LKQ (LKQ) - 2021 Q4 - Annual Report

PART I Business Overview 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 - LKQ Corporation is a global distributor of vehicle products, including replacement parts, components, systems, and specialty products and accessories[23] - The company distributes 'alternative parts' (aftermarket, recycled, refurbished, and remanufactured products) to collision and mechanical repair shops[24] - 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] - The company is organized into three reportable segments: North America (aggregating Wholesale - North America and Self Service), Europe, and Specialty[26] 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][31] - Since 2017, the company has divested certain non-core and/or low-margin businesses as part of asset rationalization[28] Strategy - LKQ's mission is to be the leading global value-added distributor of vehicle parts and accessories[29] - 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][31] - 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] - Four primary strategic pillars: growing diversified product/service offerings, expanding geographic footprint, adapting to evolving technology, and rationalizing the asset base[33] - Key priorities for measuring progress: profitable growth, cash flow generation, European integration, and talent acquisition[34] COVID-19 Impact - 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] - 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] North America Segment - The North America segment includes wholesale operations (aftermarket, OEM recycled, remanufactured, refurbished, and new OEM parts) and self-service retail operations[36][37] - Wholesale operations sell to professional collision and mechanical vehicle repair businesses, with diagnostic and repair services (Elitek Vehicle Services) added in 2019[37] - Aftermarket products are sourced primarily from North America and Asia (principally Taiwan), with 44% of purchases from top 6 vendors in 2021[39][41][42] - Scrap metal and precious metals (e.g., catalytic converters) are generated and sold from salvage operations[43] - 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][45] - The segment maintains an extensive distribution network with warehouses and cross-dock facilities, utilizing third-party software for optimized delivery routes[48] - 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] - 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][52][53] - 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][55] Europe Segment - 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] - 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] - 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][63] - The primary distribution model is two-step (direct sales to repair shops), with some three-step operations (sales to distributors)[65] - 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] - 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] - 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] Specialty Segment - 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] - 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] - 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] - Customers are a fragmented base of RV, marine, and specialty automotive dealers, installers, jobbers, builders, parts chains, mail-order businesses, and online retailers[71] - Products are promoted through marketing programs (catalogs, advertising, trade shows) and online platforms (ekeystone.com, viantp.com)[72][73] - 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] - Competition is based on product breadth/depth, rapid and dependable delivery, marketing initiatives, support services, and price[75] - Most operations utilize an internally developed inventory management and order entry system that interfaces with third-party software for accounting and data analytics[76] Intellectual Property - 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] - The company does not believe its business is materially dependent on any single item or group of related intellectual property[77] Human Capital - 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] - 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] - 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] - 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] - Employees are offered market-competitive compensation and benefits, including medical, dental, vision, paid time off, retirement plans, and tuition reimbursement[84][85] - Professional development and training programs are provided across all levels, covering legal, ethics compliance, general workplace safety, and cybersecurity[86] 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] - Global headquarters are in Chicago, Illinois; North American headquarters in Nashville, Tennessee; and European headquarters in Zug, Switzerland[88][89] - 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] 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][92][93][95] - Some jurisdictions have enacted laws that restrict or prohibit the sale of alternative vehicle parts (aftermarket, recycled, refurbished, or remanufactured products)[94] 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] - 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] - 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] Environmental, Social and Governance Matters - 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][98] 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] - 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][103] - 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] Risk Factors The company faces diverse risks including pandemic impacts, economic volatility, intense competition, substantial debt, regulatory compliance, and operational disruptions Risks Relating to Our Business - 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][107][108][110] - 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][113][115][116][117] - 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][120][121][122][123] - 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][125][126][127] - 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][129][130][131] - 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][134][135][136] - 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][138] - 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][140][141][142][143][144][145] - 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] - 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][148] - 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][150] - 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][152][154][155] Risks Relating to Our Financial Structure - 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][157][159] - 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] - 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][165] - 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] - 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][337] - 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] - 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] - 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] - 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][172][173][174] - 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][176] - 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][179] - 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] - The amount and frequency of share repurchases and dividend payments may fluctuate based on cash priorities, market conditions, and Board approval[182] Legal and Regulatory Risks - 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][184][185][186] - 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][188][189][190][191][192] - 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][194] - 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][197] - 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][199][200][201][202] - 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] - Governmental agencies may refuse to grant or renew operating licenses and permits for salvage, self-service, and refurbishing businesses, potentially impacting operations[204] General Risks - 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][207][208] - Operating in foreign jurisdictions exposes the company to foreign exchange risks, political instability, anti-corruption laws, and other international business risks[206] - 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][210] - 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][212] - 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][215] - 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] - Activist investor activities could cause substantial costs, divert management's attention, and have an adverse effect on the business and stock price[217] Unresolved Staff Comments There are no unresolved staff comments to report Properties 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 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] - 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] - 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] Mine Safety Disclosure This item is not applicable to the company PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - 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] - 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] 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] - 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] - As of December 31, 2021, there was $654 million of remaining capacity under the repurchase program[233][234] RESERVED This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes LKQ's financial performance, highlighting 2021 revenue growth, improved margins, liquidity changes, capital allocation, and market risk management Overview - LKQ Corporation is a global distributor of vehicle products, including replacement parts, components, systems, and specialty products and accessories[237] - The company offers 'alternative parts' (aftermarket, recycled, refurbished, and remanufactured) to collision and mechanical repair shops[238] - LKQ's operating results have historically fluctuated and are expected to continue to do so due to various factors, some beyond its control[241] Acquisitions and Investments - 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] - 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] - During 2019, 2020, and 2021, LKQ acquired various immaterial businesses across its North America, Europe, and Specialty segments[243] Sources of Revenue - Revenue is reported in two categories: parts and services, and other; parts and services revenue represented approximately 93% of consolidated revenue in 2021[244] - Parts revenue is generated from the sale of vehicle replacement parts, components, systems, and specialty products/accessories[244] - Service revenue primarily comes from service-type warranties, admission fees to self-service yards, and diagnostic and repair services[244] - 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] Critical Accounting Estimates - 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][248] - 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][406] Recently Issued Accounting Pronouncements - In Q1 2021, LKQ adopted ASU No. 2019-12, 'Income Taxes,' which did not have a material impact on its Consolidated Financial Statements[444] - 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] 1 LKQ Europe Program - 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] - The program involves restructuring expenses, transformation expenses (non-capitalizable implementation costs), and transformation capital expenditures (capitalizable costs for long-lived assets)[252] - Organizational design and implementation projects were completed in June 2021, with remaining projects scheduled for completion by 2024[252] - 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] COVID-19 Impact on Our Operations - 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] - 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] - 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] - 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] - LKQ qualified for $16 million in government assistance in 2021 and $52 million in 2020, primarily from European and Canadian governments[257] - 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] Key Performance Indicators - 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][263] - Organic revenue growth measures the ability to serve and grow the customer base, excluding effects of acquisitions, divestitures, and foreign currency movements[263] - Segment EBITDA is the key measure of segment profit or loss, focusing on ongoing operational results[263] - Free cash flow (non-GAAP) provides insight into liquidity available for debt service, working capital, strategic acquisitions, stock repurchases, and dividends[263] Results of Operations—Consolidated 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][267] - Selling, general and administrative (SG&A) expenses as a percentage of revenue decreased to 27.3% in 2021 from 28.1% in 2020[264][268] - Operating income increased to 11.3% of revenue in 2021 from 8.5% in 2020[264] 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] - 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] - 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] - Equity in earnings of unconsolidated subsidiaries increased by $18 million in 2021, primarily from improved results at Mekonomen and North America investments[275] - 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] Results of Operations—Segment Reporting - 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][280] 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] - 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] - 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][285] - Europe's parts and services organic revenue increased 6.2% in 2021 due to less severe pandemic effects and easing lockdown measures[288] - Europe Segment EBITDA increased $190 million (+44.5%), with a $20 million positive foreign currency translation impact[291] - 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][293] - 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] - Specialty Segment EBITDA increased $60 million (+37.2%) due to increased revenue and expanded margin[295] - 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][297] Quantitative and Qualitative Disclosures About Market Risk 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] - 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] - 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] - 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][337] - 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] - 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] Financial Statements and Supplementary Data 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 - 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] - An unqualified opinion was also issued on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[343] - 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][348] Consolidated Statements of Income 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 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 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 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 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 Note 1. Business - LKQ Corporation is a Delaware holding company with all operations conducted by its consolidated subsidiaries, acting as a global distributor of vehicle products[373] - The company operates in the United States, Canada, and various European countries, organized into North America, Europe, and Specialty reportable segments[374][375] Note 2. Discontinued Operations - 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][378] - The glass manufacturing business (PGW) was sold in March 2017; the Purchase and Supply Agreement expired in Q1 2020[379] - Net results from discontinued operations were insignificant for the years ended December 31, 2021, 2020, and 2019[381] Note 3. Summary of Significant Accounting Policies - 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] 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][407] 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][419][424] - The warranty reserve was $29.5 million at December 31, 2021, up from $27.9 million at December 31, 2020[426] - Total self-insurance reserves were $117 million at December 31, 2021, with $61 million classified as current[427] - Government assistance received, primarily grants from European and Canadian governments, totaled $16 million in 2021, a decrease from $52 million in 2020[430] - 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] Note 4. Revenue Recognition 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] - 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] - 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] Note 5. Restructuring and Acquisition Related Expenses - 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][461] - 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][464] - 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][466][468] - 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][474] Note 6. Stock-Based Compensation - 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] - 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][482] - No stock options were outstanding as of December 31, 2021 or 2020[486] - 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] - 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] Note 7. Earnings Per Share 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) 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 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] - 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][523] - 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] - The receivables securitization facility was terminated effective July 30, 2021[529] Note 10. Derivative Instruments and Hedging Activities - 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] - 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][533][535] - 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][541] Note 11. Fair Value Measurements 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] 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 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] 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] Note 13. Employee Benefit Plans - 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] - 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] 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] - Employer contributions to pension plans were $5 million in 2021, with an estimated $5 million for 2022[583] Note 14. Income Taxes 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] - Undistributed earnings of foreign subsidiaries amounted to approximately $1,151 million at December 31, 2021, which the company intends to permanently reinvest[589] - The net deferred tax liability was $247.4 million at December 31, 2021, compared to $274.5 million at December 31, 2020[591] - 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] - Gross unrecognized tax benefits were $4.5 million at December 31, 2021, compared to $2.3 million at December 31, 2020[597] Note 15. Segment and Geographic Information 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,