LKQ (LKQ) - 2021 Q3 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements The company presents its unaudited condensed consolidated financial statements for the periods ended September 30, 2021 and 2020 Unaudited Condensed Consolidated Statements of Income The company reports significant year-over-year growth in revenue, operating income, and net income for the reported periods | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Revenue | $3,296,611 | $3,047,684 | $9,902,511 | $8,674,942 | | Gross margin | $1,343,392 | $1,198,542 | $4,052,815 | $3,423,422 | | Operating income | $378,154 | $296,002 | $1,194,276 | $718,304 | | Net income attributable to LKQ stockholders | $284,055 | $193,483 | $854,592 | $457,411 | | Diluted EPS | $0.96 | $0.64 | $2.85 | $1.50 | Unaudited Condensed Consolidated Statements of Comprehensive Income Comprehensive income reflects net income changes and significant fluctuations in other comprehensive income (loss) | Metric | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net income attributable to LKQ stockholders | $284,055 | $193,483 | $854,592 | $457,411 | | Other comprehensive income (loss) | $(47,485) | $70,041 | $(49,566) | $(8,837) | | Comprehensive income attributable to LKQ stockholders | $236,570 | $263,524 | $805,026 | $448,574 | - Foreign currency translation was a significant component of other comprehensive income (loss), showing a loss of $48.1 million for the three months ended September 30, 2021, compared to a gain of $70.2 million in the prior year period[9] Unaudited Condensed Consolidated Balance Sheets The balance sheet shows growth in total assets and stockholders' equity, alongside a reduction in long-term obligations | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total assets | $12,460,860 | $12,360,533 | | Total current liabilities | $2,322,259 | $1,988,491 | | Total stockholders' equity | $5,917,857 | $5,671,300 | | Cash and cash equivalents | $402,703 | $312,154 | | Receivables, net | $1,185,004 | $1,073,389 | | Inventories | $2,423,853 | $2,414,612 | | Goodwill | $4,525,474 | $4,591,569 | | Long-term obligations, excluding current portion | $2,348,448 | $2,812,641 | Unaudited Condensed Consolidated Statements of Cash Flows Cash flow statements indicate strong operating cash flow generation, with significant uses in financing activities | Metric | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,362,028 | $1,134,641 | | Net cash used in investing activities | $(200,842) | $(106,433) | | Net cash used in financing activities | $(1,065,811) | $(1,150,783) | | Net increase (decrease) in cash | $90,549 | $(113,475) | | Cash and cash equivalents, end of period | $402,703 | $421,382 | - Supplemental disclosures show cash paid for income taxes increased to $337.1 million in 2021 from $211.0 million in 2020, while interest paid decreased to $52.9 million from $97.9 million[16] Unaudited Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity increased, driven by net income and impacted by significant treasury stock repurchases | Metric | Sep 30, 2021 (in thousands) | Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | | Total Stockholders' Equity | $5,917,857 | $5,415,586 | | Retained Earnings | $5,630,632 | $4,595,028 | | Treasury Stock (Amount) | $(1,048,809) | $(439,819) | | Treasury Stock (Shares) | (29,310) | (16,496) | - The company repurchased 11.995 million shares of treasury stock for $579.7 million during the nine months ended September 30, 2021, significantly higher than the 3.3 million shares for $88.0 million in the prior year[22] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies and specific financial statement items Note 1. Interim Financial Statements This note clarifies the basis of preparation for the unaudited interim statements and the ongoing impact of COVID-19 - The company's unaudited condensed consolidated financial statements are prepared in accordance with SEC rules for interim financial statements and reflect all material, normally recurring adjustments[26] - The COVID-19 pandemic has impacted and is expected to continue to impact the business in 2020 and 2021, affecting demand, liquidity, and leading to organizational changes[28] Note 2. Discontinued Operations This note details the divestiture of Stahlgruber's Czech Republic wholesale business in February 2020 - The sale of Stahlgruber's Czech Republic business was completed on February 28, 2020, resulting in an immaterial loss on sale[31] - The business was classified as discontinued operations because it was never integrated into the Europe segment[30] Note 3. Financial Statement Information This note details key financial items including credit loss allowances, inventory, goodwill, and government assistance Allowance for Credit Losses and Bad Debt Expense | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Reserve for expected lifetime credit losses | $63,000 | $70,000 | | Bad debt expense (nine months) | $3,000 | $23,000 | Inventories by Type | Inventory Type | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Aftermarket and refurbished products | $2,004,516 | $2,025,002 | | Salvage and remanufactured products | $388,769 | $368,815 | | Manufactured products | $30,568 | $20,795 | | Total inventories | $2,423,853 | $2,414,612 | Government Assistance Received | Category | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Cost of goods sold | $163 | $695 | $526 | $1,165 | | Selling, general and administrative expenses | $884 | $11,754 | $15,121 | $43,928 | | Total government assistance | $1,047 | $12,449 | $15,647 | $45,093 | - Goodwill impairment testing was performed in Q4 2020 with no impairment found; no triggering event for interim testing was identified in 2021[35] - The Board of Directors authorized a $1.0 billion increase and a two-year extension to the stock repurchase program on July 28, 2021, raising the aggregate authorization to $2.0 billion through October 25, 2024[47] - The company adopted ASU No 2019-12, 'Income Taxes,' in Q1 2021 with no material impact, and is evaluating ASU No 2020-04, 'Reference Rate Reform,' which provides temporary optional guidance[51][52] Note 4. Revenue Recognition This note outlines revenue recognition policies and disaggregates revenue by category and segment Revenue by Category and Segment | Segment/Category | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | North America | $1,076,599 | $1,007,001 | $3,172,207 | $3,007,169 | | Europe | $1,519,682 | $1,479,174 | $4,544,749 | $4,043,473 | | Specialty | $465,027 | $399,554 | $1,454,389 | $1,150,962 | | Parts and services | $3,061,308 | $2,885,729 | $9,171,345 | $8,201,604 | | Other | $235,303 | $161,955 | $731,166 | $473,338 | | Total revenue | $3,296,611 | $3,047,684 | $9,902,511 | $8,674,942 | Refund Liability and Return Asset | Metric | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Refund liability | $108,000 | $102,000 | | Return asset | $59,000 | $57,000 | - Revenue from other sources, including scrap and precious metals, is recognized when the customer collects the scrap, with adjustments for weighing[59] Note 5. Restructuring and Acquisition Related Expenses This note details costs associated with the company's global restructuring and European integration programs - The 2019 Global Restructuring Program is substantially complete, with immaterial expenses incurred in Q3 2021[65] - The 2020 Global Restructuring Program incurred $1 million and $7 million in expenses for the three and nine months ended September 30, 2021, respectively, with total estimated costs between $60 million and $70 million through 2023[67] - The '1 LKQ Europe' program incurred $6 million in employee-related restructuring charges during the nine months ended September 30, 2021, with estimated total personnel and inventory-related charges of $40 million to $50 million through 2024[72] - Acquisition related expenses were immaterial in 2021, primarily consisting of professional fees for transactions[73] Note 6. Stock-Based Compensation This note describes the company's equity-based award programs and associated compensation expenses RSU Activity (Nine Months Ended Sep 30, 2021) | Metric | Number Outstanding | | :--- | :--- | | Unvested as of Jan 1, 2021 | 1,479,672 | | Granted | 732,527 | | Vested | (758,268) | | Forfeited / Canceled | (46,552) | | Unvested as of Sep 30, 2021 | 1,407,379 | PSU Activity (Nine Months Ended Sep 30, 2021) | Metric | Number Outstanding | | :--- | :--- | | Unvested as of Jan 1, 2021 | 291,601 | | Granted | 125,656 | | Forfeited / Canceled | (7,398) | | Unvested as of Sep 30, 2021 | 409,859 | Stock-Based Compensation Expense | Period | Pre-tax Stock-Based Compensation Expense (in thousands) | | :--- | :--- | | Three Months Ended Sep 30, 2021 | $8,000 | | Three Months Ended Sep 30, 2020 | $7,000 | | Nine Months Ended Sep 30, 2021 | $25,000 | | Nine Months Ended Sep 30, 2020 | $23,000 | Note 7. Earnings Per Share This note provides the computation of basic and diluted earnings per share for continuing operations Earnings Per Share (Continuing Operations) | Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $0.97 | $0.64 | $2.86 | $1.51 | | Diluted EPS | $0.96 | $0.64 | $2.85 | $1.51 | | Weighted-average shares outstanding (basic) | 294,026 | 304,271 | 299,184 | 304,837 | | Adjusted weighted-average shares outstanding (diluted) | 294,885 | 304,566 | 300,006 | 305,171 | Note 8. Accumulated Other Comprehensive Income (Loss) This note details the components of Accumulated Other Comprehensive Income (Loss) and their reclassification Accumulated Other Comprehensive Income (Loss) Components (Sep 30, 2021) | Component | Balance as of July 1, 2021 (in thousands) | Three Months Ended Sep 30, 2021 Change (in thousands) | Balance as of Sep 30, 2021 (in thousands) | | :--- | :--- | :--- | :--- | | Foreign Currency Translation | $(59,834) | $(48,139) | $(107,973) | | Unrealized Gain (Loss) on Cash Flow Hedges | $(99) | $0 | $(99) | | Unrealized Gain (Loss) on Pension Plans | $(32,341) | $306 | $(32,035) | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | $(8,816) | $348 | $(8,468) | | Total Accumulated Other Comprehensive Income (Loss) | $(101,090) | $(47,485) | $(148,575) | - Net unrealized losses and gains related to pension plans were reclassified to Other (income) expense, net in the income statement[87] Note 9. Long-Term Obligations This note details the company's long-term debt structure, recent redemptions, and credit agreement amendments Long-Term Obligations | Debt Type | Sep 30, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Revolving credit facilities | $1,443,063 | $642,958 | | Euro Notes (2024) | $579,000 | $610,800 | | Euro Notes (2026/28) | $289,500 | $1,221,600 | | Total debt | $2,398,502 | $2,896,676 | | Long term debt, net of debt issuance costs | $2,348,448 | $2,812,641 | - The company prepaid the outstanding amount on the term loan during Q2 2021, resulting in no term loan borrowings as of September 30, 2021[92] - On April 1, 2021, the company redeemed the 3.625% Euro Notes (2026) for $915 million, incurring a $24 million loss on debt extinguishment[105] - The receivables securitization facility was terminated effective July 30, 2021, with no outstanding balance as of December 31, 2020[110] Note 10. Derivative Instruments and Hedging Activities This note describes the company's use of derivative instruments to manage interest rate and foreign currency risks Cash Flow Hedges Notional Amounts (Dec 31, 2020) | Derivative Type | Notional Amount | | :--- | :--- | | USD denominated interest rate swap agreements | $480,000 | | Euro denominated cross currency swap agreements | €340,000 | | SEK denominated foreign currency forward contracts | kr227,000 | - As of September 30, 2021, the company held no cash flow hedges, compared to December 31, 2020, when it held interest rate swap agreements, cross currency swap agreements, and foreign currency forward contracts[117] Note 11. Fair Value Measurements This note outlines the fair value measurement hierarchy for the company's financial assets and liabilities Financial Assets and Liabilities Measured at Fair Value (Sep 30, 2021) | Category | Balance (in thousands) | Level 1 (in thousands) | Level 2 (in thousands) | Level 3 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Assets: Cash surrender value of life insurance | $85,934 | $0 | $85,934 | $0 | | Liabilities: Contingent consideration liabilities | $5,576 | $0 | $0 | $5,576 | | Liabilities: Deferred compensation liabilities | $85,961 | $0 | $85,961 | $0 | Fair Value vs. Carrying Value of Debt (Sep 30, 2021) | Debt Type | Carrying Value (in millions) | Fair Value (in millions) | | :--- | :--- | :--- | | Credit agreement borrowings | $1,400 | ~$1,400 | | Euro Notes (2024) | $579 | ~$625 | | Euro Notes (2028) | $290 | ~$311 | - Contingent consideration liabilities are classified as Level 3 due to significant unobservable inputs in their valuation[126] Note 12. Employee Benefit Plans This note provides information on the company's defined benefit plans, including funded status and periodic cost Net Periodic Benefit Cost | Component | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Service cost | $921 | $688 | $2,749 | $2,214 | | Interest cost | $333 | $682 | $1,028 | $2,131 | | Expected return on plan assets | $(415) | $(411) | $(1,261) | $(1,551) | | Amortization of actuarial loss | $427 | $238 | $1,301 | $907 | | Settlement loss | $0 | $3,556 | $0 | $5,656 | | Net periodic benefit cost | $1,266 | $4,753 | $3,817 | $9,357 | - The aggregate funded status of defined benefit plans was a liability of $145 million as of September 30, 2021, compared to $153 million as of December 31, 2020[130] Note 13. Income Taxes This note details the company's effective income tax rates and the factors influencing them - The effective income tax rate for the nine months ended September 30, 2021, was 25.7%, a decrease from 28.3% in the comparable prior year period[135] - The lower 2021 tax rate is primarily due to higher forecasted operating results compared to 2020, when COVID-19 impacts depressed forecasts[135] Note 14. Segment and Geographic Information This note provides detailed financial performance for the company's three reportable segments and geographic areas Segment EBITDA by Reportable Segment (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | North America | $225,582 | $204,957 | $750,935 | $565,949 | | Europe | $175,093 | $136,165 | $484,157 | $303,814 | | Specialty | $51,644 | $48,340 | $192,525 | $132,805 | | Consolidated | $452,319 | $389,462 | $1,427,617 | $1,002,568 | Total Capital Expenditures by Segment (in thousands) | Segment | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | North America | $22,654 | $12,352 | $52,806 | $52,565 | | Europe | $18,953 | $17,420 | $66,454 | $49,970 | | Specialty | $3,244 | $2,876 | $13,445 | $7,414 | | Total | $44,851 | $32,648 | $132,705 | $109,949 | Revenue by Geographic Area (in thousands) | Geographic Area | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | United States | $1,671,186 | $1,463,063 | $5,026,114 | $4,327,563 | | United Kingdom | $428,730 | $411,861 | $1,253,482 | $1,080,899 | | Germany | $413,914 | $396,119 | $1,220,608 | $1,129,805 | | Other countries | $782,781 | $776,641 | $2,402,307 | $2,136,675 | | Total revenue | $3,296,611 | $3,047,684 | $9,902,511 | $8,674,942 | - The company has three reportable segments: North America, Europe, and Specialty[136] Note 15. Subsequent Event This note discloses the declaration of a quarterly cash dividend subsequent to the reporting period - On October 26, 2021, LKQ's Board of Directors declared a quarterly cash dividend of $0.25 per share, payable on December 2, 2021[145] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on financial performance, business overview, operational impacts, and liquidity Forward-Looking Statements The report contains forward-looking statements subject to various risks, uncertainties, and other factors - The report contains forward-looking statements subject to risks, uncertainties, assumptions, and other factors, including the unfavorable effects of COVID-19, that may cause actual results to differ materially[147][148] Overview LKQ is a global distributor of vehicle replacement parts, components, and specialty products across three segments - LKQ Corporation is a global distributor of vehicle products, including replacement parts, components, systems, and specialty products, serving collision and mechanical repair shops[149][150] - The company is a leading provider of alternative vehicle collision and mechanical replacement products in North America and Europe, and a leading distributor of specialty vehicle aftermarket equipment in the U S and Canada[151] - LKQ is organized into three reportable segments: North America, Europe, and Specialty[152] Acquisitions and Investments The company's growth strategy combines organic means with a historical focus on acquisitions - Since 1998, LKQ has pursued growth through organic means and acquisitions, shifting focus from large-scale consolidation to tuck-in acquisitions and strategic investments in recent years[154] Sources of Revenue Revenue is primarily derived from parts and services, with other revenue fluctuating based on commodity prices - Revenue is categorized into 'parts and services' (vehicle products, warranties, diagnostic/repair services) and 'other' (scrap, precious metals, bulk sales), with 'other' revenue fluctuating based on commodity prices and volume[156] Critical Accounting Policies and Estimates No material changes to critical accounting policies and estimates occurred during the first nine months of 2021 - There have been no material changes to critical accounting policies and estimates during the nine months ended September 30, 2021[157] Recently Issued Accounting Pronouncements Information regarding new accounting standards is available in Note 3 of the financial statements - Information on new accounting standards is provided in Note 3, 'Financial Statement Information'[158] Financial Information by Geographic Area Details on revenue and long-lived assets by geographic region are provided in Note 14 - Revenue and long-lived assets by geographic region are detailed in Note 14, 'Segment and Geographic Information'[159] 1 LKQ Europe Program The '1 LKQ Europe' program aims to centralize and standardize key functions to improve efficiency and integration - The '1 LKQ Europe' program aims for structural centralization and standardization of key functions, with organizational design and implementation projects completed in June 2021 and remaining projects by 2024[160][161] - Costs incurred for the program across restructuring, transformation expenses, and capital expenditures were $6 million and $26 million for the three and nine months ended September 30, 2021, respectively[161] - Expected total costs for the program are $30 million to $40 million in 2021 and an additional $100 million to $130 million between 2022 and 2024, funded by improved trade working capital initiatives[161] COVID-19 Impact on Our Operations The company experienced a continued recovery from the pandemic, with revenue growth and sustained cost benefits - Organic parts and services revenue increased by 4.0% in Q3 2021, continuing the recovery from pandemic-induced declines in 2020[162] - The company implemented cost reduction actions in 2020, sustaining a portion of these benefits through Q3 2021, leading to higher profitability[164][166] - Government assistance received for personnel expenses totaled $16 million for the nine months ended September 30, 2021, significantly less than $52 million in 2020[165] Key Performance Indicators Management uses organic revenue growth, Segment EBITDA, and free cash flow to evaluate performance - Key performance indicators include organic revenue growth, Segment EBITDA, and free cash flow, used to evaluate growth, profitability, and cash generation[171][172] - Organic revenue growth measures the ability to serve and grow the customer base, excluding acquisitions, divestitures, and foreign currency movements[172] - Free cash flow is calculated as net cash provided by operating activities less purchases of property, plant, and equipment, providing insight into liquidity[172] Results of Operations—Consolidated This section analyzes the consolidated financial performance for the three and nine months ended September 30, 2021 Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 Consolidated revenue grew 8.2% to $3.3 billion, driven by organic growth and higher other revenue Consolidated Revenue Growth (Q3 YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 4.0 % | 0.5 % | 1.5 % | 6.1 % | | Other revenue | 45.1 % | 0.1 % | 0.1 % | 45.3 % | | Total revenue | 6.2 % | 0.5 % | 1.5 % | 8.2 % | Restructuring and Acquisition Related Expenses (Q3 YoY) | Expense Type | Three Months Ended Sep 30, 2021 (in thousands) | Three Months Ended Sep 30, 2020 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Restructuring expenses | $1,843 | $12,701 | $(10,858) | | Acquisition related expenses | $682 | $7,794 | $(7,112) | | Total | $2,525 | $20,495 | $(17,970) | - Cost of goods sold decreased to 59.2% of revenue in Q3 2021 from 60.7% in Q3 2020, reflecting improvements in Europe and North America segments[177] - Selling, general and administrative (SG&A) expenses as a percentage of revenue increased to 27.2% in Q3 2021 from 26.7% in Q3 2020, primarily due to increases in North America and Europe[179] - The effective income tax rate for Q3 2021 was 24.4%, down from 29.3% in Q3 2020, due to a lower projected annual effective tax rate and favorable discrete items[184] - Equity in earnings of unconsolidated subsidiaries increased by $4 million, mainly from improved North America investments[185] Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 Consolidated revenue increased 14.2% to $9.9 billion, with substantial growth in operating and net income Consolidated Revenue Growth (9M YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 8.3 % | (0.1)% | 3.6 % | 11.8 % | | Other revenue | 54.1 % | 0.0 % | 0.3 % | 54.5 % | | Total revenue | 10.8 % | (0.1)% | 3.5 % | 14.2 % | Restructuring and Acquisition Related Expenses (9M YoY) | Expense Type | Nine Months Ended Sep 30, 2021 (in thousands) | Nine Months Ended Sep 30, 2020 (in thousands) | Change (in thousands) | | :--- | :--- | :--- | :--- | | Restructuring expenses | $14,679 | $44,498 | $(29,819) | | Acquisition related expenses | $800 | $7,917 | $(7,117) | | Total | $15,479 | $52,415 | $(36,936) | - Cost of goods sold decreased to 59.1% of revenue in 9M 2021 from 60.5% in 9M 2020, reflecting improvements across segments, partially offset by an unfavorable mix impact from higher Specialty segment growth[191] - SG&A expenses as a percentage of revenue decreased to 26.7% in 9M 2021 from 28.3% in 9M 2020, driven by decreases in all segments and a favorable mix impact[192] - Interest expense decreased by $21 million due to lower outstanding debt and interest rates, partially offset by a $11 million increase in loss on debt extinguishment from the Euro Notes (2026) redemption[197][200] - Equity in earnings of unconsolidated subsidiaries increased by $15 million, driven by improved results from Mekonomen and North America investments[203] Results of Operations—Segment Reporting This section analyzes the financial performance of the North America, Europe, and Specialty segments Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 2020 All segments reported revenue and Segment EBITDA growth in Q3 2021, led by strong performance in Europe and Specialty North America Third Party Revenue Growth (Q3 YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 5.9 % | 0.6 % | 0.4 % | 6.9 % | | Other revenue | 46.1 % | 0.1 % | 0.0 % | 46.3 % | | Total third party revenue | 11.3 % | 0.6 % | 0.3 % | 12.2 % | Europe Third Party Revenue Growth (Q3 YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 0.1 % | (0.0)% | 2.6 % | 2.7 % | | Other revenue | 10.9 % | — % | 2.6 % | 13.6 % | | Total third party revenue | 0.2 % | (0.0)% | 2.6 % | 2.8 % | Specialty Third Party Revenue Growth (Q3 YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 13.7 % | 2.1 % | 0.6 % | 16.4 % | | Other revenue | — % | — % | — % | — % | | Total third party revenue | 13.7 % | 2.1 % | 0.6 % | 16.4 % | - North America Segment EBITDA increased by $21 million (10.1%), driven by margin initiatives, rightsizing actions, favorable commodity prices (precious metals and scrap steel contributing an estimated $17 million), and improving revenue[212] - Europe Segment EBITDA increased by $39 million (28.6%), with a $4 million positive impact from foreign currency translation and a 2.5% increase in gross margin due to net price increases and procurement initiatives[215][216][219] - Specialty Segment EBITDA increased by $3 million (6.8%), driven by strong demand and inventory position, despite a slight decrease in gross margin due to inflation in manufacturing and increased operating expenses from incentive compensation and acquisition-related duplicative costs[218][220][221] Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020 All segments delivered significant year-to-date growth in revenue and Segment EBITDA, reflecting strong market recovery North America Third Party Revenue Growth (9M YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 4.7 % | 0.3 % | 0.5 % | 5.5 % | | Other revenue | 55.1 % | 0.0 % | 0.0 % | 55.2 % | | Total third party revenue | 11.4 % | 0.3 % | 0.4 % | 12.1 % | Europe Third Party Revenue Growth (9M YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 6.3 % | (0.7)% | 6.8 % | 12.4 % | | Other revenue | 25.6 % | — % | 8.4 % | 34.0 % | | Total third party revenue | 6.4 % | (0.7)% | 6.8 % | 12.5 % | Specialty Third Party Revenue Growth (9M YoY) | Category | Organic Change | Acquisition and Divestiture Change | Foreign Exchange Change | Total Change | | :--- | :--- | :--- | :--- | :--- | | Parts & services revenue | 24.6 % | 1.0 % | 0.7 % | 26.4 % | | Other revenue | — % | — % | — % | — % | | Total third party revenue | 24.6 % | 1.0 % | 0.7 % | 26.4 % | - North America Segment EBITDA increased by $185 million (32.7%), driven by higher precious metals and scrap steel prices (estimated $108 million impact), margin initiatives, and revenue recovery[223] - Europe Segment EBITDA increased by $180 million (59.4%), with a $21 million positive impact from foreign currency translation and a 1.5% increase in gross margin due to price increases and procurement initiatives[229][230] - Specialty Segment EBITDA increased by $60 million (45.0%), driven by strong demand and inventory position, with gross margin increasing due to favorable product/channel mix and lower discounting[232][234] Liquidity and Capital Resources The company maintains sufficient liquidity despite a decrease from year-end 2020 due to debt management activities Liquidity Data (in thousands) | Metric | Sep 30, 2021 | Dec 31, 2020 | Sep 30, 2020 | | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $402,703 | $312,154 | $421,382 | | Total debt | $2,398,502 | $2,896,676 | $3,133,465 | | Availability under credit facilities | $1,637,753 | $2,546,081 | $2,270,953 | | Total liquidity (cash and cash equivalents + availability) | $2,040,456 | $2,858,235 | $2,692,335 | Summary of Inventory Procurement (9M YoY, in thousands) | Segment | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | North America | $798,100 | $760,600 | $37,500 | | Europe | $2,860,900 | $2,491,600 | $369,300 | | Specialty | $1,105,200 | $678,400 | $426,800 | | Total | $4,764,200 | $3,930,600 | $833,600 | Net Cash Provided by Operating Activities (9M YoY, in millions) | Component | Increase (decrease) | | :--- | :--- | | Operating income | $476 | | Cash paid for taxes | $(126) | | Cash paid for interest | $45 | | Receivables, net | $(105) | | Inventories | $(588) | | Accounts payable | $484 | | Other operating activities | $41 | | Total change | $227 | | Net cash provided by operating activities (2021) | $1,362 | Free Cash Flow (in thousands) | Metric | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,362,028 | $1,134,641 | | Less: purchases of property, plant and equipment | $132,705 | $109,949 | | Free cash flow | $1,229,323 | $1,024,692 | - Available liquidity decreased by $818 million from December 31, 2020, primarily due to the redemption of Euro Notes (2026) and repayment of term loans using revolving credit facility proceeds, and termination of the receivables securitization facility[236] - The company is in compliance with all restrictive covenants under its credit agreement, with a net leverage ratio of 1.1 (covenant 4.25:1.00) and an interest coverage ratio of 24.4 (covenant 3.00:1.00) as of September 30, 2021[239][241] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign exchange rates, interest rates, and commodity prices Foreign Exchange Rates A significant portion of revenue is generated outside the U.S., creating exposure to currency fluctuations - Operations outside the U.S. accounted for 49.2% of revenue for the nine months ended September 30, 2021[264] - 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 for the nine months ended September 30, 2021[264] - The company hedges a portion of foreign currency exposure related to inventory purchases in Europe but not in North America, and does not hold derivative contracts to hedge foreign currency risk for net investment in foreign operations[265][266][268] Interest Rates Interest rate risk primarily stems from variable rate borrowings under the company's credit facilities - The company is exposed to interest rate changes primarily on variable rate borrowings under its credit facilities[269] - At September 30, 2021, $1.4 billion of variable rate debt was not hedged; a 100 basis point movement in interest rates would change interest expense by $14 million over the next twelve months[271] Commodity Prices The company is exposed to price fluctuations in scrap and precious metals, which affect both revenue and costs - LKQ is exposed to price fluctuations in scrap metal and other metals (including precious metals), which affect both revenue and costs, providing a natural hedge[272] - There is typically a lag between the effect of metal price fluctuations on revenue and inventory cost changes, which can lead to positive or negative gross margin effects, especially with rapid price movements[272] - Average prices of rhodium, palladium, and platinum decreased by 32%, 17%, and 13% respectively, for the three months ended September 30, 2021, compared to the prior quarter[272] Item 4. Controls and Procedures Management confirms the effectiveness of disclosure controls and notes changes to internal controls due to an ERP implementation Evaluation of Disclosure Controls and Procedures The company's disclosure controls and procedures were deemed effective as of the end of the reporting period - As of September 30, 2021, the company's disclosure controls and procedures were deemed effective in providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[274] Changes in Internal Control over Financial Reporting The ongoing implementation of a new ERP system in Europe has resulted in changes to internal controls - The company is implementing a new ERP system across its European business units, which has automated, modified, or implemented certain internal controls over financial reporting[275] PART II OTHER INFORMATION Item 1. Legal Proceedings The company faces various incidental lawsuits and recent EPA enforcement actions not expected to be material - Management expects that currently outstanding legal claims and suits will not materially affect the company's financial position, results of operations, or cash flows[278] - The EPA initiated enforcement actions against several facilities in July 2021, with Region 3 proposing a $130,000 penalty for alleged Clean Water Act violations[278] Item 1A. Risk Factors This section refers to the company's 2020 Form 10-K for a comprehensive discussion of business risks - Readers are directed to the 2020 Form 10-K for a comprehensive discussion of risk factors[279] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's stock repurchase activity and program authorization Stock Repurchases (Q3 2021) | Period | Total Number of Shares Purchased (in thousands) | Average Price Paid per Share | | :--- | :--- | :--- | | July 1, 2021 - July 31, 2021 | 2,501 | $50.18 | | August 1, 2021 - August 31, 2021 | 190 | $51.03 | | September 1, 2021 - September 30, 2021 | 1,647 | $50.92 | | Total (Q3 2021) | 4,338 | | - On July 28, 2021, the Board of Directors authorized a $1.0 billion increase and extension to the stock repurchase program, bringing the total authorization to $2.0 billion through October 25, 2024[282] - As of September 30, 2021, approximately $951.2 million remained available under the stock repurchase program[284] Item 6. Exhibits This section lists the exhibits filed with the report, including officer certifications and XBRL data - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[286] - Various Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are also filed as exhibits[286] SIGNATURES The report is duly signed and submitted on behalf of LKQ Corporation by its authorized officers - The report is signed by Varun Laroyia, Executive Vice President and Chief Financial Officer, and Michael S Clark, Vice President - Finance and Controller, on November 3, 2021[289]