April 2011 to March 2015 as Treasurer of Baird Funds, Inc., a family of fixed income and equity mutual funds managed by Robert W. Baird & Co. Incorporated, a registered broker/dealer. From February 1995 to April 2011, Mr. Zarcone was a Managing Director of the Investment Banking department of Robert W. Baird & Co. Incorporated. From February 1986 to February 1995, he was with the investment banking company Kidder, Peabody & Co., Incorporated, most recently as Senior Vice President of Investment Banking. Mr. Zarcone is a member of the Board of Directors of Generac Power Systems, Inc., a designer and manufacturer of power generation equipment and engine-powered products.
Varun Laroyia
Rick Galloway became our Senior Vice President and Chief Financial Officer in September 2022. Mr. Galloway served as Chief Financial Officer of our Wholesale - North America and Self Service Segments from July 2019 to September 2022. Prior to joining our company, Mr. Galloway held various positions at Alcoa Corporation from 2010 to 2019, including Chief Financial Officer of Alcoa’s Engineered Products and Solutions division, a business that consisted of 97 manufacturing facilities across the globe. Mr. Galloway began his career in public accounting with Grant Thornton as an auditor with clients in various industries, including manufacturing, oil and gas, non-profit, and government.
Varun Laroyia became our Chief Executive Officer and Managing Director of LKQ Europe in September 2022. Previously, Mr. Laroyia was our Executive Vice President and Chief Financial Officer infrom October 2017.2017 to September 2022. Prior to joining our Company,us, he was the Chief Financial Officer of CBRE’s Global Workplace Solutions ("GWS")(GWS) business since 2015, following CBRE’s acquisition of the GWS business from Johnson Controls Inc. (“JCI”), where he was the Chief Financial Officer and Vice President of Information Technology since 2013. From 2006 to 2013, Mr. Laroyia held various positions of increasing responsibility at JCI including Group Vice President of Global Audit and Vice President of Finance and Administration for its Building Efficiency business across Europe and Africa. From 2000 to 2006, Mr. Laroyia held various positions at Gateway, Inc., including Vice President and Controller based in the U.S. and Finance Director for the United Kingdom and Ireland. Prior to Gateway, he was with General Electric in the U.S. and then GE Capital in London, where he served as a Manager of European Corporate Development.U.K.. Mr. Laroyia started his career at KPMG in London.
Arnd Franz became our Chief Executive Officer, LKQ Europe in October 2019. Prior to joining us in April 2019 as Chief Operating Officer of LKQ Europe, Mr. Franz was Corporate Executive Vice President of Automotive Sales, Application Engineering and Aftermarket of the MAHLE Group, an automotive parts manufacturer headquartered in Stuttgart, Germany, from 2013. From 2006 until 2013, he was Executive Vice President and General Manager for MAHLE Aftermarket. Mr. Franz also served asLaroyia is a member of the Board of ManagementDirectors of the MAHLE group from 2013 to March 2019.
Victor M. Casini has been our Vice President, General Counsel and Corporate Secretary from our inception in February 1998. In March 2008, he was elected Senior Vice President. Mr. Casini was a member of our Board of Directors from May 2010 until May 2012. From July 1992 to December 2011, Mr. Casini was the Executive Vice President and General Counsel of Flynn Enterprises,Univar Solutions, Inc., a venture capital, hedgingglobal distributor of chemical products and consulting firm. Mr. Casini served as Senior Vice President, General Counsel and Corporate Secretary of Discovery Zone, Inc., an operator and franchiser of family entertainment centers, from July 1992 until May 1995. Prior to July 1992, Mr. Casini practiced corporate and securities law with the law firm of Bell, Boyd & Lloyd LLP (now known as K&L Gates LLP) in Chicago, Illinois for more than five years.related services.
Walter P. Hanley joined us in December 2002 as our Vice President of Development, Associate General Counsel and Assistant Secretary. In December 2005, he became our Senior Vice President of Development. Mr. Hanley served as Senior Vice President, General Counsel and Secretary of Emerald Casino, Inc., an owner of a license to operate a riverboat casino in the State of Illinois, from June 1999 until August 2002. Mr. Hanley served as Senior Vice President, General Counsel and Secretary of Blue Chip Casino, Inc., an owner and operator of a riverboat gaming vessel in Michigan City, Indiana, from July 1996 until November 1999. Mr. Hanley served as Vice President and Associate General Counsel of Flynn Enterprises, Inc. from May 1995 until February 1998 and as Associate General Counsel of Discovery Zone, Inc. from March 1993 until May 1995. Prior to March 1993, Mr. Hanley practiced corporate and securities law with the law firm of Bell, Boyd & Lloyd LLP (now known as K&L Gates LLP) in Chicago, Illinois.
Justin L. Jude became our Senior Vice President of Operations – Wholesale Parts Division in July 2015. Mr. Jude has been with us since February 2004 in various roles, including from March 2008 to February 2011 as Vice President - Supply Chain, from February 2011 to May 2014 as Vice President – Information Systems (North America), and from June 2014 to July 2015 as President of Keystone Automotive Operations, Inc., our specialty automotive business. Mr. Jude has been in the Company’s industry for over 1920 years.
Michael T. Brooks joined LKQ as Senior Vice President – Chief Information Officer in February 2020. Prior to joining us, Mr. Brooks held various Senior Vice Presidentsenior management positions including Chief Information Officer, forwith GATX Corporation, a global railcar leasing company, from 2008 to 2020.2020, including Chief Information Officer and Chief Operations Officer. Prior to GATX, he served as Chief Information Officer for Constellation Energy,NewEnergy, a retail energy company, from 2003 to 2008. Mr. Brooks also spent over ten years in consulting roles with a focusfocusing on process improvement and systems implementations with firms such asincluding Accenture and Oracle.
Matthew J. McKay became our Senior Vice President, of Human ResourcesGeneral Counsel and Corporate Secretary in June 2016.March 2021. Prior thereto, he served as our Senior Vice President of Human Resources from June 2016 to March 2021 and Associate General Counsel from December 2007 to May 2016, focusing on employment-related matters.2016. Prior to joining us, Mr. McKay served as a law clerk for Judge William Bauer at the United States Court of Appeals for the Seventh Circuit.
Genevieve L. Dombrowskibecame our Senior Vice President of Human Resources in March 2021. Ms. Dombrowski joined us from Republic Services where she held various leadership positions within the HR function from May 2011 to February 2021, most recently serving as Vice President of Talent. Prior to Republic Services, Ms. Dombrowski worked as an HR leader for six years with Aramark in its Sports and Entertainment line of business from February 2005 to May 2011.
Michael S. Clark has been our Vice President – Finance and Controller since February 2011. Prior thereto, he served as our Assistant Controller since May 2008. Prior to joining our Company, he was the SEC Reporting Manager of FMC Technologies, Inc., a global provider of technology solutions for the energy industry, from December 2004 to May 2008. Before joining FMC Technologies, Mr. Clark, a certified public accountant (inactive), worked in public accounting for more than eight years, leaving as a Senior Manager in the audit practice of Deloitte & Touche.
Code of Ethics
A copy of our Code of Ethics, which is applicable to our principal executive officer, principal financial officer, and principal accounting officer, is available free of charge through our website at www.lkqcorp.com. Any amendments to the elements of our Code of Ethics enumerated in paragraph (b) of Item 406 of Regulation S-K, or waivers granted to the above listed officers relating to such elements, will be posted on our website.
Section 16 Compliance
Information appearing under the caption "Delinquent Section 16(a) Reports" in the Proxy Statement is incorporated herein by reference.
Audit Committee
Information appearing under the caption "Corporate Governance—Committees of the Board—Audit Committee" in the Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information appearing under the captions "Director Compensation—Director Compensation Table," "Executive Compensation—Compensation Discussion and Analysis," "Corporate Governance—Compensation Committee Interlocks and Insider Participation" and "Executive Compensation—Compensation Tables" in the Proxy Statement is incorporated herein by reference.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information appearing under the caption "Other Information—Principal Stockholders" in the Proxy Statement is incorporated herein by reference.
The following table provides information about our common stock that may be issued under our equity compensation plans as of December 31, 2019:2022 (in millions):
Equity Compensation Plan Information
| | | | | | | | | | | | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by stockholders | | | | | | |
| | | | | | |
| Restricted stock units | | 1.3 | | | $ | — | | | |
| Performance-based restricted stock units | | 0.5 | | | $ | — | | | |
| Total equity compensation plans approved by stockholders | | 1.8 | | | | | 8.2 | |
| Equity compensation plans not approved by stockholders | | — | | | $ | — | | | — | |
| Total | | 1.8 | | | | | 8.2 | |
|
| | | | | | | | | | |
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants, and rights (a) | | Weighted-average exercise price of outstanding options, warrants, and rights (b) | | Number of securities remaining available for future issuance under equity
compensation plans (excluding
securities reflected in column (a))
(c) |
| Equity compensation plans approved by stockholders | | | | | | |
| Stock options | | 114,594 |
| | $ | 12.26 |
| | |
| Restricted stock units | | 1,612,026 |
| | $ | — |
| | |
| Performance-based restricted stock units | | 136,170 |
| | $ | — |
| | |
| Total equity compensation plans approved by stockholders | | 1,862,790 |
| | | | 10,426,797 |
|
| Equity compensation plans not approved by stockholders | | — |
| | $ | — |
| | — |
|
| Total | | 1,862,790 |
| | | | 10,426,797 |
|
See Note 7,15, "Stock-Based Compensation," to the consolidated financial statementsConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information related to the equity incentive plans listed above.
| |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information appearing under the captions "Other Information—Certain Transactions," "Election of our Board of Directors" and "Corporate Governance—Director Independence" in the Proxy Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information appearing under the captions "Ratification of Appointment of Our Independent Registered Public Accounting Firm—Audit Fees and Non-Audit Fees" and "Ratification of Appointment of Our Independent Registered Public Accounting Firm—Policy on Audit Committee Approval of Audit and Non-Audit Services" in the Proxy Statement is incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
Reference is made to the information set forth in Part II, Item 8 of this Annual Report on Form 10-K, which information is incorporated herein by reference.
(a)(2) Financial Statement Schedules
Other than as set forth below, all
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not required under the related instructions, are not applicable, or the information has been provided in the consolidated financial statementsConsolidated Financial Statements or the notes thereto.
Schedule II—Valuation and Qualifying Accounts and Reserves
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| Description | | Balance at
Beginning of
Period | | Additions
Charged to
Costs and
Expenses | | Deductions | | Acquisitions and Other | | Balance at End
of Period |
| | | |
| ALLOWANCE FOR DOUBTFUL ACCOUNTS: | | | | | | | | | | |
| Year ended December 31, 2019 | | $ | 57,207 |
| | $ | 12,088 |
| | $ | (18,308 | ) | | $ | 1,698 |
| | $ | 52,685 |
|
| Year ended December 31, 2018 | | 57,609 |
| | 13,970 |
| | (15,945 | ) | | 1,573 |
| | 57,207 |
|
| Year ended December 31, 2017 | | 45,608 |
| | 15,387 |
| | (13,012 | ) | | 9,626 |
| | 57,609 |
|
| | | | | | | | | | | |
ALLOWANCE FOR ESTIMATED RETURNS, DISCOUNTS & ALLOWANCES: (1) | | | | | | | | | | |
| Year ended December 31, 2017 | | $ | 38,345 |
| | $ | 1,885,517 |
| | $ | (1,884,250 | ) | | $ | 2,713 |
| | $ | 42,325 |
|
| |
(1) | Subsequent to our adoption of ASC 606 in 2018, we present a refund liability and a returns asset within the Consolidated Balance Sheet, whereas in periods prior to adoption, we presented the estimated margin impact of expected returns as a contra-asset within accounts receivable. See Note 5, "Revenue Recognition," to the consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for additional information. |
(a)(3) Exhibits
The exhibits to this Annual Report on Form 10-K are listed in Item 15(b) of this Annual Report on Form 10-K. Included in the exhibits listed therein are the following exhibits which constitute management contracts or compensatory plans or arrangements:
|
| | | | | | | |
| Exhibit Number | | Description |
| | LKQ Corporation 401(k) Plus Plan dated August 1, 1999. |
| | Amendment to LKQ Corporation 401(k) Plus Plan. |
| | Trust for LKQ Corporation 401(k) Plus Plan. |
| | LKQ Corporation 401(k) Plus Plan II, as amended and restated effective as of January 1, 2019. |
| | LKQ Corporation 1998 Equity Incentive Plan, as amended. |
| | Form of LKQ Corporation Restricted Stock Unit Agreement for Non-Employee Directors. |
| | Form of LKQ Corporation Restricted Stock Unit Agreement for Employees. |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 1 Award). |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 2 Award). |
| | LKQ Corporation Cash Incentive PlanPlan. |
| | Form of LKQ Corporation Annual Cash Bonus Award MemorandumMemorandum. |
| | Form of LKQ Corporation Long-Term Cash Incentive Award MemorandumMemorandum. |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement. |
| | Form of Indemnification Agreement between directors and officers of LKQ Corporation and LKQ Corporation. |
| Amended and Restated LKQ Corporation Long Term Incentive Plan. |
| Form of LKQ Corporation Executive Officer Long Term Incentive Plan Award Memorandum. |
| Change of Control Agreement between LKQ Corporation and John S. Quinn dated as of July 24, 2014. |
| Change of Control Agreement between LKQ Corporation and Walter P. Hanley dated as of July 24, 2014. |
| Change of Control Agreement between LKQ Corporation and Victor M. Casini dated as of July 24, 2014. |
| Change of Control Agreement between LKQ Corporation and Michael S. Clark dated as of July 24, 2014. |
| | Change of Control Agreement between LKQ Corporation and Dominick P. Zarcone dated as of March 30, 2015. |
| | Change of Control Agreement between LKQ Corporation and Justin L. Jude dated as of May 13, 2015. |
| Change of Control Agreement between LKQ Corporation and Ashley T. Brooks dated as of May 2, 2016. |
| Change of Control Agreement between LKQ Corporation and Matthew J. McKay dated as of June 1, 2016. |
| | Change of Control Agreement between LKQ Corporation and Varun Laroyia dated as of October 1, 2017. |
| Change of Control Agreement between LKQ Corporation and Arnd Franz dated as of October 1, 2019. |
| Change of Control Agreement between LKQ Corporation and Michael T. Brooks dated as of January 31, 2020. |
| | Change of Control Agreement between LKQ Corporation and Genevieve L. Dombrowski dated as of March 22, 2021. |
| | Change of Control Agreement between LKQ Corporation and Rick Galloway dated as of September 15, 2022. |
| | LKQ Severance Policy for Key Executives. |
| Offer Letter to John S. Quinn dated February 12, 2015, as amended. |
| Services Agreement dated as of February 26, 2015 between LKQ Corporation and John S. Quinn. |
| Offer Letter to Dominick P. Zarcone dated February 12, 2015. |
| | Memorandum dated as of May 25, 2017 from Joseph M. Holsten to Dominick P. Zarcone. |
| | Offer letter to Varun Laroyia dated September 5, 2017. |
| Service Agreement between Euro Car Parts Limited and Sukhpal Singh AhluwaliaLetter dated as of September 7, 2017.14, 2022 from Dominick Zarcone to Varun Laroyia. |
| Settlement Agreement among Euro Car Parts Limited, LKQ Corporation and Sukhpal Singh Ahluwalia | Memorandum dated as of January 2, 2019.September 14, 2022 from Dominick Zarcone to Rick Galloway. |
| | LKQ Corporation Nonqualified Deferred Compensation Plan for Non-Employee Directors |
(b) Exhibits
|
| | | | | | | |
| Exhibit Number | | Description |
| | Restated Certificate of Incorporation of LKQ Corporation (incorporated herein by reference to Exhibit 3.1 to the Company’s report on Form 10-Q filed with the SEC on October 31, 2014). |
| | Amended and Restated Bylaws of LKQ Corporation, as amended as of May 7, 2019 (incorporated herein by reference to Exhibit 3.1 to the Company's report on Form 8-K filed with the SEC on May 8, 2019). |
| | Specimen of common stock certificate (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1/A, Registration No. 333-107417 filed with the SEC on September 12, 2003). |
| Amendment and Restatement | Credit Agreement, dated as of January 29, 20165, 2023, by and among LKQ Corporation LKQ Delaware LLP, and certain additional subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as administrative agent (incorporated herein by reference to Exhibit 4.1 to the Company'sCompany’s report on Form 8-K filed with the SEC on February 2, 2016)January 6, 2023). |
| Amendment No. 1 dated as of December 14, 2016 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as administrative agent (incorporated herein by reference to Exhibit 4.3 to the Company's report on Form 10-K filed with the SEC on February 27, 2017). |
| Amendment No. 2 dated as of December 1, 2017 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as administrative agent. (incorporated herein by reference to Exhibit 4.4 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| Amendment No. 3 dated as of November 20, 2018 to the Fourth Amended and Restated Credit Agreement, which is Exhibit A to the Amendment and Restatement Agreement dated as of January 29, 2016 by and among LKQ Corporation, LKQ Delaware LLP, and certain additional subsidiaries of LKQ Corporation, as borrowers, certain financial institutions, as lenders, and Wells Fargo Bank, National Association, as administrative agent (incorporated herein by reference to Exhibit 4.5 to the Company's report on Form 10-K filed with the SEC on March 1, 2019). |
| Indenture dated as of May 9, 2013 among LKQ Corporation, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 8-K filed with the SEC on May 10, 2013). |
| Supplemental Indenture dated as of May 8, 2014 among LKQ Corporation, as Issuer, the Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company’s report on Form 10-Q filed with the SEC on August 1, 2014). |
| Supplemental Indenture dated as of September 9, 2016 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.11 to the Company's report on Form 10-K filed with the SEC on February 27, 2017). |
| Supplemental Indenture dated as of July 20, 2017 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.8 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| Supplemental Indenture dated as of November 29, 2017 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.9 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| Supplemental Indenture dated as of April 6, 2018 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company's report on Form 10-Q filed with the SEC on May 7, 2018). |
| Supplemental Indenture dated as of July 12, 2018 among LKQ Corporation, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and U.S. Bank National Association, as Trustee (incorporated herein by reference to Exhibit 4.4 to the Company's report on Form 10-Q filed with the SEC on August 6, 2018). |
| Indenture dated as of April 14, 2016 among LKQ Italia Bondco S.p.A., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation, the Trustee, and the Paying Agent, Transfer Agent and Registrar (incorporated herein by reference to Exhibit 4.1 to the Company’s report on Form 8-K filed with the SEC on April 18, 2016). |
| | Supplemental Indenture dated as of June 13, 2016 among Auto Kelly a.s., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016). |
| | Supplemental Indenture dated as of June 13, 2016 among ELIT CZ, spol. s r.o., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee (incorporated herein by reference to Exhibit 4.3 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016). |
|
| |
| | Supplemental Indenture dated as of June 13, 2016 among Rhiag-Inter Auto Parts Italia S.p.A., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee (incorporated herein by reference to Exhibit 4.4 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016). |
| | Supplemental Indenture dated as of June 13, 2016 among Bertolotti S.p.A., LKQ Corporation, LKQ Italia Bondco S.p.A. and the Trustee (incorporated herein by reference to Exhibit 4.5 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016). |
| | Supplemental Indenture dated as of September 9, 2016 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company’s report on Form 10-Q filed with the SEC on November 1, 2016). |
| | Supplemental Indenture dated as of July 24, 2017 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.16 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| | Supplemental Indenture dated as of November 29, 2017 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.17 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| | Supplemental Indenture dated as of April 27, 2018 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.3 to the Company's report on Form 10-Q filed with the SEC on August 6, 2018). |
| | Supplemental Indenture dated as of July 16, 2018 among LKQ Italia Bondco S.p.A., as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.5 to the Company's report on Form 10-Q filed with the SEC on August 6, 2018). |
| | Supplemental Indenture dated as of June 21, 2019 among LKQ Italia Bondco S.p.A, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 10-Q filed with the SEC on August 2, 2019). |
| | Indenture dated as of April 9, 2018 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation, the trustee, paying agent, transfer agent, and registrar (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 8-K filed with the SEC on April 12, 2018). |
| | Supplemental Indenture dated as of July 16, 2018 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.6 to the Company's report on Form 10-Q filed with the SEC on August 6, 2018). |
| | | | | | | | |
| Exhibit Number | | Description |
| Supplemental Indenture dated as of June 21, 2019 among LKQ Italia Bondco S.p.A, as Issuer, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.1 to the Company's report on Form 10-Q filed with the SEC on August 2, 2019). |
| Supplemental Indenture dated as of June 21, 2019 among LKQ European Holdings B.V., as Issuer, LKQ Corporation, certain subsidiaries of LKQ Corporation, as Guarantors, and BNP Paribas Trust Corporation UK Limited, as Trustee (incorporated herein by reference to Exhibit 4.2 to the Company's report on Form 10-Q filed with the SEC on August 2, 2019). |
| | Description of the Company's Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934.1934 (incorporated herein by reference to Exhibit 4.21 to the Company's report on Form 10-K filed with the SEC on February 26, 2021). |
| | LKQ Corporation 401(k) Plus Plan dated August 1, 1999 (incorporated herein by reference to Exhibit 10.23 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003). |
| | Amendment to LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.24 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003). |
| | Trust for LKQ Corporation 401(k) Plus Plan (incorporated herein by reference to Exhibit 10.25 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003). |
| | LKQ Corporation 401(k) Plus Plan II, as amended and restated effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.4 to the Company's report on Form 10-K filed with the SEC on March 1, 2019). |
| | LKQ Corporation 1998 Equity Incentive Plan, as amended (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q filed with the SEC on November 1, 2016). |
| | Form of LKQ Corporation Restricted Stock Unit Agreement for Non-Employee Directors.Directors (incorporated herein by reference to Exhibit 10.6 to the Company's report on Form 10-K filed with the SEC on February 26, 2021). |
| | Form of LKQ Corporation Restricted Stock Unit Agreement for Employees (incorporated herein by reference to Exhibit 10.7 to the Company’s report on Form 10-K filed with the SEC on February 25, 2022). |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 1 Award) (incorporated herein by reference to Exhibit 10.7 to the Company's report on Form 10-K filed with the SEC on February 27, 2020). |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (PSU 2 Award) (incorporated herein by reference to Exhibit 10.8 to the Company's report on Form 10-K filed with the SEC on February 27, 2020). |
| | LKQ Corporation Cash Incentive Plan (incorporated herein by reference to Exhibit 10.6 to the Company’s report on Form 10-Q filed with the SEC on May 2, 2019). |
|
| |
| | Form of LKQ Corporation Annual Cash Bonus Award Memorandum.Memorandum (incorporated herein by reference to Exhibit 10.10 to the Company's report on Form 10-K filed with the SEC on February 27, 2020). |
| | Form of LKQ Corporation Long-Term Cash Incentive Award Memorandum.Memorandum (incorporated herein by reference to Exhibit 10.11 to the Company's report on Form 10-K filed with the SEC on February 26, 2021). |
| | Form of LKQ Corporation Performance-Based Restricted Stock Unit Agreement (incorporated herein by reference to Exhibit 10.9 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| | Form of Indemnification Agreement between directors and officers of LKQ Corporation and LKQ Corporation (incorporated herein by reference to Exhibit 10.30 to the Company’s Registration Statement on Form S-1, Registration No. 333-107417 filed with the SEC on July 28, 2003). |
| Amended and Restated LKQ Corporation Long Term Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on November 7, 2014). |
| Form of LKQ Corporation Executive Officer Long Term Incentive Plan Award Memorandum (incorporated herein by reference to Exhibit 10.15 to the Company's report on Form 10-K filed with the SEC on March 1, 2019). |
| Change of Control Agreement between LKQ Corporation and John S. Quinn dated as of July 24, 2014 (incorporated herein by reference to Exhibit 10.3 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014). |
| Change of Control Agreement between LKQ Corporation and Walter P. Hanley dated as of July 24, 2014 (incorporated herein by reference to Exhibit 10.4 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014). |
| Change of Control Agreement between LKQ Corporation and Victor M. Casini dated as of July 24, 2014 (incorporated herein by reference to Exhibit 10.5 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014). |
| Change of Control Agreement between LKQ Corporation and Michael S. Clark dated as of July 24, 2014 (incorporated herein by reference to Exhibit 10.8 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014). |
| | Change of Control Agreement between LKQ Corporation and Dominick P. Zarcone dated as of March 30, 2015 (incorporated herein by reference to Exhibit 10.7 to the Company’s report on Form 10-Q filed with the SEC on May 1, 2015). |
| | Change of Control Agreement between LKQ Corporation and Justin L. Jude dated as of May 13, 2015 (incorporated herein by reference to Exhibit 10.32 to the Company’s report on Form 10-K filed with the SEC on February 25, 2016). |
| Change of Control Agreement between LKQ Corporation and Ashley T. Brooks dated as of May 2, 2016 (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 10-Q filed with the SEC on August 2, 2016). |
| Change of Control Agreement between LKQ Corporation and Matthew J. McKay dated as of June 1, 2016 (incorporated herein by reference to Exhibit 10.34 to the Company's report on Form 10-K filed with the SEC on February 27, 2017). |
| | | | | | | | |
| Exhibit Number | | Description |
| | Change of Control Agreement between LKQ Corporation and Varun Laroyia dated as of October 1, 2017 (incorporated herein by reference to Exhibit 10.26 to the Company's report on Form 10-K filed with the SEC on February 28, 2018). |
| Change of Control Agreement between LKQ Corporation and Arnd Franz dated as of October 1, 2019. |
| Change of Control Agreement between LKQ Corporation and Michael T. Brooks dated as of January 31, 2020.2020 (incorporated herein by reference to Exhibit 10.26 to the Company's report on Form 10-K filed with the SEC on February 27, 2020). |
| | Change of Control Agreement between LKQ Corporation and Genevieve L. Dombrowski dated as of March 22, 2021 (incorporated herein by reference to Exhibit 10.24 to the Company's report on Form 10-K filed with the SEC on February 25, 2022). |
| | Change of Control Agreement between LKQ Corporation and Rick Galloway dated as of September 15, 2022. (incorporated herein by reference to exhibit 10.4 of the Company's report on Form 10-Q filed with the SEC on November 1, 2022) |
| | LKQ Severance Policy for Key Executives (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on July 28, 2014). |
| Receivables Sale Agreement dated as of September 28, 2012 among Keystone Automotive Industries, Inc., as an Originator, Greenleaf Auto Recyclers, LLC, as an Originator, and LKQ Receivables Finance Company, LLC, as Buyer (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on October 4, 2012). |
| Receivables Purchase Agreement dated as of September 28, 2012 among LKQ Receivables Finance Company, LLC, as Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as a Financial Institution, as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.2 to the Company’s report on Form 8-K filed with the SEC on October 4, 2012). |
| Amendment No. 1 to Receivables Purchase Agreement dated as of September 29, 2014 among LKQ Receivables Finance Company, LLC, as Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as a Financial Institution, as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.1 to the Company’s report on Form 8-K filed with the SEC on October 3, 2014). |
|
| |
| Performance Undertaking, dated as of September 28, 2012 by LKQ Corporation in favor of LKQ Receivables Finance Company, LLC (incorporated herein by reference to Exhibit 10.3 to the Company’s report on Form 8-K filed with the SEC on October 4, 2012). |
| Amendment No. 2 to Receivables Purchase Agreement dated as of November 29, 2016 among LKQ Receivables Finance Company, LLC, as Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit, and The Bank of Tokyo-Mitsubishi UFJ, Ltd., a Financial Institution, as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.40 to the Company's report on Form 10-K filed with the SEC on February 27, 2017). |
| Amendment No. 3 to Receivables Purchase Agreement dated as of December 20, 2018 among LKQ Receivables Finance Company, LLC, as Seller, LKQ Corporation, as Servicer, Victory Receivables Corporation, as a Conduit, MUFG Bank, a Financial Institution as Administrative Agent and as a Managing Agent (incorporated herein by reference to Exhibit 10.31 to the Company's report on Form 10-K filed with the SEC on March 1, 2019). |
| Offer Letter to John S. Quinn dated February 12, 2015, as amended (incorporated herein by reference to Exhibit 10.41 to the Company’s report on Form 10-K filed with the SEC on February 25, 2016). |
| Services Agreement dated as of February 26, 2015 between LKQ Corporation and John S. Quinn (incorporated herein by reference to Exhibit 10.3 to the Company’s report on Form 8-K filed with the SEC on March 3, 2015). |
| Offer Letter to Dominick P. Zarcone dated February 12, 2015 (incorporated herein by reference to Exhibit 10.4 to the Company’s report on Form 8-K filed with the SEC on March 3, 2015). |
| | Memorandum dated as of May 25, 2017 from Joseph M. Holsten to Dominick P. Zarcone (incorporated herein by reference to Exhibit 10.1 to the Company's report on Form 8-K filed with the SEC on June 5, 2017). |
| | Offer letterLetter dated as of September 14, 2022 from Dominick Zarcone to Varun Laroyia dated September 5, 2017 (incorporated herein by reference to Exhibit 10.1 to the Company's report on Form 8-K filed with the SEC on September 6, 2017)20, 2022). |
| Service Agreement between Euro Car Parts Limited and Sukhpal Singh Ahluwalia | Memorandum dated as of September 7, 201714, 2022 from Dominick Zarcone to Rick Galloway (incorporated herein by reference to Exhibit 10.110.2 to the Company's report on Form 8-K filed with the SEC on September 13, 2017)20, 2022). |
| Settlement Agreement among Euro Car Parts Limited, | LKQ Corporation and Sukhpal Singh Ahluwalia dated as of January 2, 2019 (incorporated herein by reference to Exhibit 10.40 to the Company's report on Form 10-K filed with the SEC on March 1, 2019).Nonqualified Deferred Compensation Plan for Non-Employee Directors |
| | List of subsidiaries, jurisdictions and assumed names. |
| | Consent of Independent Registered Public Accounting Firm. |
| | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | | XBRL Instance Document |
| 101.SCH | | XBRL Taxonomy Extension Schema Document |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document |
| 104 | | Cover Page Interactive Data File (formatted as(embedded within the Inline XBRL and contained in Exhibit 101)document) |
ITEM 16. FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 27, 2020.23, 2023.
| | | | | |
| LKQ CORPORATION |
| |
| By: | LKQ CORPORATION |
| |
By: | /s/ DOMINICK ZARCONE |
| Dominick Zarcone |
| President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 27, 2020.
|
| | | | | | | |
| Signature | | Title |
Principal Executive Officer: | | |
| /s/ DOMINICK ZARCONE | | President and Chief Executive Officer, Director |
| Dominick Zarcone | | (Principal Executive Officer) |
Principal Financial Officer: | | |
/s/ VARUN LAROYIARICK GALLOWAY | Executive | Senior Vice President and Chief Financial Officer |
Varun LaroyiaRick Galloway | | (Principal Financial Officer) |
Principal Accounting Officer: | | |
| /s/ MICHAEL S. CLARK | | Vice President—Finance and Controller |
| Michael S. Clark | | (Principal Accounting Officer) |
A Majority of the Directors: | | |
/s/ A. CLINTON ALLEN | Director |
A. Clinton Allen | |
| /s/ PATRICK BERARD | | Director |
| Patrick Berard | | |
| | |
| /s/ MEG ANN DIVITTO | | Director |
| Meg Ann Divitto | | |
| | |
| /s/ ROBERT M. HANSER | | Director |
| Robert M. Hanser | | |
| | |
| /s/ JOSEPH M. HOLSTEN | | Director |
| Joseph M. Holsten | | |
| | |
| /s/ BLYTHE J. MCGARVIE | | Director |
| Blythe J. McGarvie | | |
| | |
| /s/ JOHN W. MENDEL | | Director |
| John W. Mendel | | |
| | |
| /s/ JODY G. MILLER | | Director |
| Jody G. Miller | | |
/s/ JOHN F. O'BRIEN | Director | |
John F. O'Brien | | |
| | |
| /s/ GUHAN SUBRAMANIAN | | Director |
| Guhan Subramanian | | |
| | |
| /s/ XAVIER URBAIN | | Director |
| Xavier Urbain | | |
/s/ WILLIAM M. WEBSTER, IV | Director | |
William M. Webster, IV/s/ JACOB WELCH | | Director |
/s/ DOMINICK ZARCONEJacob Welch | Director | |
Dominick Zarcone | | |
| | |
| | |
