LKQ Corporation (NASDAQ:LKQ) Q3 2022 Earnings Conference Call October 27, 2022 8:00 AM ET Company Participants Joe Boutross – Vice President-Investor Relations Dominick Zarcone – President and Chief Executive Officer Varun Laroyia – Chief Executive Officer-LKQ Europe Rick Galloway – Senior Vice President and Chief Financial Officer Conference Call Participants Daniel Imbro – Stephens Inc. Michael Hoffman – Stifel Ali Faghri – Guggenheim Partners Craig Kennison – Baird Scott Stember – MKM Partners Bret Jorda ...

Q3 2022 Performance Highlights - Organic revenue growth for parts and services was 4.8% (5.3% on a per day basis)[4] - Wholesale - North America organic revenue growth for parts and services reached 10.9%[4] - Europe organic revenue growth for parts and services was 4.8% (5.8% on a per day basis)[4] - The company repurchased 6.8 million shares for $343 million[4] - The Board of Directors authorized a $1.0 billion increase to the stock repurchase program, bringing the total to $3.5 billion, extending through October 25, 2025[4] Financial Results - Q3 2022 revenue was $3.104 billion, a decrease of 5.9% compared to $3.297 billion in Q3 2021[5, 9] - Currency translation had a negative impact of 6.9%, or $228 million, on revenue[5] - Diluted EPS was $0.95, a decrease of 1.0% from $0.96 in Q3 2021[5, 9] - Adjusted Diluted EPS was $0.97, a decrease of 4.9% from $1.02 in Q3 2021[5, 9] - For the nine months ended September 30, 2022, revenue was $9.793 billion, a decrease of 1.1% compared to $9.903 billion in the same period of 2021[42, 45] Segment Performance - Europe's parts and services revenue was negatively impacted by $224 million due to unfavorable foreign exchange rates in Q3 2022[6] - Unfavorable F/X impact on European parts and services revenue of $476 million for YTD 2022[44] - Self Service revenue decreased 16.2% to $164 million in Q3 2022, including Other Revenue of $109 million[20] - Self Service revenue decreased 5.4% to $571 million for YTD 2022, including Other Revenue of $399 million[50] Outlook - The updated Adjusted Diluted EPS guidance midpoint reflects headwinds from declining metals prices and currency translation[4] - The company updated its full-year 2022 organic parts and services revenue growth outlook to 4.75% to 5.75%[7] - The company expects approximately $1.0 billion in free cash flow for the full year 2022[7]

[PART I FINANCIAL INFORMATION](index=3&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited condensed consolidated financial statements and accompanying notes for the period [Unaudited Condensed Consolidated Statements of Income](index=3&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income) Condensed Consolidated Statements of Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $3,341 | $3,435 | $6,689 | $6,606 | | Cost of goods sold | $1,974 | $2,020 | $3,965 | $3,897 | | Gross margin | $1,367 | $1,415 | $2,724 | $2,709 | | Operating income | $559 | $445 | $930 | $816 | | Income from continuing operations | $420 | $306 | $689 | $572 | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Basic earnings per share (continuing operations) | $1.49 | $1.01 | $2.43 | $1.89 | | Diluted earnings per share (continuing operations) | $1.49 | $1.01 | $2.42 | $1.89 | [Unaudited Condensed Consolidated Statements of Comprehensive Income](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Other comprehensive (loss) income | $(149) | $25 | $(202) | $(2) | | Comprehensive income attributable to LKQ stockholders | $271 | $330 | $491 | $569 | - Foreign currency translation resulted in a **significant loss of $150 million** for the three months ended June 30, 2022, compared to a gain of $22 million in the prior year, and a **loss of $204 million** for the six months ended June 30, 2022, compared to a loss of $3 million in the prior year[10](index=10&type=chunk) [Unaudited Condensed Consolidated Balance Sheets](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (in millions) | Asset/Liability/Equity | June 30, 2022 | December 31, 2021 | | :------------------------------------ | :-------------- | :---------------- | | Cash and cash equivalents | $265 | $274 | | Total current assets | $4,331 | $4,254 | | Total assets | $12,134 | $12,606 | | Total current liabilities | $2,485 | $2,165 | | Long-term obligations, excluding current portion | $2,313 | $2,777 | | Total stockholders' equity | $5,605 | $5,787 | | Total liabilities and stockholders' equity | $12,134 | $12,606 | - **Goodwill decreased** from $4,540 million at December 31, 2021, to **$4,290 million** at June 30, 2022[13](index=13&type=chunk) - **Accounts payable increased significantly** from $1,176 million at December 31, 2021, to **$1,457 million** at June 30, 2022[13](index=13&type=chunk) [Unaudited Condensed Consolidated Statements of Cash Flows](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (in millions) | Cash Flow Activity | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $737 | $933 | | Net cash provided by (used in) investing activities | $265 | $(109) | | Net cash used in financing activities | $(985) | $(809) | | Net (decrease) increase in cash and cash equivalents | $(9) | $17 | | Cash and cash equivalents, end of period | $265 | $329 | - Net cash provided by investing activities **significantly improved to $265 million** in H1 2022 from a net use of $109 million in H1 2021, primarily due to **$372 million in proceeds from the disposal of businesses**[15](index=15&type=chunk) - Net cash used in financing activities **increased to $985 million** in H1 2022 from $809 million in H1 2021, driven by **increased treasury stock purchases** ($528 million vs $344 million) and dividend payments ($142 million vs $0)[15](index=15&type=chunk) [Unaudited Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Key Changes in Stockholders' Equity (in millions) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income attributable to LKQ stockholders | $420 | $305 | $693 | $571 | | Other comprehensive (loss) income | $(149) | $25 | $(202) | $(2) | | Purchase of treasury stock | $(404) | $(304) | $(548) | $(361) | | Dividends declared to LKQ stockholders | $(71) | — | $(143) | — | | Stock-based compensation expense | $10 | $9 | $23 | $17 | | Balance as of June 30, 2022 | $5,605 | $5,895 | $5,605 | $5,895 | - The company repurchased **8.1 million shares for $404 million** during the three months ended June 30, 2022, and **10.8 million shares for $548 million** during the six months ended June 30, 2022[17](index=17&type=chunk)[21](index=21&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) [Note 1. Interim Financial Statements](index=10&type=section&id=Note%201.%20Interim%20Financial%20Statements) - The financial statements are unaudited and prepared in accordance with SEC rules for interim financial statements, condensing or omitting certain GAAP disclosures[25](index=25&type=chunk) - Interim results are not necessarily indicative of full-year results and should be read in conjunction with the 2021 Form 10-K[26](index=26&type=chunk) [Note 2. Financial Statement Information](index=10&type=section&id=Note%202.%20Financial%20Statement%20Information) Allowance for Credit Losses (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :-------------------------- | :-------------- | :---------------- | | Reserve for expected credit losses | $56 | $53 | | Provision for credit losses (3M) | $1 | $1 | | Provision for credit losses (6M) | $9 | $4 | Inventories Breakdown (in millions) | Inventory Type | June 30, 2022 | December 31, 2021 | | :----------------------------- | :-------------- | :---------------- | | Aftermarket and refurbished products | $2,172 | $2,168 | | Salvage and remanufactured products | $439 | $406 | | Manufactured products | $39 | $37 | | Total inventories | $2,650 | $2,611 | - In April 2022, the company completed the sale of PGW Auto Glass for **$361 million**, recognizing a **$155 million pretax gain** ($127 million after tax)[30](index=30&type=chunk) Investments in Unconsolidated Subsidiaries (in millions) | Investment | Ownership (June 30, 2022) | Carrying Value (June 30, 2022) | Carrying Value (December 31, 2021) | | :------------------- | :------------------------ | :----------------------------- | :--------------------------------- | | MEKO AB | 26.6% | $141 | $145 | | Other | N/A | $13 | $36 | | Total | N/A | $154 | $181 | Warranty Reserve (in millions) | Metric | Amount | | :-------------------------- | :----- | | Balance as of December 31, 2021 | $30 | | Warranty expense | $38 | | Warranty claims | $(38) | | Balance as of June 30, 2022 | $30 | [Note 3. Revenue Recognition](index=13&type=section&id=Note%203.%20Revenue%20Recognition) - Revenue is primarily derived from the sale of vehicle parts, recognized when control transfers to the customer, generally upon shipment or delivery[39](index=39&type=chunk) Revenue by Category and Segment (in millions) | Segment/Category | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :----------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | **Parts and services** | | | | | | Wholesale - North America | $1,050 | $1,024 | $2,156 | $1,993 | | Europe | $1,470 | $1,570 | $2,951 | $3,025 | | Specialty | $512 | $531 | $972 | $989 | | Self Service | $60 | $53 | $117 | $103 | | Total Parts and services | $3,092 | $3,178 | $6,196 | $6,110 | | **Other revenue** | | | | | | Wholesale - North America | $94 | $94 | $189 | $176 | | Europe | $7 | $7 | $14 | $15 | | Self Service | $148 | $156 | $290 | $305 | | Total Other revenue | $249 | $257 | $493 | $496 | | **Total revenue** | $3,341 | $3,435 | $6,689 | $6,606 | - Service-type warranty revenue deferred and recognized was **$28 million** for the six months ended June 30, 2022, with a balance of **$32 million** as of June 30, 2022[43](index=43&type=chunk) - Refund liability was **$108 million** and return asset was **$58 million** as of June 30, 2022[46](index=46&type=chunk) [Note 4. Restructuring and Transaction Related Expenses](index=15&type=section&id=Note%204.%20Restructuring%20and%20Transaction%20Related%20Expenses) - Global Restructuring Programs (2019 & 2020) are substantially complete or expected to be completed by 2023, with estimated total costs between **$108 million and $115 million**[48](index=48&type=chunk) - Restructuring liabilities related to these programs totaled **$11 million** as of June 30, 2022[49](index=49&type=chunk) - Acquisition integration plans incurred **$2 million** in restructuring expenses for both the three and six months ended June 30, 2022, with up to **$5 million** expected for future Specialty segment integrations[50](index=50&type=chunk) - The '1 LKQ Europe' program, aimed at centralization and standardization, is scheduled for completion by the end of 2024, with estimated personnel and inventory-related restructuring charges of **$40 million to $50 million** through 2024[52](index=52&type=chunk)[53](index=53&type=chunk) - Transaction related expenses were **$1 million** and **$4 million** for the three and six months ended June 30, 2022, respectively[54](index=54&type=chunk) [Note 5. Stock-Based Compensation](index=16&type=section&id=Note%205.%20Stock-Based%20Compensation) Restricted Stock Units (RSUs) Activity (in millions, except per share data) | Metric | Number Outstanding | Weighted Average Grant Date Fair Value | | :-------------------------- | :----------------- | :------------------------------------- | | Unvested as of January 1, 2022 | 1.4 | $34.85 | | Granted | 0.6 | $49.00 | | Vested | (0.4) | $36.34 | | Unvested as of June 30, 2022 | 1.6 | $40.14 | | Expected to vest after June 30, 2022 | 1.3 | $40.28 | Performance-Based RSUs (PSUs) Activity (in millions, except per share data) | Metric | Number Outstanding | Weighted Average Grant Date Fair Value | | :-------------------------- | :----------------- | :------------------------------------- | | Unvested as of January 1, 2022 | 0.5 | $31.96 | | Granted | 0.1 | $48.92 | | Vested | (0.2) | $27.74 | | Unvested as of June 30, 2022 | 0.4 | $38.64 | | Expected to vest after June 30, 2022 | 0.4 | $38.64 | - Pre-tax stock-based compensation expense totaled **$10 million** and **$23 million** for the three and six months ended June 30, 2022, respectively[57](index=57&type=chunk) [Note 6. Earnings Per Share](index=17&type=section&id=Note%206.%20Earnings%20Per%20Share) Earnings Per Share Computation (in millions, except per share amounts) | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income from continuing operations | $420 | $306 | $689 | $572 | | Weighted-average shares outstanding (basic) | 281.4 | 300.6 | 283.5 | 301.8 | | Adjusted weighted-average shares outstanding (diluted) | 282.3 | 301.5 | 284.5 | 302.6 | | Basic EPS from continuing operations | $1.49 | $1.01 | $2.43 | $1.89 | | Diluted EPS from continuing operations | $1.49 | $1.01 | $2.42 | $1.89 | [Note 7. Accumulated Other Comprehensive Income (Loss)](index=17&type=section&id=Note%207.%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Components of Accumulated Other Comprehensive Income (Loss) (in millions) | Component | Balance as of April 1, 2022 | Three Months Ended June 30, 2022 Change | Balance as of June 30, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------------------- | :-------------------------- | | Foreign Currency Translation | $(175) | $(150) | $(325) | | Unrealized Gain (Loss) on Pension Plans | $(24) | — | $(24) | | Income (Loss) from Unconsolidated Subsidiaries | $(7) | $1 | $(6) | | Total Accumulated Other Comprehensive Income (Loss) | $(206) | $(149) | $(355) | - Accumulated Other Comprehensive Loss **increased significantly from $(153) million** at January 1, 2022, to **$(355) million** at June 30, 2022, primarily due to a pretax foreign currency translation loss of **$(208) million**[60](index=60&type=chunk) [Note 8. Long-Term Obligations](index=19&type=section&id=Note%208.%20Long-Term%20Obligations) Long-Term Obligations (in millions) | Debt Type | Maturity Date | Interest Rate (June 30, 2022) | Amount (June 30, 2022) | Amount (December 31, 2021) | | :-------------------------- | :------------ | :---------------------------- | :--------------------- | :------------------------- | | Revolving credit facilities | January 2024 | 1.72% | $1,494 | $1,887 | | Euro Notes (2024) | April 2024 | 3.88% | $524 | $569 | | Euro Notes (2028) | April 2028 | 4.13% | $262 | $284 | | Total debt | N/A | N/A | $2,369 | $2,824 | - S&P Global Ratings assigned LKQ an issuer credit rating of **'BBB-' with a stable outlook** on April 18, 2022, triggering the release and suspension of collateral requirements under the Credit Agreement[67](index=67&type=chunk) - Moody's Investors Services upgraded the rating on LKQ Italia's and LKQ Euro Holdings' senior unsecured notes to **Baa3 with a stable outlook** on May 31, 2022, triggering a Covenant Suspension Event[74](index=74&type=chunk)[81](index=81&type=chunk) [Note 9. Derivative Instruments and Hedging Activities](index=21&type=section&id=Note%209.%20Derivative%20Instruments%20and%20Hedging%20Activities) - **No cash flow hedges** (interest rate swap agreements or cross currency swaps) were outstanding as of June 30, 2022, or December 31, 2021, as they were settled by June 2021[82](index=82&type=chunk) - Other short-term derivative instruments, such as foreign currency forward contracts for inventory purchases, were **not material** in notional amount or fair value[84](index=84&type=chunk) [Note 10. Fair Value Measurements](index=22&type=section&id=Note%2010.%20Fair%20Value%20Measurements) Financial Liabilities Measured at Fair Value (in millions) | Liability Type | Balance as of June 30, 2022 | Level 1 | Level 2 | Level 3 | | :----------------------------- | :-------------------------- | :------ | :------ | :------ | | Contingent consideration liabilities | $13 | $— | $— | $13 | | Deferred compensation liabilities | $71 | $— | $71 | $— | | Total Liabilities | $84 | $— | $71 | $13 | - Contingent consideration liabilities are classified as **Level 3** due to significant unobservable inputs, while deferred compensation liabilities are **Level 2**, valued using third-party and market observable data[87](index=87&type=chunk)[88](index=88&type=chunk) - The fair value of Euro Notes (2024) was approximately **$527 million** (carrying value $524 million) and Euro Notes (2028) was **$251 million** (carrying value $262 million) as of June 30, 2022[90](index=90&type=chunk) [Note 11. Employee Benefit Plans](index=23&type=section&id=Note%2011.%20Employee%20Benefit%20Plans) - The aggregate funded status of defined benefit plans was a **liability of $119 million** as of June 30, 2022, a decrease from $131 million at December 31, 2021[93](index=93&type=chunk) - Net periodic benefit cost for defined benefit plans was **$3 million** for the six months ended June 30, 2022, consistent with the prior year[94](index=94&type=chunk) [Note 12. Income Taxes](index=23&type=section&id=Note%2012.%20Income%20Taxes) - The effective income tax rate for the six months ended June 30, 2022, was **24.1%**, down from 26.3% in the prior year, primarily due to net favorable discrete items (1.2%) related to the PGW sale and geographic income distribution[97](index=97&type=chunk) [Note 13. Segment and Geographic Information](index=23&type=section&id=Note%2013.%20Segment%20and%20Geographic%20Information) - Beginning in 2022, **Wholesale - North America and Self Service** operating segments are reported separately, providing greater transparency[98](index=98&type=chunk)[99](index=99&type=chunk) Segment Financial Performance (in millions) | Segment | Third Party Revenue (3M Q2 2022) | Third Party Revenue (3M Q2 2021) | Segment EBITDA (3M Q2 2022) | Segment EBITDA (3M Q2 2021) | | :-------------------- | :------------------------------- | :------------------------------- | :-------------------------- | :-------------------------- | | Wholesale - North America | $1,144 | $1,118 | $214 | $219 | | Europe | $1,477 | $1,577 | $160 | $168 | | Specialty | $512 | $531 | $69 | $80 | | Self Service | $208 | $209 | $32 | $56 | | **Total** | **$3,341** | **$3,435** | **$475** | **$523** | | Segment | Third Party Revenue (6M H1 2022) | Third Party Revenue (6M H1 2021) | Segment EBITDA (6M H1 2022) | Segment EBITDA (6M H1 2021) | | :-------------------- | :------------------------------- | :------------------------------- | :-------------------------- | :-------------------------- | | Wholesale - North America | $2,345 | $2,169 | $432 | $413 | | Europe | $2,965 | $3,040 | $291 | $309 | | Specialty | $972 | $989 | $127 | $141 | | Self Service | $407 | $408 | $72 | $112 | | **Total** | **$6,689** | **$6,606** | **$922** | **$975** | Capital Expenditures by Reportable Segment (in millions) | Segment | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Wholesale - North America | $16 | $12 | $45 | $23 | | Europe | $19 | $22 | $42 | $48 | | Specialty | $4 | $8 | $8 | $10 | | Self Service | $1 | $4 | $4 | $7 | | **Total** | **$40** | **$46** | **$99** | **$88** | Revenue by Geographic Area (in millions) | Geographic Area | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :---------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | United States | $1,747 | $1,750 | $3,497 | $3,355 | | United Kingdom | $393 | $422 | $818 | $825 | | Germany | $390 | $419 | $776 | $807 | | Other countries | $811 | $844 | $1,598 | $1,619 | | **Total revenue** | **$3,341** | **$3,435** | **$6,689** | **$6,606** | [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's analysis of financial performance, condition, and key operational drivers [Forward-Looking Statements](index=28&type=section&id=Forward-Looking%20Statements) - The report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ materially[107](index=107&type=chunk)[108](index=108&type=chunk) [Overview](index=28&type=section&id=Overview) - LKQ Corporation is a global distributor of vehicle products, focusing on alternative parts (aftermarket, recycled, refurbished, remanufactured) for collision and mechanical repair[109](index=109&type=chunk)[110](index=110&type=chunk)[111](index=111&type=chunk) - The company operates through four reportable segments: **Wholesale - North America, Europe, Specialty, and Self Service**, with the latter two separated from the previous North America segment in 2022[112](index=112&type=chunk) [Acquisitions and Investments](index=29&type=section&id=Acquisitions%20and%20Investments) - The company has shifted its acquisition strategy from large-scale consolidation to smaller **'tuck-in' acquisitions** that offer high synergies or critical capabilities[114](index=114&type=chunk) [Sources of Revenue](index=29&type=section&id=Sources%20of%20Revenue) - Revenue is categorized into 'parts and services' (vehicle products, warranties, diagnostic services) and 'other' (scrap, precious metals, bulk sales), with 'other' revenue fluctuating based on commodity prices and volumes[115](index=115&type=chunk) [Critical Accounting Estimates](index=29&type=section&id=Critical%20Accounting%20Estimates) - There have been **no material changes** to critical accounting estimates during the six months ended June 30, 2022[116](index=116&type=chunk) [Financial Information by Geographic Area](index=29&type=section&id=Financial%20Information%20by%20Geographic%20Area) - Geographic revenue and long-lived asset information is detailed in **Note 13, 'Segment and Geographic Information'**[117](index=117&type=chunk) [1 LKQ Europe Program](index=29&type=section&id=1%20LKQ%20Europe%20Program) - The '1 LKQ Europe' program aims for structural centralization and standardization, with projects scheduled for completion by the **end of 2024**[118](index=118&type=chunk)[120](index=120&type=chunk) - Costs incurred for the program were **$8 million (3M) and $14 million (6M)** ended June 30, 2022, with expected costs of **$25-$45 million in 2022** and **$50-$70 million in 2023-2024**[120](index=120&type=chunk) [Ukraine/Russia Conflict](index=30&type=section&id=Ukraine/Russia%20Conflict) - The conflict has impacted operations in Ukraine and restricted sales to Russia, but is **not expected to have a material impact** on overall results, as Ukraine operations represent **less than 1%** of total annual revenue and operating profit[121](index=121&type=chunk) [Key Performance Indicators](index=30&type=section&id=Key%20Performance%20Indicators) - Key performance indicators include **organic revenue growth, Segment EBITDA, and Free Cash Flow**, used to evaluate growth, profitability, and cash generation[122](index=122&type=chunk)[123](index=123&type=chunk) - Organic revenue growth excludes effects of acquisitions, divestitures, and foreign currency movements[123](index=123&type=chunk) - Free Cash Flow is calculated as net cash provided by operating activities less purchases of property, plant and equipment[123](index=123&type=chunk) [Results of Operations—Consolidated](index=31&type=section&id=Results%20of%20Operations%E2%80%94Consolidated) [Consolidated Income Statement as % of Revenue](index=31&type=section&id=Consolidated%20Income%20Statement%20as%20%25%20of%20Revenue) Consolidated Income Statement as Percentage of Total Revenue | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :------------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | 100.0 % | 100.0 % | 100.0 % | 100.0 % | | Cost of goods sold | 59.1 % | 58.8 % | 59.3 % | 59.0 % | | Gross margin | 40.9 % | 41.2 % | 40.7 % | 41.0 % | | Selling, general and administrative expenses | 26.8 % | 26.2 % | 27.2 % | 26.5 % | | Operating income | 16.7 % | 12.9 % | 13.9 % | 12.4 % | | Net income attributable to LKQ stockholders | 12.6 % | 8.9 % | 10.4 % | 8.6 % | [Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021](index=31&type=section&id=Three%20Months%20Ended%20June%2030,%202022%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202021) Revenue Changes (Three Months Ended June 30, 2022 vs. 2021) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $3,092 | $3,178 | 3.8 % | (1.0)% | (5.6)% | (2.7)% | | Other revenue | $249 | $257 | (2.9)% | 0.4 % | (0.4)% | (2.9)% | | **Total revenue** | **$3,341** | **$3,435** | **3.3 %** | **(0.9)%** | **(5.2)%** | **(2.7)%** | - Cost of goods sold increased to **59.1% of revenue** in Q2 2022 from 58.8% in Q2 2021, reflecting impacts in Self Service and Wholesale - North America, partially offset by Europe and mix shift[127](index=127&type=chunk) - SG&A expenses as a percentage of revenue increased to **26.8% in Q2 2022** from 26.2% in Q2 2021, with increases across Europe, Specialty, and Self Service segments[128](index=128&type=chunk) - A **$155 million pretax gain** ($127 million after tax) was recorded from the sale of PGW Auto Glass in Q2 2022[130](index=130&type=chunk) - Total depreciation and amortization **decreased by $4 million to $61 million** in Q2 2022, primarily due to lower depreciation from foreign currency translation and the PGW sale, partially offset by increased software amortization[131](index=131&type=chunk) - Other expense, net **decreased by $18 million to $16 million** in Q2 2022, mainly due to a **$24 million decrease in loss on debt extinguishment** (Euro Notes 2026 redemption in prior year) and lower net interest expense, partially offset by unfavorable equity investment fair value adjustments and foreign currency variances[132](index=132&type=chunk) - The effective income tax rate **decreased to 23.4%** in Q2 2022 from 26.3% in Q2 2021, driven by favorable discrete items (2.0%) related to the PGW sale and geographic income distribution[133](index=133&type=chunk) - Foreign currency impact resulted in a **negative $0.03 effect on diluted EPS** in Q2 2022 due to the stronger U.S. dollar[135](index=135&type=chunk) [Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021](index=34&type=section&id=Six%20Months%20Ended%20June%2030,%202022%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202021) Revenue Changes (Six Months Ended June 30, 2022 vs. 2021) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $6,196 | $6,110 | 5.3 % | 0.3 % | (4.2)% | 1.4 % | | Other revenue | $493 | $496 | (0.5)% | 0.3 % | (0.3)% | (0.5)% | | **Total revenue** | **$6,689** | **$6,606** | **4.9 %** | **0.3 %** | **(3.9)%** | **1.3 %** | - Cost of goods sold increased to **59.3% of revenue** in H1 2022 from 59.0% in H1 2021, primarily due to impacts in the Self Service segment[138](index=138&type=chunk) - SG&A expenses as a percentage of revenue increased to **27.2% in H1 2022** from 26.5% in H1 2021, reflecting increases in Europe and Specialty segments[139](index=139&type=chunk) - Restructuring and transaction related expenses **decreased by $6 million to $7 million** in H1 2022, primarily due to lower global restructuring and 1 LKQ Europe program charges in the prior year[140](index=140&type=chunk) - Total depreciation and amortization **decreased by $11 million to $120 million** in H1 2022, mainly due to foreign currency translation, the PGW sale, and lower amortization of customer relationship intangible assets[142](index=142&type=chunk) - Other expense, net **decreased by $21 million to $31 million** in H1 2022, primarily due to a **$24 million decrease in loss on debt extinguishment** and lower net interest expense, partially offset by unfavorable equity investment fair value adjustments and foreign currency variances[143](index=143&type=chunk) - The effective income tax rate **decreased to 24.1%** in H1 2022 from 26.3% in H1 2021, driven by favorable discrete items (1.2%) related to the PGW sale and geographic income distribution[144](index=144&type=chunk) - Equity in earnings of unconsolidated subsidiaries **decreased by $3 million** in H1 2022, primarily due to a decline in Mekonomen's results[145](index=145&type=chunk) - Foreign currency impact resulted in a **negative $0.05 effect on diluted EPS** in H1 2022 due to the stronger U.S. dollar[146](index=146&type=chunk) [Results of Operations—Segment Reporting](index=37&type=section&id=Results%20of%20Operations%E2%80%94Segment%20Reporting) - Constant currency presentation, a non-GAAP measure, excludes the impact of foreign currency exchange rate fluctuations to provide valuable supplemental information on growth and profitability[148](index=148&type=chunk) [Segment Financial Performance Overview](index=37&type=section&id=Segment%20Financial%20Performance%20Overview) Segment EBITDA as % of Total Segment Revenue | Segment | 3M Q2 2022 % | 3M Q2 2021 % | 6M H1 2022 % | 6M H1 2021 % | | :-------------------- | :----------- | :----------- | :----------- | :----------- | | Wholesale - North America | 18.7 % | 19.6 % | 18.4 % | 19.0 % | | Europe | 10.8 % | 10.7 % | 9.8 % | 10.2 % | | Specialty | 13.4 % | 14.9 % | 13.1 % | 14.2 % | | Self Service | 15.3 % | 27.2 % | 17.6 % | 27.5 % | [Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021 (Segment)](index=38&type=section&id=Three%20Months%20Ended%20June%2030,%202022%20Compared%20to%20Three%20Months%20Ended%20June%2030,%202021%20(Segment)) [Wholesale - North America](index=38&type=section&id=Wholesale%20-%20North%20America%20(3M)) Wholesale - North America Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $1,050 | $1,024 | 10.7 % | (8.0)% | (0.2)% | 2.5 % | | Other revenue | $94 | $94 | (0.9)% | 1.1 % | (0.2)% | — % | | **Total** | **$1,144** | **$1,118** | **9.8 %** | **(7.2)%** | **(0.2)%** | **2.3 %** | - Segment EBITDA **decreased by $5 million (2.3%)**, impacted by a **$12 million decline** from the PGW divestiture and an **$8 million decline** from lower precious metals prices[152](index=152&type=chunk) - Precious metals and scrap steel pricing had an **unfavorable effect of 0.9%** on Segment EBITDA margin[152](index=152&type=chunk) [Europe](index=39&type=section&id=Europe%20(3M)) Europe Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $1,470 | $1,570 | 4.2 % | 0.5 % | (11.0)% | (6.4)% | | Other revenue | $7 | $7 | 14.4 % | — % | (11.6)% | 2.8 % | | **Total** | **$1,477** | **$1,577** | **4.3 %** | **0.5 %** | **(11.0)%** | **(6.3)%** | - Segment EBITDA **decreased by $8 million (5.2%)**, with a **negative $19 million impact** from foreign currency translation; on a constant currency basis, Segment EBITDA **increased by $10 million (6.0%)**[156](index=156&type=chunk) - Gross margin **increased by 0.8%** due to net price increases and margin improvement initiatives[157](index=157&type=chunk) [Specialty](index=40&type=section&id=Specialty%20(3M)) Specialty Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $512 | $531 | (11.5)% | 8.2 % | (0.4)% | (3.6)% | | Other revenue | $— | $— | — % | — % | — % | — % | | **Total** | **$512** | **$531** | **(11.5)%** | **8.2 %** | **(0.4)%** | **(3.6)%** | - Parts and services organic revenue **decreased by 11.5%** due to strong prior-year growth, demand softness from lower new vehicle sales, and decreased drop shipment volumes[159](index=159&type=chunk) - Segment EBITDA **decreased by $11 million (13.1%)** due to organic revenue decline and inflationary effects on overhead[160](index=160&type=chunk) [Self Service](index=41&type=section&id=Self%20Service%20(3M)) Self Service Third Party Revenue Changes (3M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $60 | $53 | 13.2 % | — % | — % | 13.2 % | | Other revenue | $148 | $156 | (4.8)% | — % | — % | (4.8)% | | **Total** | **$208** | **$209** | **(0.3)%** | **— %** | **— %** | **(0.3)%** | - Segment EBITDA **decreased by $24 million (43.7%)**, primarily due to unfavorable commodity price movements, with precious metals contributing an estimated **$18 million decline**[165](index=165&type=chunk) - Precious metals and scrap steel pricing had an **unfavorable effect of 8.4%** on Segment EBITDA margin[165](index=165&type=chunk) [Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021 (Segment)](index=42&type=section&id=Six%20Months%20Ended%20June%2030,%202022%20Compared%20to%20Six%20Months%20Ended%20June%2030,%202021%20(Segment)) [Wholesale - North America](index=42&type=section&id=Wholesale%20-%20North%20America%20(6M)) Wholesale - North America Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $2,156 | $1,993 | 12.1 % | (3.8)% | (0.1)% | 8.2 % | | Other revenue | $189 | $176 | 6.9 % | 0.8 % | (0.1)% | 7.6 % | | **Total** | **$2,345** | **$2,169** | **11.7 %** | **(3.5)%** | **(0.1)%** | **8.1 %** | - Segment EBITDA **increased by $19 million (4.6%)**, driven by higher prices and productivity initiatives offsetting inflation, despite a **$12 million decline** from precious metals prices[168](index=168&type=chunk) - Precious metals and scrap steel pricing had an **unfavorable effect of 0.9%** on Segment EBITDA margin[168](index=168&type=chunk) [Europe](index=43&type=section&id=Europe%20(6M)) Europe Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $2,951 | $3,025 | 5.5 % | 0.4 % | (8.3)% | (2.4)% | | Other revenue | $14 | $15 | 2.8 % | — % | (8.7)% | (6.0)% | | **Total** | **$2,965** | **$3,040** | **5.5 %** | **0.4 %** | **(8.3)%** | **(2.5)%** | - Segment EBITDA **decreased by $18 million (5.9%)**, with a **negative $26 million impact** from foreign currency translation; on a constant currency basis, Segment EBITDA **increased by $8 million (2.6%)**[173](index=173&type=chunk) - Gross margin **increased by 0.1%** due to net price increases and margin improvement initiatives[174](index=174&type=chunk) [Specialty](index=44&type=section&id=Specialty%20(6M)) Specialty Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $972 | $989 | (10.0)% | 8.5 % | (0.2)% | (1.8)% | | Other revenue | $— | $— | — % | — % | — % | — % | | **Total** | **$972** | **$989** | **(10.0)%** | **8.5 %** | **(0.2)%** | **(1.8)%** | - Parts and services organic revenue **decreased by 10.0%** due to strong comparative growth in the prior year and demand softness[176](index=176&type=chunk) - Segment EBITDA **decreased by $14 million (9.8%)** due to organic revenue decline and inflationary effects on overhead expenses[177](index=177&type=chunk) [Self Service](index=45&type=section&id=Self%20Service%20(6M)) Self Service Third Party Revenue Changes (6M) (in millions) | Category | 2022 Revenue | 2021 Revenue | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--------------- | :----------- | :----------- | :------------- | :------------------------------- | :---------------------- | :----------- | | Parts & services | $117 | $103 | 13.9 % | — % | — % | 13.9 % | | Other revenue | $290 | $305 | (4.9)% | — % | — % | (4.9)% | | **Total** | **$407** | **$408** | **(0.2)%** | **— %** | **— %** | **(0.2)%** | - Segment EBITDA **decreased by $40 million (36.2%)**, primarily due to unfavorable commodity price movements, with precious metals contributing an estimated **$27 million decline**[181](index=181&type=chunk) - Precious metals and scrap steel pricing had an **unfavorable effect of 9.7%** on Segment EBITDA margin[181](index=181&type=chunk) [Liquidity and Capital Resources](index=46&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity Data (in millions) | Metric | June 30, 2022 | December 31, 2021 | | :---------------------------------------------------- | :-------------- | :---------------- | | Cash and cash equivalents | $265 | $274 | | Total debt | $2,369 | $2,824 | | Capacity under credit facilities | $3,150 | $3,150 | | Availability under credit facilities | $1,587 | $1,194 | | Total liquidity (cash + availability) | $1,852 | $1,468 | - Total liquidity **increased by $384 million to $1,852 million** as of June 30, 2022[185](index=185&type=chunk) - The company's debt structure includes **$1,494 million** outstanding under revolving credit facilities (maturing Jan 2024), **$524 million** Euro Notes (2024), and **$262 million** Euro Notes (2028)[187](index=187&type=chunk) Dividend Activity (2022) | Dividend Amount | Declaration Date | Record Date | Payment Date | | :---------------- | :--------------- | :---------- | :----------- | | $0.25 | February 15, 2022 | March 3, 2022 | March 24, 2022 | | $0.25 | April 26, 2022 | May 19, 2022 | June 2, 2022 | Debt Covenants as of June 30, 2022 | Covenant | Covenant Level | Ratio Achieved | | :-------------------------- | :------------- | :------------- | | Maximum net leverage ratio | 4.00 : 1.00 | 1.2 | | Minimum interest coverage ratio | 3.00 : 1.00 | 32.7 | - **Investment grade ratings** from S&P and Moody's in Q2 2022 mean the company is no longer required to comply with certain restrictive covenants under the credit agreement[192](index=192&type=chunk) Scheduled Maturities of Long-Term Obligations (in millions) | Period | Amount | | :-------------------------- | :----- | | Six months ending Dec 31, 2022 | $38 | | Years ending Dec 31, 2023 | $18 | | Years ending Dec 31, 2024 | $2,026 | | Years ending Dec 31, 2025 | $9 | | Years ending Dec 31, 2026 | $3 | | Thereafter | $275 | | **Total debt** | **$2,369** | Inventory Procurement (in millions) | Segment | Aftermarket & Manufactured (3M Q2 2022) | Aftermarket & Manufactured (3M Q2 2021) | Aftermarket & Manufactured (6M H1 2022) | Aftermarket & Manufactured (6M H1 2021) | | :-------------------- | :-------------------------------------- | :-------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Wholesale - North America | $302 | $262 | $619 | $522 | | Europe | $924 | $1,005 | $1,879 | $1,899 | | Specialty | $306 | $362 | $709 | $753 | | **Total** | **$1,532** | **$1,629** | **$3,207** | **$3,174** | | Segment | Salvage & Self Service Vehicles (3M Q2 2022, in thousands) | Salvage & Self Service Vehicles (3M Q2 2021, in thousands) | Salvage & Self Service Vehicles (6M H1 2022, in thousands) | Salvage & Self Service Vehicles (6M H1 2021, in thousands) | | :-------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | :------------------------------------------------------- | | Wholesale - North America | 65 | 63 | 125 | 113 | | Europe | 8 | 6 | 16 | 13 | | Self Service | 139 | 140 | 274 | 277 | - Net cash provided by operating activities **decreased by $196 million to $737 million** for the six months ended June 30, 2022, primarily due to increased cash outflows from inventories ($266 million) and receivables ($25 million), partially offset by higher cash inflows from accounts payable ($128 million)[204](index=204&type=chunk)[206](index=206&type=chunk) Free Cash Flow (in millions) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $737 | $933 | | Less: purchases of property, plant and equipment | $99 | $88 | | **Free cash flow** | **$638** | **$845** | [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=51&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section outlines the company's exposure to market risks including foreign exchange, interest rates, and commodity prices [Foreign Exchange Rates](index=51&type=section&id=Foreign%20Exchange%20Rates) - Operations outside the U.S. accounted for **47.7% of revenue** in H1 2022, making the company exposed to foreign currency fluctuations; a **10% change** in the U.S. dollar's strength could result in a **4.8% change** in consolidated revenue and a **2.6% change** in operating income[210](index=210&type=chunk) - The company hedges a portion of foreign currency exposure related to inventory purchases in Europe but does not currently hedge for Wholesale - North America operations[211](index=211&type=chunk) [Interest Rates](index=52&type=section&id=Interest%20Rates) - The company is exposed to variable interest rates on **$1,494 million of unhedged debt** under its credit facilities as of June 30, 2022[216](index=216&type=chunk) - A **100 basis point movement** in interest rates would change interest expense by **$15 million** over the next twelve months[216](index=216&type=chunk) [Commodity Prices](index=52&type=section&id=Commodity%20Prices) - The company is exposed to price fluctuations in scrap metal and precious metals (platinum, palladium, rhodium), which affect both revenue and inventory costs, creating a natural hedge but with potential lag effects[217](index=217&type=chunk) - Average scrap metal prices **increased by 5%** in Q2 2022 over Q1 2022, while average prices of rhodium, palladium, and platinum **decreased by 35%, 27%, and 19%** respectively in Q2 2022 compared to Q2 2021[217](index=217&type=chunk) [Inflation](index=52&type=section&id=Inflation) - The company is exposed to inflation in product, labor, shipping, freight, and overhead costs, and is mitigating these effects through price adjustments and productivity initiatives[218](index=218&type=chunk) [Item 4. Controls and Procedures](index=53&type=section&id=Item%204.%20Controls%20and%20Procedures) This section confirms the effectiveness of disclosure controls and procedures as of the reporting date [Evaluation of Disclosure Controls and Procedures](index=53&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) - The CEO and CFO concluded that the company's disclosure controls and procedures were **effective** as of June 30, 2022[219](index=219&type=chunk) [Changes in Internal Control over Financial Reporting](index=53&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) - There were **no material changes** in internal control over financial reporting during the quarter ended June 30, 2022[220](index=220&type=chunk) [PART II OTHER INFORMATION](index=54&type=section&id=PART%20II%20OTHER%20INFORMATION) [Item 1. Legal Proceedings](index=54&type=section&id=Item%201.%20Legal%20Proceedings) This section details outstanding legal claims and lawsuits, including a recent demand from the U.S. EPA - Management expects that currently outstanding claims and suits will **not materially affect** the company's financial position, results of operations, or cash flows[223](index=223&type=chunk) - On July 7, 2022, the company received a demand from the U.S. EPA Region 4 seeking penalties totaling **$787,750** for alleged violations of federal stormwater regulations[224](index=224&type=chunk) [Item 1A. Risk Factors](index=54&type=section&id=Item%201A.%20Risk%20Factors) This section refers to previous SEC filings for a comprehensive discussion of business and financial risks - Readers are referred to the **2021 Form 10-K** and the **Quarterly Report on Form 10-Q** for the three months ended March 31, 2022, for information concerning risk factors[225](index=225&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=54&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section details the company's stock repurchase program activity and remaining authorization [Issuer Purchases of Equity Securities](index=54&type=section&id=Issuer%20Purchases%20of%20Equity%20Securities) - On May 10, 2022, the Board of Directors authorized a **$500 million increase** to the existing stock repurchase program, raising the aggregate authorization to **$2,500 million** as of June 30, 2022[226](index=226&type=chunk) Stock Repurchases for Three Months Ended June 30, 2022 (in millions, except per share data) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | | :-------------------------- | :------------------------------- | :--------------------------- | :--------------------------------------------------------------------------- | | April 1, 2022 - April 30, 2022 | 1.6 | $49.56 | $428 | | May 1, 2022 - May 31, 2022 | 3.1 | $50.00 | $772 | | June 1, 2022 - June 30, 2022 | 3.4 | $49.31 | $606 | | **Total** | **8.1** | **N/A** | **N/A** | [Item 6. Exhibits](index=55&type=section&id=Item%206.%20Exhibits) This section lists all exhibits filed with the report, including certifications and XBRL documents - Exhibits include certifications from the CEO and CFO (pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350) and various Inline XBRL documents[228](index=228&type=chunk) [SIGNATURES](index=56&type=section&id=SIGNATURES) [Signatories](index=56&type=section&id=Signatories) This section confirms the report's authorization by the company's designated financial officers - The report was signed on August 2, 2022, by **Varun Laroyia** (Executive Vice President and Chief Financial Officer) and **Michael S. Clark** (Vice President - Finance and Controller)[230](index=230&type=chunk)[231](index=231&type=chunk)

LKQ Corp (NASDAQ:LKQ) Q2 2022 Earnings Conference Call July 28, 2022 8:00 AM ET Company Participants Joseph Boutross - VP, IR Dominick Zarcone - President, CEO & Director Varun Laroyia - EVP & CFO Conference Call Participants Scott Stember - MKM Partners Craig Kennison - Robert W. Baird & Co. Brian Butler - Stifel, Nicolaus & Company Gary Prestopino - Barrington Research Associates Daniel Imbro - Stephens Inc. Bret Jordan - Jefferies Operator Good morning. My name is Rex, and I'll be your conference operato ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________________________________ FORM 10-Q ____________________________ ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2022 OR ☐ 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 ____________________________ LKQ CORPORATION (Exact name of re ...

LKQ Corporation (NASDAQ:LKQ) Q1 2022 Earnings Conference Call April 28, 2022 8:00 AM ET Company Participants Joe Boutross - Vice President, Investor Relations Nick Zarcone - President and Chief Executive Officer Varun Laroyia - Executive Vice President and Chief Financial Officer Conference Call Participants Bret Jordan - Jefferies Michael Hoffman - Stifel Daniel Imbro - Stephens Stephanie Moore - Truist Craig Kennison - Baird Gary Prestopino - Barrington Research Ryan Brinkman - JPMorgan Operator Good morn ...

| --- | --- | --- | |----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First Quarter 2022 Earnings Call April 28, 2022 | | | | Nick Zarcone – President & Chief Executive Officer Varun Laroyia – Executive Vice President & Chief Financial Officer Joe Boutross – Vice President, Investor Relations | | | Forward Looki ...

[PART I](index=5&type=section&id=PART%20I) [Business Overview](index=5&type=section&id=Item%201.%20Business) LKQ Corporation is a global distributor of vehicle products, operating through North America, Europe, and Specialty segments, focusing on organic growth and operational excellence [Overview](index=7&type=section&id=OVERVIEW) - LKQ Corporation is a global distributor of vehicle products, including replacement parts, components, systems, and specialty products and accessories[23](index=23&type=chunk) - The company distributes 'alternative parts' (aftermarket, recycled, refurbished, and remanufactured products) to collision and mechanical repair shops[24](index=24&type=chunk) - LKQ is a leading provider of alternative vehicle collision and mechanical replacement products in the United States, Canada, and various European countries (Germany, UK, Benelux, Italy, Czech Republic, Austria, Slovakia, Poland)[25](index=25&type=chunk) - The company is organized into three reportable segments: North America (aggregating Wholesale - North America and Self Service), Europe, and Specialty[26](index=26&type=chunk) [History](index=8&type=section&id=HISTORY) - LKQ was formed in 1998 and expanded through approximately **290 business acquisitions**, including significant ones like Keystone Automotive Industries (2007), Euro Car Parts (2011), and Stahlgruber GmbH (2018)[27](index=27&type=chunk)[31](index=31&type=chunk) - Since 2017, the company has divested certain non-core and/or low-margin businesses as part of asset rationalization[28](index=28&type=chunk) [Strategy](index=8&type=section&id=STRATEGY) - LKQ's mission is to be the leading global value-added distributor of vehicle parts and accessories[29](index=29&type=chunk) - From 1998 to 2018, the strategy focused on consolidating alternative and specialty vehicle parts markets; since 2019, the focus shifted to organic growth and operational excellence[30](index=30&type=chunk)[31](index=31&type=chunk) - The company is implementing a multi-year '1 LKQ Europe' program to integrate European operations, aiming for a single entity in procurement, product strategy, revenue optimization, digitization, and value-added services[32](index=32&type=chunk) - Four primary strategic pillars: growing diversified product/service offerings, expanding geographic footprint, adapting to evolving technology, and rationalizing the asset base[33](index=33&type=chunk) - Key priorities for measuring progress: profitable growth, cash flow generation, European integration, and talent acquisition[34](index=34&type=chunk) [COVID-19 Impact](index=10&type=section&id=COVID-19%20IMPACT) - The COVID-19 pandemic significantly impacted business in 2020, 2021, and is expected to continue into 2022, leading to reduced demand, liquidity challenges, supply chain interruptions, and organizational changes[35](index=35&type=chunk) - The company undertook cost actions (e.g., personnel reductions, route consolidation) and liquidity preservation measures (e.g., deferral of capital projects, inventory reductions, tax deferrals, suspension of share buyback program) in response to the pandemic[35](index=35&type=chunk) [North America Segment](index=10&type=section&id=NORTH%20AMERICA%20SEGMENT) - The North America segment includes wholesale operations (aftermarket, OEM recycled, remanufactured, refurbished, and new OEM parts) and self-service retail operations[36](index=36&type=chunk)[37](index=37&type=chunk) - Wholesale operations sell to professional collision and mechanical vehicle repair businesses, with diagnostic and repair services (Elitek Vehicle Services) added in 2019[37](index=37&type=chunk) - Aftermarket products are sourced primarily from North America and Asia (principally Taiwan), with **44% of purchases from top 6 vendors in 2021**[39](index=39&type=chunk)[41](index=41&type=chunk)[42](index=42&type=chunk) - Scrap metal and precious metals (e.g., catalytic converters) are generated and sold from salvage operations[43](index=43&type=chunk) - Customers include individually-owned small businesses, multiple shop operators (MSOs), and new/used car dealerships, with automobile insurance companies influencing demand for collision products[44](index=44&type=chunk)[45](index=45&type=chunk) - The segment maintains an extensive distribution network with warehouses and cross-dock facilities, utilizing third-party software for optimized delivery routes[48](index=48&type=chunk) - Competition comes from all suppliers of vehicle collision and mechanical products (aftermarket, recycling, refurbishing, remanufacturing, OEMs, internet-based suppliers), with LKQ competing on distribution, product availability, customer service, and insurance relationships[49](index=49&type=chunk) - Information technology systems include a third-party enterprise management system for aftermarket, an internally-developed proprietary system (LKQX) for wholesale recycled products, and other third-party software for data analytics[51](index=51&type=chunk)[52](index=52&type=chunk)[53](index=53&type=chunk) - Self-service retail operations, primarily 'LKQ Pick Your Part,' allow consumers to remove parts from older, lower-priced salvage vehicles, generating revenue from parts, core, scrap, and admission fees[54](index=54&type=chunk)[55](index=55&type=chunk) [Europe Segment](index=14&type=section&id=EUROPE%20SEGMENT) - The Europe segment operates in over **20 countries**, built on key acquisitions including ECP (UK), Sator (Benelux), Rhiag (Italy, CEE), and Stahlgruber (Germany, Austria)[60](index=60&type=chunk) - The '1 LKQ Europe' program aims to integrate acquired businesses into a single Pan-European operation, optimizing purchasing, warehousing, systems, logistics, and back-office functions, with remaining projects scheduled for completion by **2024**[61](index=61&type=chunk) - Inventory primarily consists of mechanical aftermarket parts for vehicles **3 to 15 years old**, with a strategic goal to reduce product portfolio complexity and supplier count[62](index=62&type=chunk)[63](index=63&type=chunk) - The primary distribution model is two-step (direct sales to repair shops), with some three-step operations (sales to distributors)[65](index=65&type=chunk) - The segment boasts an extensive distribution network with national/international distribution centers and regional hubs, supported by its own fleet and common carriers, and is building a new central distribution center in the Netherlands[66](index=66&type=chunk) - Competition is faced from other alternative parts suppliers and OEMs, with LKQ differentiating through its distribution network, efficient stock management, proprietary technology, product lines, pricing, and service reliability[67](index=67&type=chunk) - As part of the '1 LKQ Europe' strategy, a multi-year program to develop and implement a European-wide Enterprise Resource Planning (ERP) system is underway, with implementation in Italy in H2 2021[68](index=68&type=chunk) [Specialty Segment](index=15&type=section&id=SPECIALTY%20SEGMENT) - The Specialty segment, formed in 2014, distributes specialty vehicle aftermarket products and accessories in North America across seven product segments (RV, truck/off-road, towing, speed/performance, wheels/tires, marine, miscellaneous)[69](index=69&type=chunk) - Expansion includes the acquisition of Warn Industries (2017) for manufacturing high-performance vehicle equipment and SeaWide Marine Distribution (2021) for marine electrical/electronic products[69](index=69&type=chunk) - Inventory is purchased from suppliers primarily in the U.S., Canada, and China, with limited supplier concentration; top-selling products include RV appliances, towing hitches, and truck bed covers[70](index=70&type=chunk) - Customers are a fragmented base of RV, marine, and specialty automotive dealers, installers, jobbers, builders, parts chains, mail-order businesses, and online retailers[71](index=71&type=chunk) - Products are promoted through marketing programs (catalogs, advertising, trade shows) and online platforms (ekeystone.com, viantp.com)[72](index=72&type=chunk)[73](index=73&type=chunk) - The segment uses a hub-and-spoke distribution model, leveraging existing North America wholesale operations for efficient delivery across the U.S. and Canada, and global shipping[74](index=74&type=chunk) - Competition is based on product breadth/depth, rapid and dependable delivery, marketing initiatives, support services, and price[75](index=75&type=chunk) - Most operations utilize an internally developed inventory management and order entry system that interfaces with third-party software for accounting and data analytics[76](index=76&type=chunk) [Intellectual Property](index=16&type=section&id=INTELLECTUAL%20PROPERTY) - LKQ owns and has rights to various intellectual property, including trade names, trademarks, patents, and technology-based assets, some acquired through past acquisitions (e.g., Warn)[77](index=77&type=chunk) - The company does not believe its business is materially dependent on any single item or group of related intellectual property[77](index=77&type=chunk) [Human Capital](index=17&type=section&id=HUMAN%20CAPITAL) - As of December 31, 2021, LKQ employed approximately **46,000 persons globally**, with **18,000 in North America** and **28,000 outside North America**[80](index=80&type=chunk) - The company's core values (dependability, excellence, leadership, integrity, value, efficiency, responsiveness) form the foundation of its culture, with objectives to attract, retain, and develop high-quality talent[79](index=79&type=chunk) - LKQ promotes inclusion and diversity; as of December 31, 2021, approximately **42% of its U.S. employee population** self-identified as Asian, Black or African American, Hispanic or Latino, Native American, Pacific Islander, or two or more races[81](index=81&type=chunk) - The company is committed to employee health and safety, implementing various programs and practices, including new protocols in response to the COVID-19 pandemic[83](index=83&type=chunk) - Employees are offered market-competitive compensation and benefits, including medical, dental, vision, paid time off, retirement plans, and tuition reimbursement[84](index=84&type=chunk)[85](index=85&type=chunk) - Professional development and training programs are provided across all levels, covering legal, ethics compliance, general workplace safety, and cybersecurity[86](index=86&type=chunk) [Facilities](index=18&type=section&id=FACILITIES) - As of December 31, 2021, LKQ operated approximately **1,600 facilities globally**, mostly leased, with **525 in the U.S.** and **1,075 in over 25 other countries**[87](index=87&type=chunk) - Global headquarters are in Chicago, Illinois; North American headquarters in Nashville, Tennessee; and European headquarters in Zug, Switzerland[88](index=88&type=chunk)[89](index=89&type=chunk) - Key European distribution centers are located in Tamworth, England (totaling **1,275,000 sq ft**) and Sulzbach-Rosenberg, Germany (**900,000 sq ft**); a new central distribution center in the Netherlands will open in 2022[89](index=89&type=chunk) [Regulation](index=18&type=section&id=REGULATION) - LKQ's operations are subject to various environmental protection, health and safety laws, tariffs, import laws, privacy and data protection regulations (e.g., GDPR), and labor and employment laws in multiple jurisdictions[91](index=91&type=chunk)[92](index=92&type=chunk)[93](index=93&type=chunk)[95](index=95&type=chunk) - Some jurisdictions have enacted laws that restrict or prohibit the sale of alternative vehicle parts (aftermarket, recycled, refurbished, or remanufactured products)[94](index=94&type=chunk) [Seasonality](index=19&type=section&id=SEASONALITY) - Operating results are subject to quarterly variations, primarily influenced by seasonal changes in weather patterns, leading to higher demand for vehicle replacement products during winter months due to more weather-related repairs and accidents[96](index=96&type=chunk) - Aftermarket glass and specialty vehicle operations typically generate greater revenue and earnings in the second and third quarters, with lower performance in the fourth quarter[96](index=96&type=chunk) - The COVID-19 pandemic led to increased demand in the RV market in 2020 and 2021, extending its effect into the fourth quarter of 2021[96](index=96&type=chunk) [Environmental, Social and Governance Matters](index=19&type=section&id=ENVIRONMENTAL,%20SOCIAL%20AND%20GOVERNANCE%20MATTERS) - LKQ's North American recycling operations contribute to environmental health by harvesting vehicle components for reuse, repurposing valuable materials (steel, aluminum, plastic, rubber), and extracting/recycling fluids, thereby preserving natural resources and reducing pollution[97](index=97&type=chunk)[98](index=98&type=chunk) North American Recycling Operations Efforts (2021) | (in thousands) | 2021 Totals | | :--- | :--- | | Vehicles procured | 780 | | Catalytic converters | 1,461 | | Tires | 2,051 | | Batteries | 740 | | Fuel (in gallons) | 3,894 | | Waste oil (in gallons) | 2,247 | | Anti-freeze/Washer fluid (in gallons) | 343 | | Crush auto/Scrap (in tons) | 1,100 | | Individual parts sold | 13,794 | - Social initiatives focus on employee engagement, diversity, equity, inclusion, and community support[101](index=101&type=chunk) - Governance improvements include Board refreshment (over half of current Board added since August 2018, three women, over **80% independent**), adoption of 'proxy access,' and majority voting for director elections[102](index=102&type=chunk)[103](index=103&type=chunk) - A revised Code of Ethics, adopted in 2019 and available in over **20 languages**, guides ethical decisions and includes an anonymous global 'Speak Up' line[104](index=104&type=chunk) [Risk Factors](index=20&type=section&id=Item%201A.%20Risk%20Factors) The company faces diverse risks including pandemic impacts, economic volatility, intense competition, substantial debt, regulatory compliance, and operational disruptions [Risks Relating to Our Business](index=20&type=section&id=Risks%20Relating%20to%20Our%20Business) - The COVID-19 pandemic has adversely affected and will likely continue to affect business through reduced demand, supply chain disruptions, labor shortages, and increased operating costs[106](index=106&type=chunk)[107](index=107&type=chunk)[108](index=108&type=chunk)[110](index=110&type=chunk) - Economic, political, and social conditions (e.g., Brexit, geopolitical tensions, inflation, consumer spending, social media) in the U.S., Europe, and other operating countries could materially impact the company[111](index=111&type=chunk)[113](index=113&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk)[117](index=117&type=chunk) - Intense competition from local, national, international, and internet-based vehicle product providers, including OEMs who exert pricing pressure and attempt to restrict the use of alternative parts, poses a significant risk[118](index=118&type=chunk)[120](index=120&type=chunk)[121](index=121&type=chunk)[122](index=122&type=chunk)[123](index=123&type=chunk) - Reliance on customers and insurance companies to promote alternative parts usage means changes in their practices or consolidation in the collision repair industry could negatively affect sales[124](index=124&type=chunk)[125](index=125&type=chunk)[126](index=126&type=chunk)[127](index=127&type=chunk) - Intellectual property claims by OEMs (design patents, trademarks) could restrict or prohibit the sale of certain aftermarket products, leading to litigation costs and potential loss of product certification[128](index=128&type=chunk)[129](index=129&type=chunk)[130](index=130&type=chunk)[131](index=131&type=chunk) - Declines in vehicle accident rates, repairs, or shifts in the vehicle population mix (e.g., increased accident avoidance systems, electric vehicles, newer vehicles under warranty) could reduce demand for products[132](index=132&type=chunk)[134](index=134&type=chunk)[135](index=135&type=chunk)[136](index=136&type=chunk) - Fluctuations in the prices of fuel, metals (scrap, precious metals), and other commodities can adversely affect financial results by impacting inventory costs and revenue, with potential lag effects[137](index=137&type=chunk)[138](index=138&type=chunk) - Risks related to supplier relationships include dependence on a small number of aftermarket suppliers (many from Taiwan), rising freight costs, port disruptions, and competition for salvage vehicles, which can increase costs or impede customer service[139](index=139&type=chunk)[140](index=140&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk)[143](index=143&type=chunk)[144](index=144&type=chunk)[145](index=145&type=chunk) - Misconduct, performance failures, or negligence of third-party vendors or service providers could increase expenses, impede customer service, or expose the company to liability (e.g., for cybersecurity or privacy law violations)[146](index=146&type=chunk) - Impairment of goodwill (**$4.5 billion** as of Dec 31, 2021) or other intangible assets (**$746 million** as of Dec 31, 2021) could result in significant charges to pre-tax income due to deteriorating business performance, market conditions, or regulatory changes[147](index=147&type=chunk)[148](index=148&type=chunk) - The company is exposed to product liability claims from end-users and costs associated with product recalls, which could adversely affect business, results of operations, or financial condition[149](index=149&type=chunk)[150](index=150&type=chunk) - Inability to successfully acquire new businesses or integrate acquisitions, or to divest certain businesses, could lead to difficulties in personnel/operations integration, business disruptions, and failure to realize expected synergies[151](index=151&type=chunk)[152](index=152&type=chunk)[154](index=154&type=chunk)[155](index=155&type=chunk) [Risks Relating to Our Financial Structure](index=30&type=section&id=Risks%20Relating%20to%20Our%20Financial%20Structure) - The company has substantial indebtedness (approximately **$2,823.8 million** as of December 31, 2021), which could limit its ability to satisfy obligations, operate its business, and impair its competitive position[156](index=156&type=chunk)[157](index=157&type=chunk)[159](index=159&type=chunk) - The credit agreement imposes operating and financial restrictions (e.g., limits on additional debt, dividends, liens, investments, asset sales) that may limit business flexibility; failure to comply could result in debt acceleration[162](index=162&type=chunk) - Inability to generate sufficient cash to service all indebtedness may force the company to reduce investments, sell assets, seek additional capital, or restructure debt, which may not be successful[163](index=163&type=chunk)[165](index=165&type=chunk) - Future capital needs may require refinancing debt or obtaining additional debt/equity financing, which may not be available on acceptable terms and could lead to dilution or more restrictive covenants[166](index=166&type=chunk) - Variable rate indebtedness (approximately **$1,887 million** unhedged at December 31, 2021) exposes the company to interest rate risk; a **100 basis point increase** would raise interest expense by **$19 million** over the next twelve months[167](index=167&type=chunk)[337](index=337&type=chunk) - Repayment of indebtedness, including senior notes, is dependent on cash flow generated by subsidiaries, which may be limited by legal and contractual restrictions on distributions[168](index=168&type=chunk) - A downgrade in the company's credit rating could adversely affect its cost of capital, the market value/liquidity of its senior notes, and its ability to issue new debt[169](index=169&type=chunk) - The right to receive payments on the senior notes is effectively junior to secured lenders who have a security interest in the company's assets (approximately **$1,887 million** secured debt outstanding at December 31, 2021)[170](index=170&type=chunk) - United States federal and state fraudulent transfer statutes allow courts, under specific circumstances, to void the senior notes and guarantees, subordinate claims, and require holders to return payments[171](index=171&type=chunk)[172](index=172&type=chunk)[173](index=173&type=chunk)[174](index=174&type=chunk) - Not all subsidiaries have guaranteed the credit agreement or senior notes, meaning the assets of non-guarantor subsidiaries (representing approximately **50% of total revenue** and **53% of total assets**) may not be available to make payments on such obligations[175](index=175&type=chunk)[176](index=176&type=chunk) - The company may not be able to repurchase senior notes upon a change of control or pursuant to an asset sale offer due to challenges in refinancing indebtedness or restrictions in other debt agreements[177](index=177&type=chunk)[179](index=179&type=chunk) - Many covenants in the senior notes indentures will be suspended if the notes achieve investment grade ratings, allowing certain transactions that would otherwise be restricted[180](index=180&type=chunk) - The amount and frequency of share repurchases and dividend payments may fluctuate based on cash priorities, market conditions, and Board approval[182](index=182&type=chunk) [Legal and Regulatory Risks](index=38&type=section&id=Legal%20and%20Regulatory%20Risks) - Existing or new laws and regulations, or changes in their enforcement/interpretation, may prohibit, restrict, or burden the sale of aftermarket, recycled, refurbished, or remanufactured products, potentially decreasing revenue[183](index=183&type=chunk)[184](index=184&type=chunk)[185](index=185&type=chunk)[186](index=186&type=chunk) - The company is subject to environmental regulations and may incur significant costs relating to environmental matters, including compliance, cleanup of contamination, and liabilities from past or future hazardous substance releases[187](index=187&type=chunk)[188](index=188&type=chunk)[189](index=189&type=chunk)[190](index=190&type=chunk)[191](index=191&type=chunk)[192](index=192&type=chunk) - Legal, regulatory, or market responses to global climate change could adversely affect demand for products, increase compliance costs, and impact the company's business and reputation[193](index=193&type=chunk)[194](index=194&type=chunk) - The company's bylaws designate Delaware courts as the exclusive forums for substantially all disputes between the company and its stockholders, which could limit stockholders' ability to obtain a favorable judicial forum[195](index=195&type=chunk)[197](index=197&type=chunk) - The effective tax rate could materially increase due to interpretations of the Tax Act, new U.S. and/or international tax legislation (e.g., GILTI, BEAT, BEPS), changes in the mix of earnings by jurisdiction, and U.S. and foreign jurisdictional audits[198](index=198&type=chunk)[199](index=199&type=chunk)[200](index=200&type=chunk)[201](index=201&type=chunk)[202](index=202&type=chunk) - Significant tariffs or other restrictions on imported products or materials, or related counter-measures by exporting countries, could materially harm revenue and results of operations[203](index=203&type=chunk) - Governmental agencies may refuse to grant or renew operating licenses and permits for salvage, self-service, and refurbishing businesses, potentially impacting operations[204](index=204&type=chunk) [General Risks](index=41&type=section&id=General%20Risks) - The company's future success depends on key management personnel and employees; loss of these individuals, wage inflation, or union activities/labor laws could adversely affect business and objectives[205](index=205&type=chunk)[207](index=207&type=chunk)[208](index=208&type=chunk) - Operating in foreign jurisdictions exposes the company to foreign exchange risks, political instability, anti-corruption laws, and other international business risks[206](index=206&type=chunk) - Reliance on information technology and communication systems makes the business vulnerable to disruptions, cyberattacks, employee error, and challenges during system upgrades or conversions (e.g., European ERP project)[209](index=209&type=chunk)[210](index=210&type=chunk) - The costs of complying with evolving privacy and data protection laws (e.g., GDPR) and potential liability from non-compliance or security breaches could materially adversely affect business and results[211](index=211&type=chunk)[212](index=212&type=chunk) - Business interruptions at distribution centers or other facilities due to weather, disasters, or other events, as well as problems with the delivery fleet, could harm operations and reputation[213](index=213&type=chunk)[215](index=215&type=chunk) - The company may lose the right to operate at key leased locations if it cannot negotiate renewals on acceptable terms or find suitable alternatives[216](index=216&type=chunk) - Activist investor activities could cause substantial costs, divert management's attention, and have an adverse effect on the business and stock price[217](index=217&type=chunk) [Unresolved Staff Comments](index=44&type=section&id=Item%201B.%20Unresolved%20Staff%20Comments) There are no unresolved staff comments to report [Properties](index=44&type=section&id=Item%202.%20Properties) The company's properties are described in Item 1 and are deemed sufficient to meet current needs, with no anticipated difficulties in securing additional space [Legal Proceedings](index=44&type=section&id=Item%203.%20Legal%20Proceedings) The company is involved in various legal proceedings, including EPA actions for environmental violations, but management does not expect a material adverse effect - The company received a Notice of Violation from the U.S. Environmental Protection Agency (EPA) in 2018, leading to a civil administrative proceeding initiated in January 2021, alleging Clean Air Act violations for certain performance-related parts sold between 2015 and 2018[220](index=220&type=chunk) - In 2021, LKQ received notices of alleged federal stormwater regulation violations from EPA Regions 3 and 4, resulting in Administrative Orders on Consent; a **$130,000 penalty** was paid for Region 3, with penalties for Region 4 pending[221](index=221&type=chunk) - Management believes that currently outstanding claims and suits will not, individually or in the aggregate, have a material adverse effect on the company's financial position, results of operations, or cash flows[222](index=222&type=chunk) [Mine Safety Disclosure](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosure) This item is not applicable to the company [PART II](index=45&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=36&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) LKQ common stock trades on NASDAQ, with the company declaring dividends and executing a $2 billion share repurchase program - LKQ's common stock is traded on the NASDAQ Global Select Market under the symbol 'LKQ'[225](index=225&type=chunk) - On October 26, 2021, the Board of Directors declared a quarterly cash dividend of **$0.25 per share**, paid on December 2, 2021, for an aggregate payout of **$73 million**[226](index=226&type=chunk) - As of December 31, 2021, the maximum amount of dividends the company could have paid was approximately **$2,850 million**, subject to limitations in its senior secured credit agreement, senior notes indentures, and Delaware law[226](index=226&type=chunk) Comparison of Cumulative Return (December 31, 2016 = $100) | | 12/31/2016 | 12/31/2017 | 12/31/2018 | 12/31/2019 | 12/31/2020 | 12/31/2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | LKQ Corporation | $100 | $133 | $77 | $116 | $115 | $197 | | S&P 500 Index | $100 | $122 | $116 | $153 | $181 | $233 | | Peer Group | $100 | $96 | $123 | $162 | $177 | $260 | - The Board of Directors authorized a total of **$2,000 million** for common stock repurchases through October 25, 2024[231](index=231&type=chunk) - During the year ended December 31, 2021, the company repurchased **17.2 million shares** of common stock for an aggregate price of **$877 million**[233](index=233&type=chunk) - As of December 31, 2021, there was **$654 million** of remaining capacity under the repurchase program[233](index=233&type=chunk)[234](index=234&type=chunk) [RESERVED](index=38&type=section&id=Item%206.%20%5BRESERVED%5D) This item is reserved and contains no information [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=38&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section analyzes LKQ's financial performance, highlighting 2021 revenue growth, improved margins, liquidity changes, capital allocation, and market risk management [Overview](index=48&type=section&id=Overview) - LKQ Corporation is a global distributor of vehicle products, including replacement parts, components, systems, and specialty products and accessories[237](index=237&type=chunk) - The company offers 'alternative parts' (aftermarket, recycled, refurbished, and remanufactured) to collision and mechanical repair shops[238](index=238&type=chunk) - LKQ's operating results have historically fluctuated and are expected to continue to do so due to various factors, some beyond its control[241](index=241&type=chunk) [Acquisitions and Investments](index=48&type=section&id=Acquisitions%20and%20Investments) - Since its inception in 1998, LKQ has pursued a growth strategy through both organic growth and acquisitions, initially focusing on consolidation to build scale[242](index=242&type=chunk) - In recent years, the company has shifted its focus from larger transactions to tuck-in acquisitions that target high synergies and/or add critical capabilities, alongside strategic investments[242](index=242&type=chunk) - During 2019, 2020, and 2021, LKQ acquired various immaterial businesses across its North America, Europe, and Specialty segments[243](index=243&type=chunk) [Sources of Revenue](index=48&type=section&id=Sources%20of%20Revenue) - Revenue is reported in two categories: parts and services, and other; parts and services revenue represented approximately **93% of consolidated revenue in 2021**[244](index=244&type=chunk) - Parts revenue is generated from the sale of vehicle replacement parts, components, systems, and specialty products/accessories[244](index=244&type=chunk) - Service revenue primarily comes from service-type warranties, admission fees to self-service yards, and diagnostic and repair services[244](index=244&type=chunk) - Other revenue includes sales of scrap and other metals (including precious metals like platinum, palladium, and rhodium), bulk sales to mechanical manufacturers, and sales of aluminum ingots/sows, which fluctuate with commodity prices[244](index=244&type=chunk) [Critical Accounting Estimates](index=49&type=section&id=Critical%20Accounting%20Estimates) - Goodwill impairment testing involves significant judgment in estimating fair values of reporting units, primarily using discounted cash flow and market approaches, with key assumptions including sales growth, operating margins, discount rates, and valuation multiples[247](index=247&type=chunk)[248](index=248&type=chunk) - During fiscal year 2021, no goodwill impairment charges were recorded, as the fair value of each reporting unit exceeded its carrying value by at least **70%**; a **10% decline** in projected cash flows or a **10% increase** in the discount rate would not have resulted in an impairment[249](index=249&type=chunk)[406](index=406&type=chunk) [Recently Issued Accounting Pronouncements](index=49&type=section&id=Recently%20Issued%20Accounting%20Pronouncements) - In Q1 2021, LKQ adopted ASU No. 2019-12, 'Income Taxes,' which did not have a material impact on its Consolidated Financial Statements[444](index=444&type=chunk) - In Q4 2021, LKQ adopted ASU No. 2020-04, 'Reference Rate Reform,' which did not have a significant impact on its financial position, results of operations, or cash flows[446](index=446&type=chunk) [1 LKQ Europe Program](index=50&type=section&id=1%20LKQ%20Europe%20Program) - The '1 LKQ Europe' program is a multi-year initiative to create structural centralization and standardization of key functions to operate the Europe segment as a single business[252](index=252&type=chunk) - The program involves restructuring expenses, transformation expenses (non-capitalizable implementation costs), and transformation capital expenditures (capitalizable costs for long-lived assets)[252](index=252&type=chunk) - Organizational design and implementation projects were completed in June 2021, with remaining projects scheduled for completion by **2024**[252](index=252&type=chunk) - Expected costs for the program, across all three categories, will range between **$100 million and $130 million** from 2022 to 2024, funded by improved trade working capital initiatives[252](index=252&type=chunk) [COVID-19 Impact on Our Operations](index=50&type=section&id=COVID-19%20Impact%20on%20Our%20Operations) - Organic parts and services revenue declined by **16.8%**, **4.5%**, and **5.2%** in Q2, Q3, and Q4 2020, respectively, compared to prior year periods, due to COVID-19 restrictions[253](index=253&type=chunk) - In 2021, organic parts and services revenue showed recovery, increasing by **2.2%** in Q1, **21.1%** in Q2, **4.0%** in Q3, and **7.3%** in Q4 (all on a per day basis)[254](index=254&type=chunk) - North America experienced the most negative impact, Europe recovered quicker, and Specialty revenue grew due to favorable trends in recreational vehicle activity and online sales[254](index=254&type=chunk) - The company implemented cost-reduction measures in 2020, including employee furloughs, reductions in force, decreased hours, and a hiring freeze, sustaining a portion of these benefits despite inflationary pressures in 2021[256](index=256&type=chunk) - LKQ qualified for **$16 million** in government assistance in 2021 and **$52 million** in 2020, primarily from European and Canadian governments[257](index=257&type=chunk) - The company focused on capital preservation in 2020, deferring growth-driven capital projects and suspending its share buyback program, but reinstated the buyback in Q4 2020 and issued its first dividend in Q4 2021[258](index=258&type=chunk) [Key Performance Indicators](index=52&type=section&id=Key%20Performance%20Indicators) - Key performance indicators for the business are organic revenue growth, Segment EBITDA, and free cash flow, used to motivate a balanced approach to growth, profitability, and cash flow generation[262](index=262&type=chunk)[263](index=263&type=chunk) - Organic revenue growth measures the ability to serve and grow the customer base, excluding effects of acquisitions, divestitures, and foreign currency movements[263](index=263&type=chunk) - Segment EBITDA is the key measure of segment profit or loss, focusing on ongoing operational results[263](index=263&type=chunk) - Free cash flow (non-GAAP) provides insight into liquidity available for debt service, working capital, strategic acquisitions, stock repurchases, and dividends[263](index=263&type=chunk) [Results of Operations—Consolidated](index=53&type=section&id=Results%20of%20Operations%E2%80%94Consolidated) Consolidated Revenue Changes (2021 vs 2020) | | Year Ended December 31, 2021 (in thousands) | Year Ended December 31, 2020 (in thousands) | Organic Change | Acquisition and Divestiture | Foreign Exchange | Total Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | $12,140,516 | $10,963,713 | 7.9 % | 0.3 % | 2.5 % | 10.7 % | | Other revenue | $947,988 | $665,117 | 42.3 % | 0.0 % | 0.2 % | 42.5 % | | **Total revenue** | **$13,088,504** | **$11,628,830** | **9.8 %** | **0.3 %** | **2.4 %** | **12.6 %** | - Cost of goods sold decreased to **59.3% of revenue** in 2021 from **60.5%** in 2020, leading to a gross margin increase to **40.7%** from **39.5%**[264](index=264&type=chunk)[267](index=267&type=chunk) - Selling, general and administrative (SG&A) expenses as a percentage of revenue decreased to **27.3%** in 2021 from **28.1%** in 2020[264](index=264&type=chunk)[268](index=268&type=chunk) - Operating income increased to **11.3% of revenue** in 2021 from **8.5%** in 2020[264](index=264&type=chunk) Restructuring and Acquisition Related Expenses (in thousands) | | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Restructuring expenses | $17,301 | $58,204 | $(40,903) | | Acquisition related expenses | $3,010 | $7,959 | $(4,949) | | **Total** | **$20,311** | **$66,163** | **$(45,852)** | - Depreciation and amortization decreased by **$12.3 million** to **$259.99 million** in 2021, primarily due to a **$16 million decrease** in amortization related to Stahlgruber customer relationship intangible assets[272](index=272&type=chunk) - Total other expense, net, decreased by **$25.34 million** to **$75.24 million** in 2021, driven by a **$31.7 million decrease** in interest expense and **$11 million** in fair value adjustments for equity investments, partially offset by an **$10.8 million increase** in loss on debt extinguishment[273](index=273&type=chunk) - The effective income tax rate decreased to **23.6%** in 2021 from **28.2%** in 2020, due to higher pretax income in international operations and a **0.8% rate benefit** from the reversal of valuation allowances[274](index=274&type=chunk) - Equity in earnings of unconsolidated subsidiaries increased by **$18 million** in 2021, primarily from improved results at Mekonomen and North America investments[275](index=275&type=chunk) - Foreign currency translation had a positive **$0.03 effect** on diluted earnings per share in 2021 due to stronger foreign currencies against the U.S. dollar[276](index=276&type=chunk) [Results of Operations—Segment Reporting](index=56&type=section&id=Results%20of%20Operations%E2%80%94Segment%20Reporting) - The company presents financial performance by three reportable segments: North America, Europe, and Specialty, using Segment EBITDA as the key measure of segment profit or loss[278](index=278&type=chunk)[280](index=280&type=chunk) Segment Financial Performance (2021 vs 2020, in thousands) | Segment | 2021 Third Party Revenue | 2020 Third Party Revenue | Revenue Change | 2021 Segment EBITDA | 2020 Segment EBITDA | EBITDA Change | 2021 EBITDA Margin | 2020 EBITDA Margin | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | North America | $5,162,639 | $4,631,306 | +11.5 % | $944,465 | $778,504 | +21.3 % | 18.3 % | 16.8 % | | Europe | $6,061,948 | $5,492,184 | +10.4 % | $617,825 | $427,582 | +44.5 % | 10.2 % | 7.8 % | | Specialty | $1,863,917 | $1,505,340 | +23.8 % | $223,149 | $162,673 | +37.2 % | 12.0 % | 10.8 % | - North America's parts and services organic revenue increased **5.6% (6.4% per day)** in 2021, driven by pricing and growth in recycled/remanufactured mechanical parts and aftermarket automotive glass[282](index=282&type=chunk) - Other revenue saw a **$276 million organic increase** in North America, mainly from higher scrap steel (**$134 million**) and precious metals (**$81 million**) prices[283](index=283&type=chunk) - North America Segment EBITDA increased **$166 million (+21.3%)**, benefiting from higher precious metals and scrap steel prices (estimated **1.0% favorable impact** on margin), margin initiatives, and revenue recovery, partially offset by aftermarket fill rates and inflationary cost increases[284](index=284&type=chunk)[285](index=285&type=chunk) - Europe's parts and services organic revenue increased **6.2%** in 2021 due to less severe pandemic effects and easing lockdown measures[288](index=288&type=chunk) - Europe Segment EBITDA increased **$190 million (+44.5%)**, with a **$20 million positive** foreign currency translation impact[291](index=291&type=chunk) - Europe Segment EBITDA margin improved by **2.4 percentage points to 10.2%**, driven by a **1.5% favorable impact** from net price increases and procurement initiatives, and a **0.8% decrease** in operating expenses (bad debt, freight, fuel)[292](index=292&type=chunk)[293](index=293&type=chunk) - Specialty's parts and services organic revenue increased **20.2% (21.1% per day)** in 2021 due to strong demand and competitive advantages in delivery/inventory[294](index=294&type=chunk) - Specialty Segment EBITDA increased **$60 million (+37.2%)** due to increased revenue and expanded margin[295](index=295&type=chunk) - Specialty Segment EBITDA margin improved by **1.2 percentage points to 12.0%**, reflecting lower discounting to recover increased input costs and a favorable product/channel mix[296](index=296&type=chunk)[297](index=297&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=56&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company manages market risks from foreign exchange, interest rates on variable debt, and commodity price fluctuations impacting revenue and costs - LKQ is exposed to market risks arising from adverse changes in foreign exchange rates, interest rates, and commodity prices[330](index=330&type=chunk) - Foreign operations constituted **49.4% of revenue in 2021**, exposing the company to foreign currency fluctuations; a **10% change** in the U.S. dollar's strength against other currencies would result in a **4.9% change** in consolidated revenue and a **3.4% change** in operating income[330](index=330&type=chunk) - The company hedges a portion of foreign currency exposure related to European inventory purchases but does not currently hedge North American operations' foreign currency denominated inventory purchases[332](index=332&type=chunk) - The company is exposed to interest rate risk on its variable rate debt under credit facilities; as of December 31, 2021, approximately **$1,887 million** of variable rate debt was unhedged; a **100 basis point movement** in interest rates would change interest expense by **$19 million** over the next twelve months[335](index=335&type=chunk)[337](index=337&type=chunk) - LKQ is exposed to market risk from price fluctuations in scrap metal and other metals (including precious metals like platinum, palladium, and rhodium); while revenue and costs are naturally hedged, a lag between price fluctuations and inventory cost changes can affect gross margins[338](index=338&type=chunk) - Average scrap metal prices increased **83%** in 2021 compared to 2020; average prices of rhodium, platinum, and palladium increased by **77%**, **22%**, and **7%**, respectively, in 2021 over 2020[338](index=338&type=chunk) [Financial Statements and Supplementary Data](index=58&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements and notes, with unqualified opinions from Deloitte & Touche LLP on financial reporting and internal controls [Reports of Independent Registered Public Accounting Firm](index=69&type=section&id=Reports%20of%20Independent%20Registered%20Public%20Accounting%20Firm) - Deloitte & Touche LLP issued an unqualified opinion on LKQ Corporation's consolidated financial statements as of December 31, 2021 and 2020, and for the three years ended December 31, 2021[342](index=342&type=chunk) - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[343](index=343&type=chunk) - The goodwill impairment assessment was identified as a critical audit matter due to the significant estimates and assumptions involved in valuing reporting units, specifically forecasts of future revenue and profit margins, selection of discount rates, and determination of market multiples[347](index=347&type=chunk)[348](index=348&type=chunk) [Consolidated Statements of Income](index=72&type=section&id=Consolidated%20Statements%20of%20Income) Consolidated Statements of Income (in thousands, except per share data) | Metric | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Revenue | $13,088,504 | $11,628,830 | $12,506,109 | | Gross margin | $5,322,435 | $4,593,271 | $4,851,794 | | Operating income | $1,474,372 | $985,577 | $896,643 | | Income from continuing operations before provision for income taxes | $1,399,130 | $884,995 | $791,022 | | Net income attributable to LKQ stockholders | $1,090,873 | $638,423 | $541,260 | | Basic earnings per share (attributable to LKQ stockholders) | $3.68 | $2.10 | $1.75 | | Diluted earnings per share (attributable to LKQ stockholders) | $3.66 | $2.09 | $1.74 | [Consolidated Statements of Comprehensive Income](index=73&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) Consolidated Statements of Comprehensive Income (in thousands) | Metric | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Net income attributable to LKQ stockholders | $1,090,873 | $638,423 | $541,260 | | Other comprehensive (loss) income | $(54,121) | $101,876 | $(25,935) | | Comprehensive income attributable to LKQ stockholders | $1,036,752 | $740,299 | $515,325 | [Consolidated Balance Sheets](index=74&type=section&id=Consolidated%20Balance%20Sheets) Consolidated Balance Sheets (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $4,254,368 | $4,034,032 | | Property, plant and equipment, net | $1,298,740 | $1,248,703 | | Operating lease assets, net | $1,361,324 | $1,353,124 | | Goodwill | $4,539,896 | $4,591,569 | | Other intangibles, net | $746,149 | $814,219 | | Total assets | $12,606,154 | $12,360,533 | | Total current liabilities | $2,165,446 | $1,988,491 | | Long-term operating lease liabilities, excluding current portion | $1,209,218 | $1,197,963 | | Long-term obligations, excluding current portion | $2,777,160 | $2,812,641 | | Total stockholders' equity | $5,786,584 | $5,671,300 | [Consolidated Statements of Cash Flows](index=75&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Consolidated Statements of Cash Flows (in thousands) | Metric | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $1,367,047 | $1,443,870 | $1,064,033 | | Net cash used in investing activities | $(418,758) | $(165,887) | $(264,853) | | Net cash used in financing activities | $(985,135) | $(1,512,551) | $(600,669) | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(38,020) | $(222,703) | $197,607 | | Cash, cash equivalents and restricted cash, end of period | $274,134 | $312,154 | $528,387 | [Consolidated Statements of Stockholders' Equity](index=77&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) Consolidated Statements of Stockholders' Equity (in thousands) | Metric | December 31, 2021 | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | :--- | | Total Company stockholders' equity | $5,771,744 | $5,655,718 | $5,008,876 | | Total stockholders' equity | $5,786,584 | $5,671,300 | $5,048,580 | [Notes to Consolidated Financial Statements](index=78&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) [Note 1. Business](index=78&type=section&id=Note%201.%20Business) - LKQ Corporation is a Delaware holding company with all operations conducted by its consolidated subsidiaries, acting as a global distributor of vehicle products[373](index=373&type=chunk) - The company operates in the United States, Canada, and various European countries, organized into North America, Europe, and Specialty reportable segments[374](index=374&type=chunk)[375](index=375&type=chunk) [Note 2. Discontinued Operations](index=78&type=section&id=Note%202.%20Discontinued%20Operations) - LKQ completed the sale of Stahlgruber's Czech Republic wholesale business on February 28, 2020, resulting in an immaterial loss on sale, after being classified as discontinued operations since May 2019[377](index=377&type=chunk)[378](index=378&type=chunk) - The glass manufacturing business (PGW) was sold in March 2017; the Purchase and Supply Agreement expired in Q1 2020[379](index=379&type=chunk) - Net results from discontinued operations were insignificant for the years ended December 31, 2021, 2020, and 2019[381](index=381&type=chunk) [Note 3. Summary of Significant Accounting Policies](index=79&type=section&id=Note%203.%20Summary%20of%20Significant%20Accounting%20Policies) - The allowance for credit losses was **$53 million** at December 31, 2021, a decrease from **$70 million** at December 31, 2020, primarily due to the recovery of the global economy from the COVID-19 pandemic[389](index=389&type=chunk) Inventories by Category (in thousands) | Category | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Aftermarket and refurbished products | $2,167,732 | $2,025,002 | | Salvage and remanufactured products | $405,776 | $368,815 | | Manufactured products | $37,007 | $20,795 | | **Total inventories** | **$2,610,515** | **$2,414,612** | - Goodwill totaled **$4.54 billion** as of December 31, 2021, with no impairment recorded in 2021 as all reporting units' fair values exceeded their carrying values by at least **70%**[406](index=406&type=chunk)[407](index=407&type=chunk) Other Intangibles, Net (in thousands) | Category | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Intangible assets subject to amortization | $664,849 | $732,919 | | Indefinite-lived intangible assets (Trademarks) | $81,300 | $81,300 | | **Total** | **$746,149** | **$814,219** | - Investments in unconsolidated subsidiaries totaled **$181 million** at December 31, 2021, including **$156 million** in Europe (mainly Mekonomen) and **$25 million** in North America[418](index=418&type=chunk)[419](index=419&type=chunk)[424](index=424&type=chunk) - The warranty reserve was **$29.5 million** at December 31, 2021, up from **$27.9 million** at December 31, 2020[426](index=426&type=chunk) - Total self-insurance reserves were **$117 million** at December 31, 2021, with **$61 million** classified as current[427](index=427&type=chunk) - Government assistance received, primarily grants from European and Canadian governments, totaled **$16 million** in 2021, a decrease from **$52 million** in 2020[430](index=430&type=chunk) - During 2021, the company repurchased **17.2 million shares** of common stock for **$877 million**, with **$654 million** remaining capacity under the repurchase program as of December 31, 2021[438](index=438&type=chunk) [Note 4. Revenue Recognition](index=88&type=section&id=Note%204.%20Revenue%20Recognition) Revenue by Category (in thousands) | Category | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Parts and services | $12,140,516 | $10,963,713 | $11,877,846 | | Other | $947,988 | $665,117 | $628,263 | | **Total revenue** | **$13,088,504** | **$11,628,830** | **$12,506,109** | - Revenue from parts and services is recognized when control transfers to the customer, generally upon shipment or delivery[447](index=447&type=chunk) - Service-type warranties are deferred at contract inception and amortized to revenue over the contract period (typically **6 to 36 months**); deferred service-type warranty revenue was **$31.7 million** at December 31, 2021[453](index=453&type=chunk) - Variable consideration (returns, discounts, rebates) is estimated using the 'expected value method' or 'most likely amount' method; a refund liability of **$107 million** and a return asset of **$58 million** were recorded at December 31, 2021[456](index=456&type=chunk) [Note 5. Restructuring and Acquisition Related Expenses](index=90&type=section&id=Note%205.%20Restructuring%20and%20Acquisition%20Related%20Expenses) - Acquisition-related expenses were **$3 million** in 2021, primarily for professional fees related to completed and potential transactions, down from **$8 million** in 2020[460](index=460&type=chunk)[461](index=461&type=chunk) - The 2019 Global Restructuring Program, aimed at eliminating underperforming assets and cost inefficiencies, is substantially complete, with **$2 million** in expenses incurred in 2021 and total cumulative costs of **$47 million**[462](index=462&type=chunk)[464](index=464&type=chunk) - The 2020 Global Restructuring Program, an incremental cost reduction initiative, incurred **$9 million** in expenses in 2021; total estimated costs for this program are between **$60 million and $70 million** through 2023[465](index=465&type=chunk)[466](index=466&type=chunk)[468](index=468&type=chunk) - The '1 LKQ Europe' program incurred **$6 million** in employee-related restructuring charges in 2021, with estimated total personnel and inventory-related restructuring charges of **$40 million to $50 million** through 2024[473](index=473&type=chunk)[474](index=474&type=chunk) [Note 6. Stock-Based Compensation](index=91&type=section&id=Note%206.%20Stock-Based%20Compensation) - LKQ grants equity-based awards (Restricted Stock Units - RSUs, Performance-Based Restricted Stock Units - PSUs, and stock options) under its Equity Incentive Plan, with **9 million shares** remaining available for issuance as of December 31, 2021[475](index=475&type=chunk) - RSUs vest over periods of up to five years, some with performance-based conditions; PSUs are three-year performance-based awards tied to metrics like adjusted EPS, organic revenue growth, and ROIC[477](index=477&type=chunk)[482](index=482&type=chunk) - No stock options were outstanding as of December 31, 2021 or 2020[486](index=486&type=chunk) - Total pre-tax stock-based compensation expense for RSUs and PSUs was **$33.7 million** in 2021, **$29.1 million** in 2020, and **$27.7 million** in 2019[488](index=488&type=chunk) - As of December 31, 2021, unrecognized compensation expense related to unvested RSUs and PSUs totaled **$43.8 million**, expected to be recognized through 2026[490](index=490&type=chunk) [Note 7. Earnings Per Share](index=94&type=section&id=Note%207.%20Earnings%20Per%20Share) Earnings Per Share (attributable to LKQ stockholders) | Metric | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Basic earnings per share from continuing operations | $3.68 | $2.10 | $1.75 | | Diluted earnings per share from continuing operations | $3.67 | $2.10 | $1.75 | Weighted-Average Shares Outstanding (in thousands) | Metric | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Basic weighted-average shares outstanding | 296,836 | 304,640 | 310,155 | | Diluted weighted-average shares outstanding | 297,722 | 305,006 | 310,969 | [Note 8. Accumulated Other Comprehensive Income (Loss)](index=95&type=section&id=Note%208.%20Accumulated%20Other%20Comprehensive%20Income%20(Loss)) Accumulated Other Comprehensive Income (Loss) Components (in thousands) | Component | December 31, 2021 | December 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | :--- | | Foreign Currency Translation | $(120,591) | $(57,126) | $(170,893) | | Unrealized Gain (Loss) on Cash Flow Hedges | $(6) | $(968) | $5,358 | | Unrealized Gain (Loss) on Pension Plans | $(24,156) | $(32,967) | $(31,934) | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | $(8,377) | $(7,948) | $(3,416) | | **Total Accumulated Other Comprehensive Income (Loss)** | **$(153,130)** | **$(99,009)** | **$(200,885)** | [Note 9. Long-Term Obligations](index=96&type=section&id=Note%209.%20Long-Term%20Obligations) Long-Term Obligations (in thousands) | Debt Type | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Senior secured credit agreement: Term loans payable | $— | $323,750 | | Senior secured credit agreement: Revolving credit facilities | $1,886,802 | $642,958 | | Euro Notes (2024) | $568,500 | $610,800 | | Euro Notes (2026/28) | $284,250 | $1,221,600 | | Other debt | $84,279 | $97,568 | | **Total debt** | **$2,823,831** | **$2,896,676** | Scheduled Maturities of Long-Term Obligations (in thousands) | Years Ending December 31, | Amount | | :--- | :--- | | 2022 | $35,067 | | 2023 | $13,820 | | 2024 | $2,463,996 | | 2025 | $9,580 | | 2026 | $3,386 | | Thereafter | $297,982 | | **Total debt** | **$2,823,831** | - Amendment No. 6 to the Credit Agreement (November 2021) modified interest rates for loans denominated in euros, Pounds Sterling, and Swiss Francs to transition from LIBOR to risk-free rates[505](index=505&type=chunk) - The company redeemed the **€750 million Euro Notes (2026)** on April 1, 2021, incurring a **$24 million loss** on debt extinguishment, and redeemed the **$600 million U.S. Notes (2023)** on January 10, 2020, with a **$13 million loss** on debt extinguishment[515](index=515&type=chunk)[523](index=523&type=chunk) - As of December 31, 2021, the maximum amount of dividends that could be paid was approximately **$2,850 million**, subject to covenants in the senior secured credit agreement and senior notes indentures[527](index=527&type=chunk) - The receivables securitization facility was terminated effective July 30, 2021[529](index=529&type=chunk) [Note 10. Derivative Instruments and Hedging Activities](index=100&type=section&id=Note%2010.%20Derivative%20Instruments%20and%20Hedging%20Activities) - LKQ uses derivatives to manage exposure to variable interest rates on senior secured debt and changing foreign exchange rates for certain transactions, but not for trading purposes[531](index=531&type=chunk) - Through June 30, 2021, the company held interest rate swap agreements and cross currency swaps as cash flow hedges, but none were outstanding as of December 31, 2021[532](index=532&type=chunk)[533](index=533&type=chunk)[535](index=535&type=chunk) - Other short-term derivative instruments, such as foreign currency forward contracts for non-functional currency denominated borrowings and inventory purchases, are held but not designated as hedges[539](index=539&type=chunk)[541](index=541&type=chunk) [Note 11. Fair Value Measurements](index=101&type=section&id=Note%2011.%20Fair%20Value%20Measurements) Financial Liabilities Measured at Fair Value (December 31, 2021, in thousands) | Liability Type | Balance | Level | | :--- | :--- | :--- | | Contingent consideration liabilities | $17,694 | Level 3 | | Deferred compensation liabilities | $88,961 | Level 2 | | **Total Liabilities** | **$106,655** | | - The fair values of credit agreement borrowings, Euro Notes (2024), and Euro Notes (2028) are classified as Level 2 within the fair value hierarchy, determined based on observable market inputs[551](index=551&type=chunk) Fair Value of Debt (December 31, 2021, in thousands) | Debt Type | Carrying Value | Fair Value | | :--- | :--- | :--- | | Credit agreement borrowings | $1,887,000 | ~$1,887,000 | | Euro Notes (2024) | $569,000 | ~$605,000 | | Euro Notes (2028) | $284,000 | ~$301,000 | [Note 12. Leases](index=103&type=section&id=Note%2012.%20Leases) Leased Assets and Liabilities (in thousands) | Category | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Assets:** | | | | Operating lease ROU assets, net | $1,361,324 | $1,353,124 | | Finance lease assets, net | $52,944 | $55,423 | | **Total leased assets** | **$1,414,268** | **$1,408,547** | | **Liabilities:** | | | | Current operating lease liabilities | $203,108 | $221,811 | | Current finance lease liabilities | $14,746 | $12,239 | | Long-term operating lease liabilities | $1,209,218 | $1,197,963 | | Long-term finance lease liabilities | $36,810 | $45,097 | | **Total lease liabilities** | **$1,463,882** | **$1,477,110** | - Net lease cost was **$428.6 million** in 2021, compared to **$423.3 million** in 2020[557](index=557&type=chunk) Future Minimum Lease Commitments (December 31, 2021, in thousands) | Years Ending December 31, | Operating leases | Finance leases | Total | | :--- | :--- | :--- | :--- | | 2022 | $292,617 | $16,574 | $309,191 | | 2023 | $258,449 | $10,067 | $268,516 | | 2024 | $218,562 | $8,413 | $226,975 | | 2025 | $187,264 | $6,084 | $193,348 | | 2026 | $155,141 | $2,972 | $158,113 | | Thereafter | $748,729 | $20,810 | $769,539 | | **Future minimum lease payments** | **$1,860,762** | **$64,920** | **$1,925,682** | - As of December 31, 2021, additional minimum operating lease payments for leases not yet commenced totaled **$79 million**, with terms of **1 to 15 years**[558](index=558&type=chunk) [Note 13. Employee Benefit Plans](index=105&type=section&id=Note%2013.%20Employee%20Benefit%20Plans) - LKQ maintains funded and unfunded defined benefit plans for certain employee groups in the U.S. and Europe, with most plans closed to new participants[562](index=562&type=chunk) - The U.S. Plan was terminated in June 2019, with benefit accruals frozen; the final settlement in 2020 resulted in a reclassification of **$6 million** of unrealized loss to net income[563](index=563&type=chunk) Funded Status of Defined Benefit Plans (in thousands) | Metric | December 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Projected benefit obligation - end of year | $194,283 | $211,539 | | Fair value - end of year | $62,975 | $58,962 | | **Funded status at end of year (liability)** | **$(131,308)** | **$(152,577)** | - Net periodic benefit cost for defined benefit plans was **$6.0 million** in 2021, compared to **$11.1 million** in 2020[571](index=571&type=chunk) - Employer contributions to pension plans were **$5 million** in 2021, with an estimated **$5 million** for 2022[583](index=583&type=chunk) [Note 14. Income Taxes](index=109&type=section&id=Note%2014.%20Income%20Taxes) Provision for Income Taxes (in thousands) | Component | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | Total current provision for income taxes | $357,688 | $282,991 | $207,845 | | Total deferred (benefit) provision for income taxes | $(27,097) | $(33,493) | $7,485 | | **Provision for income taxes** | **$330,591** | **$249,498** | **$215,330** | - The effective income tax rate was **23.6%** in 2021, down from **28.2%** in 2020, primarily due to higher pretax income in international operations and a **0.8% rate benefit** from the reversal of valuation allowances[586](index=586&type=chunk) - Undistributed earnings of foreign subsidiaries amounted to approximately **$1,151 million** at December 31, 2021, which the company intends to permanently reinvest[589](index=589&type=chunk) - The net deferred tax liability was **$247.4 million** at December 31, 2021, compared to **$274.5 million** at December 31, 2020[591](index=591&type=chunk) - Valuation allowances for deferred tax assets totaled **$45 million** at December 31, 2021, a **$15 million net decrease** primarily due to a **$12 million release** related to Germany interest deduction carryforwards[595](index=595&type=chunk) - Gross unrecognized tax benefits were **$4.5 million** at December 31, 2021, compared to **$2.3 million** at December 31, 2020[597](index=597&type=chunk) [Note 15. Segment and Geographic Information](index=112&type=section&id=Note%2015.%20Segment%20and%20Geographic%20Information) Segment EBITDA (in thousands) | Segment | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | North America | $944,465 | $778,504 | $712,957 | | Europe | $617,825 | $427,582 | $454,220 | | Specialty | $223,149 | $162,673 | $161,184 | | **Total Segment EBITDA** | **$1,785,439** | **$1,368,759** | **$1,328,361** | Capital Expenditures by Reportable Segment (in thousands) | Segment | Year Ended December 31, 2021 | Year Ended December 31, 2020 | Year Ended December 31, 2019 | | :--- | :--- | :--- | :--- | | North America | $129,174 | $76,300 | $131,643 | | Europe | $141,009 | $85,039 | $121,596 | | Specialty | $23,283 | $11,356 | $12,491 | | **Total capital expenditures** | **$293,

LKQ Corp Brands, Inc. (NASDAQ:LKQ) Q4 2021 Earnings Conference Call February 17, 2022 8:00 AM ET Company Participants Joe Boutross - VP, IR Dominick Zarcone - President & CEO Varun Laroyia - EVP & CFO Conference Call Participants Stephanie Moore - Truist Securities Daniel Imbro - Stephens Inc. Brian Butler - Stifel, Nicolaus & Company Bret Jordan - Jefferies Scott Stember - CL King Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps wit ...

| --- | --- | --- | |----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------|-------| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Fourth Quarter & Full-Year 2021 Earnings Call February 17, 2022 | | | | Nick Zarcone – President & Chief Executive Officer Varun Laroyia – Executive Vice President & Chief Financial Officer Joe Boutross – Vice President, Investor Relations | | ...