Notes to Unaudited Condensed Consolidated Financial Statements
Note 1. Interim Financial Statements
LKQ Corporation, a Delaware corporation, is a holding company and all operations are conducted by subsidiaries. When the terms "LKQ," "the Company," "we," "us," or "our" are used in this document, those terms refer to LKQ Corporation and its consolidated subsidiaries.
We have prepared the accompanying Unaudited Condensed Consolidated Financial Statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") applicable to interim financial statements. Accordingly, certain information related to our significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted. These Unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all material adjustments (which include only normally recurring adjustments) necessary to fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Results for interim periods are not necessarily indicative of the results that can be expected for any subsequent interim period or for a full year. These interim financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on February 25, 2022 ("2021 Form 10-K").
In the current year, we changed the presentation of our Unaudited Condensed Consolidated Financial Statements from thousands to millions and, as a result, any necessary rounding adjustments have been made to prior year disclosed amounts.
Note 2. Financial Statement Information
Allowance for Credit Losses
Receivables, net are reported net of an allowance for credit losses. Management evaluates the aging of customer receivable balances, the financial condition of our customers, historical trends, and macroeconomic factors to estimate the amount of customer receivables that may not be collected in the future and records a provision it believes is appropriate. Our reserve for expected credit losses was $56 million and $53 million as of June 30, 2022 and December 31, 2021, respectively. The provision for credit losses was $1 million for both the three months ended June 30, 2022 and 2021 and $9 million and $4 million for the six months ended June 30, 2022 and 2021, respectively.
Inventories
Inventories consist of the following (in millions):
| | | | | | | | | | | |
| 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 | |
Aftermarket and refurbished products and salvage and remanufactured products are primarily composed of finished goods. As of June 30, 2022, manufactured products inventory was composed of $22 million of raw materials, $5 million of work in process, and $12 million of finished goods. As of December 31, 2021, manufactured products inventory was composed of $27 million of raw materials, $4 million of work in process, and $5 million of finished goods.
Divestitures
In March 2022, we entered into a definitive agreement to sell PGW Auto Glass (“PGW”), our aftermarket glass business within our Wholesale - North America segment, to a third party. The sale was completed in April 2022 for $361 million resulting in recognition of a $155 million pretax gain ($127 million after tax).
Intangible Assets
Goodwill and indefinite-lived intangible assets are tested for impairment at least annually. We performed our annual impairment test during the fourth quarter of 2021, and determined no impairment existed as all of our reporting units had a fair value estimate which exceeded the carrying value by at least 70%. The fair value estimates of our reporting units were established using weightings of the results of a discounted cash flow methodology and a comparative market multiples approach. Goodwill impairment testing may also be performed on an interim basis when events or circumstances arise that may lead to impairment. We did not identify any indicators of impairment in the first six months of 2022 that necessitated an interim test of goodwill impairment or indefinite-lived intangible assets impairment.
Investments in Unconsolidated Subsidiaries
We account for our Investments in unconsolidated subsidiaries using the equity method of accounting, as our investments give us the ability to exercise significant influence, but not control, over the investee.
The carrying value of our Investments in unconsolidated subsidiaries were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Ownership as of June 30, 2022 | | June 30, 2022 | | December 31, 2021 |
MEKO AB(1)(2) | 26.6% | | $ | 141 | | | $ | 145 | |
Other(3) | | | 13 | | | 36 | |
| Total | | | $ | 154 | | | $ | 181 | |
(1) As of June 30, 2022, the fair value of our investment in MEKO AB ("Mekonomen") was $173 million based on the quoted market price for Mekonomen's common stock using the same foreign exchange rate as the carrying value.
(2) As of June 30, 2022, our share of the book value of Mekonomen's net assets exceeded the book value of our investment by $8 million; this difference is primarily related to Mekonomen's Accumulated Other Comprehensive Income balance as of our acquisition date in 2016. We record our equity in the net earnings of Mekonomen on a one quarter lag.
(3) In June 2022, we sold an investment in our Self Service segment resulting in a decrease to the carrying value of $22 million, recognizing an insignificant gain upon sale.
Warranty Reserve
Some of our salvage mechanical products are sold with a standard six month warranty against defects. Additionally, some of the remanufactured engines are sold with a standard three or four year warranty against defects. We also provide a limited lifetime warranty for certain of our aftermarket products. These assurance-type warranties are not considered a separate performance obligation, and thus no transaction price is allocated to them. We record warranty costs in Cost of goods sold in our Unaudited Condensed Consolidated Statements of Income. Our warranty reserve is calculated using historical claim information to project future warranty claims activity and is recorded within Other accrued expenses and Other noncurrent liabilities on our Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments. The changes in the warranty reserve are as follows (in millions):
| | | | | |
| Warranty Reserve |
| Balance as of December 31, 2021 | $ | 30 | |
| Warranty expense | 38 | |
| Warranty claims | (38) | |
| |
| |
| Balance as of June 30, 2022 | $ | 30 | |
Litigation and Related Contingencies
We have certain contingencies resulting from litigation, claims and other commitments and are subject to a variety of environmental and pollution control laws and regulations incident to the ordinary course of business. We currently expect that the resolution of such contingencies will not materially affect our financial position, results of operations or cash flows.
Stockholders' Equity
Treasury Stock
Our Board of Directors had authorized a stock repurchase program under which we are able to purchase our common stock from time to time through October 25, 2024. Repurchases under the program may be made in the open market or in privately negotiated transactions, with the amount and timing of repurchases depending on market conditions and corporate needs. The repurchase program does not obligate us to acquire any specific number of shares and may be suspended or discontinued at any time. Repurchased shares are accounted for as treasury stock using the cost method. On May 10, 2022, our Board of Directors authorized a $500 million increase to our existing stock repurchase program, raising the aggregate program authorization to $2,500 million as of June 30, 2022.
During the three and six months ended June 30, 2022, we repurchased 8.1 million and 10.8 million shares of common stock, respectively, for an aggregate price of $404 million and $548 million, respectively. During the three and six months ended June 30, 2021, we repurchased 6.2 million and 7.7 million shares of common stock, respectively, for an aggregate price of $304 million and $361 million, respectively. As of June 30, 2022, there was $606 million of remaining capacity under our repurchase program.
Noncontrolling Interest
We present redeemable noncontrolling interest on our balance sheet related to redeemable shares issued to a minority shareholder in conjunction with a previous acquisition. The redeemable shares contain (i) a put option for all noncontrolling interest shares at a fixed price of $24 million (€21 million) for the minority shareholder exercisable in the fourth quarter of 2023, (ii) a call option for all noncontrolling interest shares at a fixed price of $26 million (€23 million) for us exercisable beginning in the first quarter of 2026 through the end of the fourth quarter of 2027, and (iii) a guaranteed dividend to be paid quarterly to the minority shareholder through the fourth quarter of 2023. The redeemable shares do not provide the minority shareholder with rights to participate in the profits and losses of the subsidiary prior to the exercise date of the put option. As the put option is outside our control, we recorded a $24 million Redeemable noncontrolling interest at the put option's redemption value outside of permanent equity on our Unaudited Condensed Consolidated Balance Sheets.
Note 3. Revenue Recognition
The majority of our revenue is derived from the sale of vehicle parts. We recognize revenue for the sale of products at the point in time when the performance obligation has been satisfied and control has transferred to the customer, which generally occurs upon shipment or delivery to a customer based on terms of the sale.
Sources of Revenue
We report our revenue in two categories: (i) parts and services and (ii) other. The following table sets forth our revenue by category, disaggregated by reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| 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 | |
| Parts and services | 3,092 | | | 3,178 | | | 6,196 | | | 6,110 | |
| Wholesale - North America | 94 | | | 94 | | | 189 | | | 176 | |
| Europe | 7 | | | 7 | | | 14 | | | 15 | |
| | | | | | | |
| Self Service | 148 | | | 156 | | | 290 | | | 305 | |
| Other | 249 | | | 257 | | | 493 | | | 496 | |
| Total revenue | $ | 3,341 | | | $ | 3,435 | | | $ | 6,689 | | | $ | 6,606 | |
Parts and Services
Parts revenue is generated from the sale of vehicle products including replacement parts, components and systems used in the repair and maintenance of vehicles and specialty products and accessories to improve the performance, functionality and appearance of vehicles. Services revenue includes (i) additional services that are generally billed concurrently with the related product sales, such as the sale of service-type warranties, (ii) fees for admission to our self service yards, and (iii) diagnostic and repair services.
For Wholesale - North America and Self Service, vehicle replacement products include sheet metal collision parts such as doors, hoods, and fenders; bumper covers; head and tail lamps; mirrors; grilles; wheels; and large mechanical items such as engines and transmissions. For Europe, vehicle replacement products include a wide variety of small mechanical products such as brake pads, discs and sensors; clutches; electrical products such as spark plugs and batteries; steering and suspension products; filters; and oil and automotive fluids. For our Specialty operations, we serve seven product segments: truck and off-road; speed and performance; recreational vehicles; towing; wheels, tires and performance handling; marine; and miscellaneous accessories.
Our service-type warranties typically have service periods ranging from 6 months to 36 months. Proceeds from these service-type warranties are deferred at contract inception and amortized on a straight-line basis to revenue over the contract period. The changes in deferred service-type warranty revenue are as follows (in millions):
| | | | | |
| Service-Type Warranties |
| Balance as of January 1, 2022 | $ | 32 | |
| Additional warranty revenue deferred | 28 | |
| Warranty revenue recognized | (28) | |
| Balance as of June 30, 2022 | $ | 32 | |
Other Revenue
Revenue from other sources include sales of scrap and precious metals (platinum, palladium, and rhodium), bulk sales to mechanical manufacturers (including cores) and sales of aluminum ingots and sows from furnace operations. We derive scrap metal and other precious metals from several sources in both our Wholesale - North America and Self Service segments, including vehicles that have been used in our recycling operations and vehicles from original equipment manufacturers ("OEMs") and other entities that contract with us for secure disposal of "crush only" vehicles. Revenue from the sale of hulks in our Wholesale - North America and Self Service segments is recognized based on a price per ton of delivered material when the customer (processor) collects the scrap.
Revenue by Geographic Area
See Note 13, "Segment and Geographic Information" for information related to our revenue by geographic region.
Variable Consideration
The amount of revenue ultimately received from the customer can vary due to variable consideration including returns, discounts, rebates, refunds, credits, price concessions, incentives, performance bonuses, or other similar items. We utilize the “expected value method” or the “most likely amount” method in order to estimate variable consideration, depending on the type of variable consideration, with contemplation of any expected reversals in revenue. We recorded a refund liability and return asset for expected returns of $108 million and $58 million, respectively, as of June 30, 2022, and $107 million and $58 million, respectively, as of December 31, 2021. The refund liability is presented separately on the Unaudited Condensed Consolidated Balance Sheets within current liabilities while the return asset is presented within Prepaid expenses and other current assets. Other types of variable consideration consist primarily of discounts, volume rebates, and other customer sales incentives that are recorded in Receivables, net on the Unaudited Condensed Consolidated Balance Sheets. We recorded a reserve for our variable consideration of $110 million and $144 million as of June 30, 2022 and December 31, 2021, respectively.
Note 4. Restructuring and Transaction Related Expenses
Global Restructuring Programs
In 2019, we commenced a cost reduction initiative, covering all of our reportable segments, designed to eliminate underperforming assets and cost inefficiencies. This program was expanded in 2020 as we identified additional opportunities to eliminate inefficiencies, including actions in response to impacts to the business from COVID-19. We have incurred and expect to incur costs for inventory write-downs; employee severance and other expenditures related to employee terminations; lease exit costs, such as lease termination fees, accelerated amortization of operating lease assets and impairment of operating lease assets; other costs related to facility exits, such as moving expenses to relocate inventory and equipment; and accelerated depreciation of fixed assets to be disposed of earlier than the end of the previously estimated useful lives.
During the three and six months ended June 30, 2022, we did not incur a significant amount of restructuring expenses under these programs. During the three and six months ended June 30, 2021, we recognized net restructuring expenses totaling $4 million and $7 million, respectively, which included employee-related costs, facility exit costs, and a $3 million gain in the first quarter from the sale of a building to be closed. Of the cumulative program costs incurred to date, $59 million, $43 million, $2 million and $2 million related to our Europe, Wholesale - North America, Specialty and Self Service segments, respectively. The actions under the 2019 Global Restructuring Program are substantially complete and the 2020 Global Restructuring Program is expected to be completed in 2023. We estimate total costs under the programs through their expected completion dates will be between $108 million and $115 million, of which approximately $63 million, $44 million, $2 million and $2 million will be incurred by our Europe, Wholesale - North America, Specialty and Self Service segments, respectively; these segment amounts represent the approximate midpoints of the expected ranges of costs to be incurred by each segment.
As of June 30, 2022 and December 31, 2021, restructuring liabilities incurred related to these programs totaled $11 million and $14 million, respectively, including $7 million and $9 million, respectively, related to leases we have exited or expect to exit prior to the end of the lease term (reported in Current portion of operating lease liabilities and Long-term operating lease liabilities, excluding current portion on our Unaudited Condensed Consolidated Balance Sheets). Our lease-related restructuring liabilities are estimated based on remaining rent payments after our actual exit date for facilities closed as of June 30, 2022 and after our planned exit date for facilities we expect to close in future periods; these liabilities do not reflect any estimated proceeds we may be able to achieve through subleasing the facilities.
Acquisition Integration Plans
We incurred $2 million of restructuring expenses for both the three and six months ended June 30, 2022. These expenses were primarily related to the integration of acquisitions completed in our Europe segment. We expect to incur future expenses of up to $5 million to complete an integration plan related to 2021 acquisitions completed in our Specialty segment.
During the three and six months ended June 30, 2021, we did not incur a significant amount of restructuring expenses for our acquisition integration plans.
1 LKQ Europe Program
In 2019, we announced a multi-year program called "1 LKQ Europe" which is intended to create structural centralization and standardization of key functions to facilitate the operation of the Europe segment as a single business. Under the 1 LKQ Europe program, we are reorganizing our non-customer-facing teams and support systems through various projects including the implementation of a common ERP platform, rationalization of our product portfolio, and creation of a Europe headquarters office and central back office. We completed the organizational design and implementation projects in June 2021, with the remaining projects scheduled to be completed by the end of 2024.
During the three and six months ended June 30, 2022, we did not incur a significant amount of expenses under our 1 LKQ Europe program. During the six months ended June 30, 2021, we incurred $5 million of employee-related restructuring charges. We did not incur a significant amount of expenses for the three months ended June 30, 2021. We estimate that we will incur between $40 million and $50 million in total personnel and inventory-related restructuring charges through 2024 under the program. We may identify additional initiatives and projects under the 1 LKQ Europe program in future periods that may result in additional restructuring expense, although we are currently unable to estimate the range of charges for such potential future initiatives and projects. As of June 30, 2022, the restructuring liabilities related to this program were insignificant.
Transaction Related Expenses
During the three and six months ended June 30, 2022, we incurred $1 million and $4 million of transaction related expenses, respectively. These expenses included external costs such as legal, accounting and advisory fees related to completed and potential transactions.
Note 5. Stock-Based Compensation
RSUs
The following table summarizes activity related to our restricted stock units ("RSUs") under the Equity Incentive Plan for the six months ended June 30, 2022 (in millions, except years and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Unvested as of January 1, 2022 | 1.4 | | | $ | 34.85 | | | | | |
Granted (2) | 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 | | | 2.9 | | $ | 66 | |
(1) The aggregate intrinsic value of expected to vest RSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of the period multiplied by the number of units) that would have been received by the holders had all the expected to vest RSUs vested. This amount changes based on the market price of LKQ’s common stock.
(2) The weighted average grant date fair value of RSUs granted during the six months ended June 30, 2021 was $39.02.
The fair value of RSUs that vested during the six months ended June 30, 2022 was $21 million; the fair value of RSUs vested is based on the market price of LKQ stock on the date vested.
PSUs
The following table summarizes activity related to our performance-based RSUs ("PSUs") under the Equity Incentive Plan for the six months ended June 30, 2022 (in millions, except years and per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Number Outstanding | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (in years) | | Aggregate Intrinsic Value(1) |
| Unvested as of January 1, 2022 | 0.5 | | | $ | 31.96 | | | | | |
Granted (2) | 0.1 | | | $ | 48.92 | | | | | |
| 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 | | | 1.5 | | $ | 19 | |
(1) The aggregate intrinsic value of expected to vest PSUs represents the total pretax intrinsic value (the fair value of LKQ's stock on the last day of each period multiplied by the number of units) that would have been received by the holders had all the expected to vest PSUs vested. This amount changes based on the market price of LKQ’s common stock and the achievement of the performance metrics relative to the established targets.
(2) Represents the number of PSUs at target payout. The weighted average grant date fair value of PSUs granted during the six months ended June 30, 2021 was $38.50.
The fair value of PSUs that vested during the six months ended June 30, 2022 was $8 million; the fair value of PSUs vested is based on the market price of LKQ stock on the date vested.
Stock-Based Compensation Expense
Pre-tax stock-based compensation expense for RSUs and PSUs totaled $10 million and $23 million for the three and six months ended June 30, 2022, respectively, and $9 million and $17 million for the three and six months ended June 30, 2021, respectively. As of June 30, 2022, unrecognized compensation expense related to unvested RSUs and PSUs was $58 million. Stock-based compensation expense related to these awards will be different to the extent that forfeitures are realized and performance under the PSUs differs from current achievement estimates.
Note 6. Earnings Per Share
The following chart sets forth the computation of earnings per share (in millions, except per share amounts):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Income from continuing operations | $ | 420 | | | $ | 306 | | | $ | 689 | | | $ | 572 | |
| Denominator for basic earnings per share—Weighted-average shares outstanding | 281.4 | | | 300.6 | | | 283.5 | | | 301.8 | |
| Effect of dilutive securities: | | | | | | | |
| RSUs | 0.5 | | | 0.7 | | | 0.7 | | | 0.7 | |
| PSUs | 0.4 | | | 0.2 | | | 0.3 | | | 0.1 | |
| | | | | | | |
| Denominator for diluted earnings per share—Adjusted weighted-average shares outstanding | 282.3 | | 301.5 | | 284.5 | | 302.6 |
| Basic earnings per share from continuing operations | $ | 1.49 | | | $ | 1.01 | | | $ | 2.43 | | | $ | 1.89 | |
Diluted earnings per share from continuing operations (1) | $ | 1.49 | | | $ | 1.01 | | | $ | 2.42 | | | $ | 1.89 | |
(1) Diluted earnings per share from continuing operations was computed using the treasury stock method for dilutive securities.
The number of antidilutive securities was de minimis for all periods presented.
Note 7. Accumulated Other Comprehensive Income (Loss)
The components of Accumulated Other Comprehensive Income (Loss) are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
| | | Foreign Currency Translation | | | | Unrealized Gain (Loss) on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of April 1, 2022 | | $ | (175) | | | | | $ | (24) | | | $ | (7) | | | $ | (206) | |
| Pretax loss | | (154) | | | | | — | | | — | | | (154) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Disposal of business | | 4 | | | | | — | | | — | | | 4 | |
| Other comprehensive income from unconsolidated subsidiaries | | — | | | | | — | | | 1 | | | 1 | |
| Balance as of June 30, 2022 | | $ | (325) | | | | | $ | (24) | | | $ | (6) | | | $ | (355) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
| | | Foreign Currency Translation | | | | Unrealized Gain (Loss) on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of April 1, 2021 | | $ | (82) | | | | | $ | (33) | | | $ | (11) | | | $ | (126) | |
| Pretax income | | 22 | | | | | — | | | — | | | 22 | |
| | | | | | | | | | |
| Reclassification of unrealized loss | | — | | | | | 1 | | | — | | | 1 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Other comprehensive income from unconsolidated subsidiaries | | — | | | | | — | | | 2 | | | 2 | |
| Balance as of June 30, 2021 | | $ | (60) | | | | | $ | (32) | | | $ | (9) | | | $ | (101) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | | Foreign Currency Translation | | | | Unrealized Gain (Loss) on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated Other Comprehensive Income (Loss) |
| Balance as of January 1, 2022 | | $ | (121) | | | | | $ | (24) | | | $ | (8) | | | $ | (153) | |
| Pretax loss | | (208) | | | | | — | | | — | | | (208) | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Disposal of business | | 4 | | | | | — | | | — | | | 4 | |
| Other comprehensive income from unconsolidated subsidiaries | | — | | | | | — | | | 2 | | | 2 | |
| Balance as of June 30, 2022 | | $ | (325) | | | | | $ | (24) | | | $ | (6) | | | $ | (355) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
| | | Foreign
Currency
Translation | | Unrealized Gain (Loss)
on Cash Flow Hedges | | Unrealized Gain (Loss)
on Pension Plans | | Other Comprehensive Income (Loss) from Unconsolidated Subsidiaries | | Accumulated
Other
Comprehensive Income (Loss) |
| Balance as of January 1, 2021 | | $ | (57) | | | $ | (1) | | | $ | (33) | | | $ | (8) | | | $ | (99) | |
| Pretax (loss) income | | (3) | | | 3 | | | — | | | — | | | — | |
| Income tax effect | | — | | | (1) | | | — | | | — | | | (1) | |
| Reclassification of unrealized (gain) loss | | — | | | (2) | | | 1 | | | — | | | (1) | |
| Reclassification of deferred income taxes | | — | | | 1 | | | — | | | — | | | 1 | |
| | | | | | | | | | |
| Other comprehensive loss from unconsolidated subsidiaries | | — | | | — | | | — | | | (1) | | | (1) | |
| Balance as of June 30, 2021 | | $ | (60) | | | $ | — | | | $ | (32) | | | $ | (9) | | | $ | (101) | |
During each of the three and six months ended June 30, 2021, net unrealized losses on interest rate swaps totaling $1 million were recorded to Interest expense, net of interest income in the Unaudited Condensed Consolidated Statements of Income. During the six months ended June 30, 2021, net unrealized gains on cross currency swaps totaling $2 million were recorded to Other income, net in the Unaudited Condensed Consolidated Statements of Income; these amounts offset the impact of the remeasurement of the underlying transactions.
Net unrealized losses and gains related to our pension plans were recorded to Other income, net in the Unaudited Condensed Consolidated Statements of Income during each of the three and six-month periods ended June 30, 2022 and 2021.
Our policy is to reclassify the income tax effect from Accumulated other comprehensive income (loss) to the Provision for income taxes when the related gains and losses are released to the Unaudited Condensed Consolidated Statements of Income.
Note 8. Long-Term Obligations
Long-term obligations consist of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 | | December 31, 2021 |
| | Maturity Date | | Interest Rate | | Amount | | Interest Rate | | Amount |
| Senior Secured Credit Agreement: | | | | | | | | | | |
| | | | | | | | | | |
| Revolving credit facilities | | January 2024 | | 1.72 | % | (1) | $ | 1,494 | | | 1.10 | % | (1) | $ | 1,887 | |
| | | | | | | | | | |
| | | | | | | | | | |
| Senior Notes: | | | | | | | | | | |
| Euro Notes (2024) | | April 2024 | | 3.88 | % | | 524 | | | 3.88 | % | | 569 | |
| Euro Notes (2028) | | April 2028 | | 4.13 | % | | 262 | | | 4.13 | % | | 284 | |
| | | | | | | | | | |
| Notes payable | | Various through October 2030 | | 3.25 | % | (1) | 16 | | | 2.80 | % | (1) | 23 | |
| Finance lease obligations | | | | 3.54 | % | (1) | 47 | | | 3.50 | % | (1) | 52 | |
| Other debt | | | | 0.89 | % | (1) | 26 | | | 1.10 | % | (1) | 9 | |
| Total debt | | | | | | 2,369 | | | | | 2,824 | |
| Less: long-term debt issuance costs | | | | | | (9) | | | | | (12) | |
| | | | | | | | | | |
| Total debt, net of debt issuance costs | | | | | | 2,360 | | | | | 2,812 | |
| Less: current maturities, net of debt issuance costs | | | | | | (47) | | | | | (35) | |
| Long term debt, net of debt issuance costs | | | | | | $ | 2,313 | | | | | $ | 2,777 | |
(1) Interest rate derived via a weighted average
Senior Secured Credit Agreement
On November 23, 2021, LKQ Corporation and certain other subsidiaries of LKQ (collectively, the "Borrowers") entered into Amendment No. 6 to the Fourth Amended and Restated Credit Agreement dated January 29, 2016 (the "Credit Agreement"), which modified certain interest rates to provide that (1) Loans denominated in euros shall bear interest at a rate per annum equal to the Euro Interbank Offered Rate as administered by the European Money Markets Institute (or a comparable or successor administrator approved by the Administrative Agent) plus the Applicable Rate, (2) Swingline Loans denominated in pounds sterling shall bear interest at a rate per annum equal to the Sterling Overnight Index Average as administered by the Bank of England (or any successor administrator of the Sterling Overnight Index Average) (“SONIA”) plus the Applicable Rate, (3) Revolving Loans denominated in pounds sterling shall bear interest at a rate per annum equal to SONIA plus an adjustment equal to 0.0326% per annum plus the Applicable Rate, and (4) Loans denominated in Swiss francs shall bear interest at a rate per annum equal to the Swiss Average Rate Overnight as administered by SIX Swiss Exchange AG (or any successor administrator of the Swiss Average Rate Overnight) plus the Applicable Rate. All other interest rates remain the same.
We also had the option to prepay outstanding amounts under the Credit Agreement without penalty. We were required to prepay the term loan by amounts equal to proceeds from the sale or disposition of certain assets if the proceeds were not reinvested within twelve months. During the second quarter of 2021, we exercised our option to prepay the outstanding amount on the term loan, and thus did not have any term loan borrowings as of June 30, 2022.
The Credit Agreement contains customary representations and warranties and customary covenants that provide limitations and conditions on our ability to enter into certain transactions. The Credit Agreement also contains financial and affirmative covenants, including limitations on our net leverage ratio and a minimum interest coverage ratio.
On April 18, 2022, S&P Global Ratings assigned LKQ an issuer credit rating of 'BBB-' with a stable outlook. This rating upgrade triggered the banks in our credit facility to release all collateral required under the Credit Agreement and suspend all collateral requirements.
Borrowings under the Credit Agreement bear interest at variable rates, which depend on the currency and duration of the borrowing elected, plus an applicable margin. The applicable margin is subject to change in increments of 0.25% depending on the net leverage ratio. Interest payments are due on the last day of the selected interest period or quarterly in arrears depending on the type of borrowing. We also pay a commitment fee based on the average daily unused amount of the revolving credit facilities. The commitment fee is subject to change in increments of 0.05% depending on our net leverage ratio. In addition, we pay a participation commission on outstanding letters of credit at an applicable rate based on our net leverage ratio, and a fronting fee of 0.125% to the issuing bank, which are due quarterly in arrears.
The total capacity under the revolving credit facility's multicurrency component is $3,150 million. Of the total borrowings outstanding under the Credit Agreement, there were no current maturities as of June 30, 2022 or December 31, 2021. As of June 30, 2022, there were letters of credit outstanding in the aggregate amount of $69 million. The amounts available under the revolving credit facilities are reduced by the amounts outstanding under letters of credit, and thus availability under the revolving credit facilities at June 30, 2022 was $1,587 million.
Euro Notes (2024)
On April 14, 2016, LKQ Italia Bondco S.p.A. ("LKQ Italia"), an indirect, wholly-owned subsidiary of LKQ Corporation, completed an offering of €500 million aggregate principal amount of senior notes due April 1, 2024 (the "Euro Notes (2024)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering were used to repay a portion of the revolver borrowings under the Credit Agreement and to pay related fees and expenses. The Euro Notes (2024) are governed by the Indenture dated as of April 14, 2016 (the "Euro Notes (2024) Indenture") among LKQ Italia, LKQ Corporation and certain of our subsidiaries (the "Euro Notes (2024) Subsidiaries"), the trustee, and the paying agent, transfer agent, and registrar.
Interest on the Euro Notes (2024) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2024) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2024) Subsidiaries (the "Euro Notes (2024) Guarantors").
The Euro Notes (2024) and the related guarantees are, respectively, LKQ Italia's and each Euro Notes (2024) Guarantor's senior unsecured obligations and are subordinated to all of LKQ Italia's and the Euro Notes (2024) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2024) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2024) to the extent of the assets of those subsidiaries. The Euro Notes (2024) have been listed on the ExtraMOT, Professional Segment of the Borsa Italia S.p.A. securities exchange and the Global Exchange Market of Euronext Dublin.
The Euro Notes (2024) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after January 1, 2024, we may redeem some or all of the Euro Notes (2024) at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date. We may be required to make an offer to purchase the Euro Notes (2024) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2024) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Italia's senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the upgrade to BBB- by S&P Global Ratings in April 2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to comply with certain restrictive covenants.
Euro Notes (2026/2028)
On April 9, 2018, LKQ European Holdings B.V. ("LKQ Euro Holdings"), a wholly-owned subsidiary of LKQ Corporation, completed an offering of €1,000 million aggregate principal amount of senior notes. The offering consisted of €750 million senior notes due 2026 (the "Euro Notes (2026)") and €250 million senior notes due 2028 (the "Euro Notes (2028)" and, together with the Euro Notes (2026), the "Euro Notes (2026/28)") in a private placement conducted pursuant to Regulation S and Rule 144A under the Securities Act of 1933. The proceeds from the offering, together with borrowings under our senior secured credit facility, were used (i) to finance a portion of the consideration paid for the Stahlgruber acquisition, (ii) for general corporate purposes and (iii) to pay related fees and expenses, including the refinancing of net financial debt. The Euro Notes (2026/28) are governed by the Indenture dated as of April 9, 2018 (the “Euro Notes (2026/28) Indenture”) among LKQ Euro
Holdings, LKQ Corporation and certain of our subsidiaries (the “Euro Notes (2026/28) Subsidiaries”), the trustee, paying agent, transfer agent, and registrar.
On April 1, 2021, we redeemed the 3.625% Euro Notes (2026) at a redemption price equal to 101.813% of the principal amount of the Euro Notes (2026) plus accrued and unpaid interest thereon to, but not including, April 1, 2021. The total redemption payment was $915 million (€777 million), including an early redemption premium of $16 million (€14 million) and accrued and unpaid interest of $16 million (€14 million). In the second quarter of 2021, we recorded a loss on debt extinguishment of $24 million related to the redemption due to the early-redemption premium and the write-off of the unamortized debt issuance costs.
Interest on the Euro Notes (2028) is payable in arrears on April 1 and October 1 of each year. The Euro Notes (2028) are fully and unconditionally guaranteed by LKQ Corporation and the Euro Notes (2028) Subsidiaries (the "Euro Notes (2028) Guarantors").
The Euro Notes (2028) and the related guarantees are, respectively, LKQ Euro Holdings' and each Euro Notes (2028) Guarantor's senior unsecured obligations and will be subordinated to all of LKQ Euro Holdings' and the Euro Notes (2028) Guarantors' existing and future secured debt to the extent of the assets securing that secured debt. In addition, the Euro Notes (2028) are effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the Euro Notes (2028) to the extent of the assets of those subsidiaries. The Euro Notes (2028) have been listed on the Global Exchange Market of Euronext Dublin.
The Euro Notes (2028) are redeemable, in whole or in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date plus a "make whole" premium. On or after April 1, 2023, we may redeem some or all of the Euro Notes (2028) at the applicable redemption prices set forth in the Euro Notes (2026/28) Indenture. We may be required to make an offer to purchase the Euro Notes (2028) upon the sale of certain assets, subject to certain exceptions, and upon a change of control. In addition, in the event of certain developments affecting taxation or under certain other circumstances which, in any case, require the payment of certain additional amounts, we may redeem the Euro Notes (2028) in whole, but not in part, at any time at a redemption price of 100% of the principal amount thereof, plus accrued but unpaid interest, if any, and such certain additional amounts, if any, to the redemption date.
On May 31, 2022, Moody's Investors Services upgraded the rating on LKQ Euro Holdings' senior unsecured notes to Baa3 with a stable outlook. This rating upgrade, combined with the upgrade to BBB- by S&P Global Ratings in April 2022, triggered a Covenant Suspension Event, and LKQ and its subsidiaries will no longer be required to comply with certain restrictive covenants.
Note 9. Derivative Instruments and Hedging Activities
Cash Flow Hedges
Through June 30, 2021, we held interest rate swap agreements to hedge a portion of the variable interest rate risk on our variable rate borrowings under our Credit Agreement and cross currency swaps, which contained an interest rate swap component and a foreign currency forward contract component that, combined with related intercompany financing arrangements, effectively converted variable rate U.S. dollar-denominated borrowings into fixed rate euro-denominated borrowings. The interest rate swap agreements and cross currency swaps were settled as of June 2021 and no cash flow hedges remained outstanding as of June 30, 2022 and December 31, 2021, respectively.
The activity related to our previously matured cash flow hedges is included in Note 7, "Accumulated Other Comprehensive Income (Loss)" and presented in either operating activities or financing activities in our Unaudited Condensed Consolidated Statements of Cash Flows.
Other Derivative Instruments Not Designated as Hedges
We hold other short-term derivative instruments, including foreign currency forward contracts, to manage our exposure to variability in the cash flows related to inventory purchases denominated in a non-functional currency. We have elected not to apply hedge accounting for these transactions. The notional amount and fair value of these contracts at June 30, 2022 and December 31, 2021, along with the effect on our results of operations during the three and six months ended June 30, 2022 and 2021, were not material.
Note 10. Fair Value Measurements
Financial Assets and Liabilities Measured at Fair Value
We use the market and income approaches to estimate the fair value of our financial assets and liabilities, and during the three and six months ended June 30, 2022, there were no significant changes in valuation techniques or inputs related to the financial assets or liabilities that we have historically recorded at fair value. The tiers in the fair value hierarchy include: Level 1, defined as observable inputs such as quoted market prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as significant unobservable inputs for which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The following tables present information about our financial liabilities measured at fair value on a recurring basis and indicate the fair value hierarchy of the valuation inputs we utilized to determine such fair value as of June 30, 2022 and December 31, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of June 30, 2022 | | Fair Value Measurements as of June 30, 2022 |
| Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 13 | | | $ | — | | | $ | — | | | $ | 13 | |
| | | | | | | |
| Deferred compensation liabilities | 71 | | | — | | | 71 | | | — | |
| | | | | | | |
| | | | | | | |
| Total Liabilities | $ | 84 | | | $ | — | | | $ | 71 | | | $ | 13 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of December 31, 2021 | | Fair Value Measurements as of December 31, 2021 |
| Level 1 | | Level 2 | | Level 3 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Contingent consideration liabilities | $ | 18 | | | $ | — | | | $ | — | | | $ | 18 | |
| Deferred compensation liabilities | 89 | | | — | | | 89 | | | — | |
| Total Liabilities | $ | 107 | | | $ | — | | | $ | 89 | | | $ | 18 | |
The current portion of contingent consideration liabilities is included in Other current liabilities on the Unaudited Condensed Consolidated Balance Sheets; deferred compensation liabilities and the noncurrent portion of contingent consideration liabilities are included in Other noncurrent liabilities on the Unaudited Condensed Consolidated Balance Sheets based on the expected timing of the related payments.
Our Level 2 liabilities are valued using inputs from third parties and market observable data. We obtain valuation data for the deferred compensation liabilities from third party sources, which use quoted market prices, investment allocations and reportable trades.
Our contingent consideration liabilities are related to our business acquisitions. Under the terms of the contingent consideration agreements, payments may be made at specified future dates depending on the performance of the acquired business subsequent to the acquisition. The liabilities for these payments are classified as Level 3 liabilities because the related fair value measurement, which is determined using an income approach, includes significant inputs not observable in the market.
We also have equity investments recorded in Other noncurrent assets that are reported at fair value. We have used net asset value as a practical expedient to value these equity investments and thus they are excluded from the fair value hierarchy disclosure.
Financial Assets and Liabilities Not Measured at Fair Value
Our debt is reflected on the Unaudited Condensed Consolidated Balance Sheets at cost. Based on market conditions as of both June 30, 2022 and December 31, 2021, the fair value of the credit agreement borrowings reasonably approximated the carrying values of $1,494 million and $1,887 million, respectively. As of June 30, 2022 and December 31, 2021, the fair values of the Euro Notes (2024) were approximately $527 million and $605 million, respectively, compared to carrying values of $524 million and $569 million, respectively. As of June 30, 2022 and December 31, 2021, the fair values of the Euro Notes (2028) were $251 million and $301 million, respectively, compared to carrying values of $262 million and $284 million, respectively.
The fair value measurements of the borrowings under the credit agreement and receivables facility are classified as Level 2 within the fair value hierarchy since they are determined based upon significant inputs observable in the market, including interest rates on recent financing transactions with similar terms and maturities. We estimated the fair value by calculating the upfront cash payment a market participant would require at June 30, 2022 and December 31, 2021 to assume these obligations. The fair values of the Euro Notes (2024) and Euro Notes (2028) are determined based upon observable market inputs including quoted market prices in markets that are not active, and therefore are classified as Level 2 within the fair value hierarchy.
Note 11. Employee Benefit Plans
We have funded and unfunded defined benefit plans covering certain employee groups in the U.S. and various European countries. Local statutory requirements govern many of our European plans. The defined benefit plans are mostly closed to new participants and, in some cases, existing participants no longer accrue benefits.
As of June 30, 2022 and December 31, 2021, the aggregate funded status of the defined benefit plans was a liability of $119 million and $131 million, respectively, and is reported in Other noncurrent liabilities and Accrued payroll-related liabilities on our Unaudited Condensed Consolidated Balance Sheets.
Net periodic benefit cost for our defined benefit plans totaled $2 million and $3 million for the three and six months ended June 30, 2022, respectively, and $1 million and $3 million for the three and six months ended June 30, 2021, respectively, and primarily related to service cost which is recorded in Selling, general and administrative expenses on the Unaudited Condensed Consolidated Statements of Income.
Note 12. Income Taxes
At the end of each interim period, we estimate our annual effective tax rate and apply that rate to our interim earnings. We also record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and the effects of changes in tax laws or rates, in the interim period in which they occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in state and foreign jurisdictions, permanent and temporary differences between book and taxable income, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.
Our effective income tax rate for the six months ended June 30, 2022 was 24.1%, compared to 26.3% for the six months ended June 30, 2021. The decrease in the effective tax rate for the six months ended June 30, 2022 compared to the six months ended June 30, 2021 was attributable to net favorable discrete items of 1.2%, primarily related to the sale of PGW, and the geographic distribution of income. Net discrete items for the six months ended June 30, 2021 increased the effective tax rate by 0.1%, primarily due to a deferred tax adjustment required as a result of a United Kingdom staged tax rate increase that will become effective April 1, 2023.
Note 13. Segment and Geographic Information
We have four operating segments: Wholesale - North America, Europe, Specialty and Self Service, each of which is presented as a reportable segment. Beginning in 2022, the Wholesale - North America and Self Service operating segment results were separated from the previous reportable segment, North America, and each of Wholesale - North America and Self Service is now a separate reportable segment. Segment results have been adjusted retrospectively to reflect this change.
The segments are organized based on a combination of geographic areas served and type of product lines offered. The segments are managed separately as the businesses serve different customers and are affected by different economic conditions. Wholesale - North America and Self Service have similar economic characteristics and have common products and services, customers and methods of distribution. We are reporting these operating segments separately to provide greater transparency to investors.
The following tables present our financial performance by reportable segment for the periods indicated (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Wholesale - North America | | Europe | | Specialty | | Self Service | | Eliminations | | Consolidated |
| Three Months Ended June 30, 2022 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 1,144 | | | $ | 1,477 | | | $ | 512 | | | $ | 208 | | | $ | — | | | $ | 3,341 | |
| Intersegment | — | | | — | | | 1 | | | — | | | (1) | | | — | |
| Total segment revenue | $ | 1,144 | | | $ | 1,477 | | | $ | 513 | | | $ | 208 | | | $ | (1) | | | $ | 3,341 | |
| Segment EBITDA | $ | 214 | | | $ | 160 | | | $ | 69 | | | $ | 32 | | | $ | — | | | $ | 475 | |
Depreciation and amortization (1) | 18 | | | 39 | | | 7 | | | 4 | | | — | | | 68 | |
| Three Months Ended June 30, 2021 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 1,118 | | | $ | 1,577 | | | $ | 531 | | | $ | 209 | | | $ | — | | | $ | 3,435 | |
| Intersegment | 1 | | | — | | | 1 | | | — | | | (2) | | | — | |
| Total segment revenue | $ | 1,119 | | | $ | 1,577 | | | $ | 532 | | | $ | 209 | | | $ | (2) | | | $ | 3,435 | |
| Segment EBITDA | $ | 219 | | | $ | 168 | | | $ | 80 | | | $ | 56 | | | $ | — | | | $ | 523 | |
Depreciation and amortization (1) | 19 | | | 40 | | | 7 | | | 4 | | | — | | | 70 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Wholesale - North America | | Europe | | Specialty | | Self Service | | Eliminations | | Consolidated |
| Six Months Ended June 30, 2022 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 2,345 | | | $ | 2,965 | | | $ | 972 | | | $ | 407 | | | $ | — | | | $ | 6,689 | |
| Intersegment | — | | | — | | | 2 | | | — | | | (2) | | | — | |
| Total segment revenue | $ | 2,345 | | | $ | 2,965 | | | $ | 974 | | | $ | 407 | | | $ | (2) | | | $ | 6,689 | |
| Segment EBITDA | $ | 432 | | | $ | 291 | | | $ | 127 | | | $ | 72 | | | $ | — | | | $ | 922 | |
Depreciation and amortization (1) | 37 | | | 73 | | | 15 | | | 8 | | | — | | | 133 | |
| Six Months Ended June 30, 2021 | | | | | | | | | | | |
| Revenue: | | | | | | | | | | | |
| Third Party | $ | 2,169 | | | $ | 3,040 | | | $ | 989 | | | $ | 408 | | | $ | — | | | $ | 6,606 | |
| Intersegment | 1 | | | — | | | 2 | | | — | | | (3) | | | — | |
| Total segment revenue | $ | 2,170 | | | $ | 3,040 | | | $ | 991 | | | $ | 408 | | | $ | (3) | | | $ | 6,606 | |
| Segment EBITDA | $ | 413 | | | $ | 309 | | | $ | 141 | | | $ | 112 | | | $ | — | | | $ | 975 | |
Depreciation and amortization (1) | 40 | | | 80 | | | 14 | | | 8 | | | — | | | 142 | |
(1) Amounts presented include depreciation and amortization expense recorded within Cost of goods sold and Restructuring and transaction related expenses.
The key measure of segment profit or loss reviewed by our chief operating decision maker, our Chief Executive Officer, is Segment EBITDA. We use Segment EBITDA to compare profitability among the segments and evaluate business strategies. Segment EBITDA includes revenue and expenses that are controllable by the segment. Corporate general and administrative expenses are allocated to the segments based on usage, with shared expenses apportioned based on the segment's percentage of consolidated revenue. We calculate Segment EBITDA as EBITDA excluding restructuring and transaction related expenses (which includes restructuring expenses recorded in Cost of goods sold); change in fair value of contingent consideration liabilities; other gains and losses related to acquisitions, equity method investments, or divestitures; equity in losses and earnings of unconsolidated subsidiaries; equity investment fair value adjustments; impairment charges; and direct impacts of the Ukraine/Russia conflict and related sanctions (including provisions for and subsequent adjustments to reserves for asset recoverability and expenditures to support our employees and their families). EBITDA, which is the basis for Segment EBITDA, is calculated as net income excluding discontinued operations, depreciation, amortization, interest (which includes gains and losses on debt extinguishment) and income tax expense.
The table below provides a reconciliation of Net Income to EBITDA and Segment EBITDA (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Net income | $ | 420 | | | $ | 306 | | | $ | 693 | | | $ | 572 | |
| Less: net income attributable to continuing noncontrolling interest | — | | | 1 | | | — | | | 1 | |
| Net income attributable to LKQ stockholders | 420 | | | 305 | | | 693 | | | 571 | |
| Subtract: | | | | | | | |
| Net income from discontinued operations | — | | | — | | | 4 | | | — | |
| Net income from continuing operations attributable to LKQ stockholders | 420 | | 305 | | 689 | | 571 |
| Add: | | | | | | | |
| Depreciation and amortization | 61 | | | 65 | | | 120 | | | 131 | |
| Depreciation and amortization - cost of goods sold | 7 | | | 5 | | | 13 | | | 11 | |
| | | | | | | |
| Interest expense, net of interest income | 14 | | | 16 | | | 29 | | | 40 | |
| Loss on debt extinguishment | — | | | 24 | | | — | | | 24 | |
| Provision for income taxes | 127 | | | 108 | | | 216 | | | 201 | |
| EBITDA | 629 | | | 523 | | | 1,067 | | | 978 | |
| Subtract: | | | | | | | |
Equity in earnings of unconsolidated subsidiaries (1) | 4 | | | 3 | | | 6 | | | 9 | |
| Equity investment fair value adjustments | (2) | | | 1 | | | (3) | | | 6 | |
| | | | | | | |
| Add: | | | | | | | |
| Restructuring and transaction related expenses | 4 | | | 5 | | | 7 | | | 13 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Gain on disposal of businesses (2) | (155) | | | (1) | | | (155) | | | (1) | |
| Change in fair value of contingent consideration liabilities | — | | | 1 | | | — | | | 1 | |
| Losses on previously held equity interests | — | | | — | | | 1 | | | — | |
Direct impacts of Ukraine/Russia conflict (3) | (1) | | | — | | | 5 | | | — | |
| Segment EBITDA | $ | 475 | | | $ | 523 | | | $ | 922 | | | $ | 975 | |
Note: In the table above, the sum of the individual amounts may not equal the total due to rounding.
(1) Refer to "Investments in Unconsolidated Subsidiaries" in Note 2, "Financial Statement Information," for further information.
(2) Refer to "Divestitures" in Note 2, "Financial Statement Information," for further information.
(3) Adjustments include provisions for and subsequent adjustments to reserves for asset recoverability (receivables and inventory) and expenditures to support our employees and their families in Ukraine.
The following table presents capital expenditures by reportable segment (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Capital Expenditures | | | | | | | |
Wholesale - North America | $ | 16 | | | $ | 12 | | | $ | 45 | | | $ | 23 | |
| Europe | 19 | | | 22 | | | 42 | | | 48 | |
| Specialty | 4 | | | 8 | | | 8 | | | 10 | |
| Self Service | 1 | | | 4 | | | 4 | | | 7 | |
| Total capital expenditures | $ | 40 | | | $ | 46 | | | $ | 99 | | | $ | 88 | |
The following table presents assets by reportable segment (in millions):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Receivables, net | | | |
Wholesale - North America | $ | 375 | | | $ | 367 | |
| Europe | 617 | | | 586 | |
| Specialty | 152 | | | 102 | |
| Self Service | 17 | | | 18 | |
| Total receivables, net | 1,161 | | | 1,073 | |
| Inventories | | | |
Wholesale - North America | 780 | | | 776 | |
| Europe | 1,352 | | | 1,327 | |
| Specialty | 458 | | | 458 | |
| Self Service | 60 | | | 50 | |
| Total inventories | 2,650 | | | 2,611 | |
| Property, plant and equipment, net | | | |
Wholesale - North America | 500 | | | 526 | |
| Europe | 525 | | | 577 | |
| Specialty | 92 | | | 93 | |
| Self Service | 100 | | | 103 | |
| Total property, plant and equipment, net | 1,217 | | | 1,299 | |
| Operating lease assets, net | | | |
Wholesale - North America | 577 | | | 611 | |
| Europe | 461 | | | 515 | |
| Specialty | 89 | | | 83 | |
| Self Service | 141 | | | 152 | |
| Total operating lease assets, net | 1,268 | | | 1,361 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Other unallocated assets | 5,838 | | | 6,262 | |
| Total assets | $ | 12,134 | | | $ | 12,606 | |
We report net receivables; inventories; net property, plant and equipment; and net operating lease assets by segment as that information is used by the chief operating decision maker in assessing segment performance. These assets provide a measure for the operating capital employed in each segment. Unallocated assets include cash and cash equivalents, prepaid expenses and other current and noncurrent assets, goodwill, other intangibles and equity method investments.
Our largest countries of operation are the U.S., followed by the U.K. and Germany. Additional European operations are located in the Netherlands, Italy, Czech Republic, Belgium, Austria, Slovakia, Poland, and other European countries. Our operations in other countries include wholesale operations in Canada, remanufacturing operations in Mexico, an aftermarket parts freight consolidation warehouse in Taiwan, and administrative support functions in India. Our net sales are attributed to geographic area based on the location of the selling operation.
The following table sets forth our revenue by geographic area (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Revenue | | | | | | | |
| 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 | |
The following table sets forth our tangible long-lived assets by geographic area (in millions):
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Long-lived assets | | | |
| United States | $ | 1,417 | | | $ | 1,487 | |
| Germany | 294 | | | 329 | |
| United Kingdom | 262 | | | 305 | |
| Other countries | 512 | | | 539 | |
| Total long-lived assets | $ | 2,485 | | | $ | 2,660 | |