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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
____________________________
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☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2022
OR
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☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the Transition Period
from
to
Commission File Number: 000-50404
____________________________
LKQ CORPORATION
(Exact name of registrant as specified in its charter)
____________________________
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Delaware |
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36-4215970 |
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(State or other jurisdiction of incorporation or
organization) |
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(I.R.S. Employer Identification No.) |
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500 West Madison Street, Suite 2800
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Chicago, Illinois
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60661 |
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(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code:
(312) 621-1950
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, par value $.01 per share |
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LKQ |
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NASDAQ Global Select Market
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________________________________________
Indicate by check mark whether the registrant: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See the
definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule
12b-2 of the Exchange Act.
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Large Accelerated Filer |
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Accelerated Filer |
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Non-accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
☐ |
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☒
At October 27, 2022, the registrant had outstanding an aggregate of
267,174,985 shares of Common Stock.
*****
TABLE OF CONTENTS
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Item |
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Page |
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PART I |
FINANCIAL INFORMATION |
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Item 1. |
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Item 2. |
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Item 3. |
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Item 4. |
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PART II |
OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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SIGNATURES |
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Income
(In millions, except per share data)
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
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Revenue |
$ |
3,104 |
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$ |
3,297 |
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$ |
9,793 |
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$ |
9,903 |
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Cost of goods sold |
1,828 |
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1,953 |
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5,793 |
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5,850 |
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Gross margin |
1,276 |
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1,344 |
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4,000 |
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4,053 |
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Selling, general and administrative expenses |
861 |
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898 |
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2,683 |
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2,648 |
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Restructuring and transaction related expenses |
3 |
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3 |
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10 |
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16 |
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(Gain) on disposal of businesses and impairment of net assets held
for sale |
(4) |
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1 |
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(159) |
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— |
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Depreciation and amortization |
58 |
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64 |
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178 |
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195 |
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Operating income |
358 |
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378 |
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1,288 |
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1,194 |
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Other expense (income): |
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Interest expense, net of interest income |
17 |
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16 |
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46 |
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56 |
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Loss on debt extinguishment |
— |
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— |
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— |
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24 |
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Other income, net |
(6) |
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(3) |
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(4) |
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(15) |
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Total other expense, net |
11 |
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13 |
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42 |
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65 |
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Income from continuing operations before provision for income
taxes |
347 |
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365 |
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1,246 |
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1,129 |
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Provision for income taxes |
88 |
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89 |
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304 |
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290 |
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Equity in earnings of unconsolidated subsidiaries |
2 |
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8 |
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8 |
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17 |
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Income from continuing operations |
261 |
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284 |
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950 |
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856 |
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Net income from discontinued operations |
1 |
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— |
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5 |
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— |
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Net income |
262 |
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284 |
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955 |
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856 |
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Less: net income attributable to continuing noncontrolling
interest |
— |
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— |
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— |
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1 |
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Net income attributable to LKQ stockholders |
$ |
262 |
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$ |
284 |
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$ |
955 |
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$ |
855 |
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Basic earnings per share:
(1)
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Income from continuing operations |
$ |
0.95 |
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$ |
0.97 |
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$ |
3.39 |
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$ |
2.86 |
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Net income from discontinued operations |
— |
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— |
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0.02 |
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— |
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Net income |
0.96 |
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0.97 |
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3.41 |
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2.86 |
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Less: net income attributable to continuing noncontrolling
interest |
— |
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— |
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— |
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— |
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Net income attributable to LKQ stockholders |
$ |
0.96 |
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$ |
0.97 |
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$ |
3.41 |
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$ |
2.86 |
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Diluted earnings per share:
(1)
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|
|
Income from continuing operations |
$ |
0.95 |
|
|
$ |
0.96 |
|
|
$ |
3.38 |
|
|
$ |
2.85 |
|
|
Net income from discontinued operations |
— |
|
|
— |
|
|
0.02 |
|
|
— |
|
|
Net income |
0.95 |
|
|
0.96 |
|
|
3.40 |
|
|
2.85 |
|
|
Less: net income attributable to continuing noncontrolling
interest |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Net income attributable to LKQ stockholders |
$ |
0.95 |
|
|
$ |
0.96 |
|
|
$ |
3.40 |
|
|
$ |
2.85 |
|
(1)
The sum of the individual earnings per share amounts may not equal
the total due to rounding.
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
3
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Comprehensive
Income
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income |
$ |
262 |
|
|
$ |
284 |
|
|
$ |
955 |
|
|
$ |
856 |
|
|
Less: net income attributable to continuing noncontrolling
interest |
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Net income attributable to LKQ stockholders |
262 |
|
|
284 |
|
|
955 |
|
|
855 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
Foreign currency translation, net of tax |
(187) |
|
|
(48) |
|
|
(391) |
|
|
(51) |
|
|
Net change in unrealized gains/losses on cash flow hedges, net of
tax |
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
Net change in unrealized gains/losses on pension plans, net of
tax |
1 |
|
|
— |
|
|
1 |
|
|
1 |
|
|
Other comprehensive income (loss) from unconsolidated
subsidiaries |
2 |
|
|
— |
|
|
4 |
|
|
(1) |
|
|
Other comprehensive loss |
(184) |
|
|
(48) |
|
|
(386) |
|
|
(50) |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
78 |
|
|
236 |
|
|
569 |
|
|
806 |
|
|
Less: comprehensive income attributable to continuing
noncontrolling interest |
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Comprehensive income attributable to LKQ stockholders |
$ |
78 |
|
|
$ |
236 |
|
|
$ |
569 |
|
|
$ |
805 |
|
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
4
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Assets |
|
|
|
|
Current assets: |
|
|
|
|
Cash and cash equivalents |
$ |
269 |
|
|
$ |
274 |
|
|
Receivables, net |
1,051 |
|
|
1,073 |
|
|
Inventories |
2,635 |
|
|
2,611 |
|
|
|
|
|
|
Prepaid expenses and other current assets |
247 |
|
|
296 |
|
|
|
|
|
|
Total current assets |
4,202 |
|
|
4,254 |
|
|
Property, plant and equipment, net |
1,169 |
|
|
1,299 |
|
|
Operating lease assets, net |
1,193 |
|
|
1,361 |
|
|
Goodwill |
4,132 |
|
|
4,540 |
|
|
Other intangibles, net |
626 |
|
|
746 |
|
|
Equity method investments |
146 |
|
|
181 |
|
|
Other noncurrent assets |
198 |
|
|
225 |
|
|
Total assets |
$ |
11,666 |
|
|
$ |
12,606 |
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
Current liabilities: |
|
|
|
|
Accounts payable |
$ |
1,356 |
|
|
$ |
1,176 |
|
|
Accrued expenses: |
|
|
|
|
Accrued payroll-related liabilities |
224 |
|
|
261 |
|
|
Refund liability |
108 |
|
|
107 |
|
|
|
|
|
|
Other accrued expenses |
309 |
|
|
271 |
|
|
|
|
|
|
|
|
|
|
Current portion of operating lease liabilities |
181 |
|
|
203 |
|
|
Current portion of long-term obligations |
50 |
|
|
35 |
|
|
Other current liabilities |
123 |
|
|
112 |
|
|
|
|
|
|
Total current liabilities |
2,351 |
|
|
2,165 |
|
|
Long-term operating lease liabilities, excluding current
portion |
1,066 |
|
|
1,209 |
|
|
Long-term obligations, excluding current portion |
2,390 |
|
|
2,777 |
|
|
Deferred income taxes |
246 |
|
|
279 |
|
|
Other noncurrent liabilities |
312 |
|
|
365 |
|
|
Commitments and contingencies |
|
|
|
|
Redeemable noncontrolling interest |
24 |
|
|
24 |
|
|
Stockholders' equity: |
|
|
|
|
Common stock, $0.01 par value, 1,000.0 shares authorized,
322.3 shares issued and 270.1 shares outstanding at
September 30, 2022; 321.6 shares issued and 287.0 shares
outstanding at December 31, 2021
|
3 |
|
|
3 |
|
|
Additional paid-in capital |
1,499 |
|
|
1,474 |
|
|
Retained earnings |
6,536 |
|
|
5,794 |
|
|
Accumulated other comprehensive loss |
(539) |
|
|
(153) |
|
|
Treasury stock, at cost; 52.2 shares at September 30, 2022 and
34.6 shares at December 31, 2021
|
(2,237) |
|
|
(1,346) |
|
|
Total Company stockholders' equity |
5,262 |
|
|
5,772 |
|
|
Noncontrolling interest |
15 |
|
|
15 |
|
|
Total stockholders' equity |
5,277 |
|
|
5,787 |
|
|
Total liabilities and stockholders' equity |
$ |
11,666 |
|
|
$ |
12,606 |
|
|
|
|
|
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
5
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash
Flows
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
2022 |
|
2021 |
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net income |
$ |
955 |
|
|
$ |
856 |
|
|
|
|
Adjustments to reconcile net income to net cash provided by
operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
197 |
|
|
212 |
|
|
|
|
|
|
|
|
|
|
(Gain) on disposal of businesses and impairment of net assets held
for sale |
(159) |
|
|
— |
|
|
|
|
Stock-based compensation expense |
31 |
|
|
25 |
|
|
|
|
Loss on debt extinguishment |
— |
|
|
24 |
|
|
|
|
Other |
(22) |
|
|
(45) |
|
|
|
|
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions: |
|
|
|
|
|
|
Receivables, net |
(118) |
|
|
(134) |
|
|
|
|
Inventories |
(349) |
|
|
(53) |
|
|
|
|
Prepaid income taxes/income taxes payable |
63 |
|
|
(29) |
|
|
|
|
Accounts payable |
378 |
|
|
378 |
|
|
|
|
Other operating assets and liabilities |
34 |
|
|
128 |
|
|
|
|
Net cash provided by operating activities |
1,010 |
|
|
1,362 |
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Purchases of property, plant and equipment |
(148) |
|
|
(133) |
|
|
|
|
Proceeds from disposals of property, plant and
equipment |
5 |
|
|
16 |
|
|
|
|
Acquisitions, net of cash acquired |
(4) |
|
|
(67) |
|
|
|
|
Proceeds from disposals of businesses |
399 |
|
|
6 |
|
|
|
|
|
|
|
|
|
|
Other investing activities, net |
(8) |
|
|
(23) |
|
|
|
|
Net cash provided by (used in) investing activities |
244 |
|
|
(201) |
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Early-redemption premium |
— |
|
|
(16) |
|
|
|
|
Repayment of Euro Notes (2026) |
— |
|
|
(883) |
|
|
|
|
Borrowings under revolving credit facilities |
1,323 |
|
|
4,098 |
|
|
|
|
Repayments under revolving credit facilities |
(1,451) |
|
|
(3,242) |
|
|
|
|
Repayments under term loans |
— |
|
|
(324) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (repayments) of other debt, net |
9 |
|
|
(18) |
|
|
|
|
Settlement of derivative instruments, net |
— |
|
|
(89) |
|
|
|
|
Dividends paid to LKQ stockholders |
(210) |
|
|
— |
|
|
|
|
Purchase of treasury stock |
(872) |
|
|
(575) |
|
|
|
|
Other financing activities, net |
(16) |
|
|
(17) |
|
|
|
|
Net cash used in financing activities |
(1,217) |
|
|
(1,066) |
|
|
|
|
Effect of exchange rate changes on cash and cash
equivalents |
(42) |
|
|
(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
(5) |
|
|
91 |
|
|
|
|
Cash and cash equivalents, beginning of period |
274 |
|
|
312 |
|
|
|
|
Cash and cash equivalents, end of period |
$ |
269 |
|
|
$ |
403 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash paid for: |
|
|
|
|
|
|
Income taxes, net of refunds |
$ |
250 |
|
|
$ |
337 |
|
|
|
|
Interest |
$ |
38 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
6
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders'
Equity
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKQ Stockholders |
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Accumulated
Other
Comprehensive Loss |
|
Noncontrolling Interest |
|
Total Stockholders' Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Balance as of July 1, 2022 |
322.0 |
|
|
$ |
3 |
|
|
(45.4) |
|
|
$ |
(1,894) |
|
|
$ |
1,492 |
|
|
$ |
6,344 |
|
|
$ |
(355) |
|
|
$ |
15 |
|
|
$ |
5,605 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
262 |
|
|
— |
|
|
— |
|
|
262 |
|
|
Other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(184) |
|
|
— |
|
|
(184) |
|
|
Purchase of treasury stock |
— |
|
|
— |
|
|
(6.8) |
|
|
(343) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(343) |
|
|
Vesting of restricted stock units, net of shares withheld for
employee tax |
0.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
(1) |
|
|
— |
|
|
— |
|
|
— |
|
|
(1) |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8 |
|
|
— |
|
|
— |
|
|
— |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to LKQ stockholders ($0.25 per
share) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(70) |
|
|
— |
|
|
— |
|
|
(70) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2022 |
322.3 |
|
|
$ |
3 |
|
|
(52.2) |
|
|
$ |
(2,237) |
|
|
$ |
1,499 |
|
|
$ |
6,536 |
|
|
$ |
(539) |
|
|
$ |
15 |
|
|
$ |
5,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKQ Stockholders |
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Accumulated
Other
Comprehensive Loss |
|
Noncontrolling Interest |
|
Total Stockholders' Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Balance as of July 1, 2021 |
321.3 |
|
|
$ |
3 |
|
|
(25.0) |
|
|
$ |
(830) |
|
|
$ |
1,459 |
|
|
$ |
5,347 |
|
|
$ |
(101) |
|
|
$ |
17 |
|
|
$ |
5,895 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
284 |
|
|
— |
|
|
— |
|
|
284 |
|
|
Other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(48) |
|
|
— |
|
|
(48) |
|
|
Purchase of treasury stock |
— |
|
|
— |
|
|
(4.3) |
|
|
(219) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(219) |
|
|
Vesting of restricted stock units, net of shares withheld for
employee tax |
0.3 |
|
|
— |
|
|
— |
|
|
— |
|
|
(2) |
|
|
— |
|
|
— |
|
|
— |
|
|
(2) |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
8 |
|
|
— |
|
|
— |
|
|
— |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2021 |
321.6 |
|
|
$ |
3 |
|
|
(29.3) |
|
|
$ |
(1,049) |
|
|
$ |
1,465 |
|
|
$ |
5,631 |
|
|
$ |
(149) |
|
|
$ |
17 |
|
|
$ |
5,918 |
|
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
7
LKQ CORPORATION AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders'
Equity
(In millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKQ Stockholders |
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Accumulated
Other
Comprehensive Loss |
|
Noncontrolling Interest |
|
Total Stockholders' Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Balance as of January 1, 2022 |
321.6 |
|
|
$ |
3 |
|
|
(34.6) |
|
|
$ |
(1,346) |
|
|
$ |
1,474 |
|
|
$ |
5,794 |
|
|
$ |
(153) |
|
|
$ |
15 |
|
|
$ |
5,787 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
955 |
|
|
— |
|
|
— |
|
|
955 |
|
|
Other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(386) |
|
|
— |
|
|
(386) |
|
|
Purchase of treasury stock |
— |
|
|
— |
|
|
(17.6) |
|
|
(891) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(891) |
|
|
Vesting of restricted stock units, net of shares withheld for
employee tax |
0.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
(6) |
|
|
— |
|
|
— |
|
|
— |
|
|
(6) |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
31 |
|
|
— |
|
|
— |
|
|
— |
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared to LKQ stockholders ($0.75 per
share) |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(213) |
|
|
— |
|
|
— |
|
|
(213) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2022 |
322.3 |
|
|
$ |
3 |
|
|
(52.2) |
|
|
$ |
(2,237) |
|
|
$ |
1,499 |
|
|
$ |
6,536 |
|
|
$ |
(539) |
|
|
$ |
15 |
|
|
$ |
5,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LKQ Stockholders |
|
|
|
|
|
|
Common Stock |
|
Treasury Stock |
|
Additional Paid-In Capital |
|
Retained Earnings |
|
Accumulated
Other
Comprehensive Loss |
|
Noncontrolling Interest |
|
Total Stockholders' Equity |
|
|
Shares |
|
Amount |
|
Shares |
|
Amount |
|
Balance as of January 1, 2021 |
320.9 |
|
|
$ |
3 |
|
|
(17.3) |
|
|
$ |
(469) |
|
|
$ |
1,444 |
|
|
$ |
4,776 |
|
|
$ |
(99) |
|
|
$ |
16 |
|
|
$ |
5,671 |
|
|
Net income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
855 |
|
|
— |
|
|
1 |
|
|
856 |
|
|
Other comprehensive loss |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(50) |
|
|
— |
|
|
(50) |
|
|
Purchase of treasury stock |
— |
|
|
— |
|
|
(12.0) |
|
|
(580) |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(580) |
|
|
Vesting of restricted stock units, net of shares withheld for
employee tax |
0.7 |
|
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|
|
— |
|
|
— |
|
|
— |
|
|
(4) |
|
|
Stock-based compensation expense |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
25 |
|
|
— |
|
|
— |
|
|
— |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2021 |
321.6 |
|
|
$ |
3 |
|
|
(29.3) |
|
|
$ |
(1,049) |
|
|
$ |
1,465 |
|
|
$ |
5,631 |
|
|
$ |
(149) |
|
|
$ |
17 |
|
|
$ |
5,918 |
|
The accompanying notes are an integral part of the Unaudited
Condensed Consolidated Financial Statements.
8
LKQ CORPORATION AND SUBSIDIARIES
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 $51 million and $53 million as
of September 30, 2022 and December 31, 2021,
respectively. The provision for credit losses was insignificant for
both the three months ended September 30, 2022 and 2021 and
$9 million and $3 million for the nine months ended
September 30, 2022 and 2021, respectively.
Inventories
Inventories consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Aftermarket and refurbished products |
$ |
2,167 |
|
|
$ |
2,168 |
|
|
Salvage and remanufactured products |
423 |
|
|
406 |
|
|
Manufactured products |
45 |
|
|
37 |
|
|
Total inventories |
$ |
2,635 |
|
|
$ |
2,611 |
|
Aftermarket and refurbished products and salvage and remanufactured
products are primarily composed of finished goods. As of
September 30, 2022, manufactured products inventory was
composed of $26 million of raw materials, $6 million of
work in process, and $13 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). In September 2022, we completed the sale of a business within
our Self Service segment, to a third party, resulting in proceeds
of $25 million and the recognition of a $4 million pretax
gain ($3 million after tax).
Discontinued Operations
For the three months ended September 30, 2022, we recorded a
$1 million benefit related to the settlement of a previously
recorded use tax liability connected to a disposed business. For
the nine months ended September 30, 2022, we recorded a
$5 million benefit primarily related to the reassessment of a
previously recorded valuation allowance on a deferred tax asset
connected to a disposed business.
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 nine 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 September 30, 2022
|
|
September 30, 2022 |
|
December 31, 2021 |
|
MEKO AB(1)(2)
|
26.6% |
|
$ |
134 |
|
|
$ |
145 |
|
|
Other(3)
|
|
|
12 |
|
|
36 |
|
|
Total |
|
|
$ |
146 |
|
|
$ |
181 |
|
(1) As
of September 30, 2022, the fair value of our investment in
MEKO AB ("Mekonomen") was $135 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 September 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 our
remanufactured engines are sold with a standard three or four year
warranty against defects. We also provide a limited lifetime
warranty for certain of our aftermarket products. 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 |
56 |
|
|
Warranty claims |
(55) |
|
|
|
|
|
|
Balance as of September 30, 2022 |
$ |
31 |
|
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 has authorized a stock repurchase program
under which we are able to purchase our common stock from time to
time. Repurchases under the program may be made in the open market
or in privately negotiated transactions, with the amount and timing
of repurchases depending on market conditions and corporate needs.
The repurchase program does not obligate us to acquire any specific
number of shares and may be suspended or discontinued at any time.
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
to $2,500 million. On October 25, 2022, our Board of Directors
authorized an additional $1,000 million increase to our
existing stock repurchase program, raising the aggregate program
authorization to $3,500 million, and extended the duration
through October 25, 2025.
During the three and nine months ended September 30, 2022, we
repurchased 6.8 million and 17.6 million shares of common stock,
respectively, for an aggregate price of $343 million and
$891 million, respectively. During the three and nine months
ended September 30, 2021, we repurchased 4.3 million and 12.0
million shares of common stock, respectively, for an aggregate
price of $219 million and $580 million, respectively. As of
September 30, 2022, there was $263 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.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements
In September 2022, the Financial Accounting Standards Board issued
Accounting Standards Update No. 2022-04, “Liabilities—Supplier
Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance
Program Obligations” ("ASU 2022-04"), which requires the buyer in a
supplier finance program to disclose certain information about
their program, including key terms, balance sheet presentation of
amounts, outstanding amounts at the end of each period, and
rollforwards of balances. ASU 2022-04 is effective for fiscal years
beginning after December 15, 2022 on a retrospective basis,
including interim periods within those fiscal years, except for the
disclosure of rollforward information, which is effective
prospectively for fiscal years beginning after December 15, 2023.
We are currently evaluating the impact ASU 2022-04 will have on our
Consolidated Financial Statements.
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 September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Wholesale - North America |
$ |
1,026 |
|
|
$ |
1,025 |
|
|
$ |
3,182 |
|
|
$ |
3,018 |
|
|
Europe |
1,376 |
|
|
1,520 |
|
|
4,327 |
|
|
4,545 |
|
|
Specialty |
452 |
|
|
465 |
|
|
1,424 |
|
|
1,454 |
|
|
Self Service |
55 |
|
|
51 |
|
|
172 |
|
|
154 |
|
|
Parts and services |
2,909 |
|
|
3,061 |
|
|
9,105 |
|
|
9,171 |
|
|
Wholesale - North America |
82 |
|
|
87 |
|
|
271 |
|
|
263 |
|
|
Europe |
4 |
|
|
5 |
|
|
18 |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
Self Service |
109 |
|
|
144 |
|
|
399 |
|
|
449 |
|
|
Other |
195 |
|
|
236 |
|
|
688 |
|
|
732 |
|
|
Total revenue |
$ |
3,104 |
|
|
$ |
3,297 |
|
|
$ |
9,793 |
|
|
$ |
9,903 |
|
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 |
44 |
|
|
Warranty revenue recognized |
(43) |
|
|
Balance as of September 30, 2022 |
$ |
33 |
|
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 September 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 $120 million and
$144 million as of September 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 nine months ended September 30, 2022, we
incurred restructuring expenses totaling $1 million and
$2 million, respectively, primarily related to
employee-related costs and facility exit costs under these
programs. During the three and nine months ended September 30,
2021, we recognized net restructuring expenses totaling
$2 million and $9 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 September 30, 2022 and December 31, 2021,
restructuring liabilities incurred related to these programs
totaled $10 million and $14 million, respectively,
including $6 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 September 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 the nine
months ended September 30, 2022, primarily related to the
integration of acquisitions completed in our Europe segment. We did
not incur a significant amount of expenses for the three months
ended September 30, 2022. 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 nine months ended September 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 2025.
During the three and nine months ended September 30, 2022, we
incurred $1 million of employee-related charges under our 1
LKQ Europe program. During the nine months ended September 30,
2021, we incurred $6 million of employee-related restructuring
charges. We did not incur a significant amount of expenses for the
three months ended September 30, 2021. We estimate that we
will incur between $40 million and $50 million in total personnel
and inventory-related restructuring charges through 2025 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 September 30, 2022, the
restructuring liabilities related to this program were
insignificant.
Transaction Related Expenses
During the three and nine months ended September 30, 2022, we
incurred $1 million and $5 million of transaction related
expenses, respectively. During the three and nine months ended
September 30, 2021, we incurred $1 million of transaction
related expenses. 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 LKQ Corporation 1998 Equity
Incentive Plan (the "Equity Incentive Plan") for the nine months
ended September 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)
|
0.7 |
|
|
$ |
49.04 |
|
|
|
|
|
|
Vested |
(0.7) |
|
|
$ |
37.03 |
|
|
|
|
|
|
Forfeited / Canceled |
(0.1) |
|
|
$ |
42.99 |
|
|
|
|
|
|
Unvested as of September 30, 2022 |
1.3 |
|
|
$ |
40.89 |
|
|
|
|
|
|
Expected to vest after September 30, 2022 |
1.1 |
|
|
$ |
41.23 |
|
|
2.8 |
|
$ |
52 |
|
(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
nine months ended September 30, 2021 was $39.12.
The fair value of RSUs that vested during the nine months ended
September 30, 2022 was $36 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 nine months ended September 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 |
|
|
$ |
48.95 |
|
|
|
|
|
|
Vested |
(0.2) |
|
|
$ |
27.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested as of September 30, 2022 |
0.4 |
|
|
$ |
38.84 |
|
|
|
|
|
|
Expected to vest after September 30, 2022 |
0.4 |
|
|
$ |
38.81 |
|
|
1.2 |
|
$ |
18 |
|
(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 nine months ended
September 30, 2021 was $38.31.
The fair value of PSUs that vested during the nine months ended
September 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
$8 million and $31 million for the three and nine months ended
September 30, 2022, respectively, and $8 million and $25
million for the three and nine months ended September 30,
2021, respectively. As of September 30, 2022, unrecognized
compensation expense related to unvested RSUs and PSUs was $51
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 September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Income from continuing operations |
$ |
261 |
|
|
$ |
284 |
|
|
$ |
950 |
|
|
$ |
856 |
|
|
Denominator for basic earnings per share—Weighted-average shares
outstanding |
273.8 |
|
|
294.0 |
|
|
280.2 |
|
|
299.2 |
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
RSUs |
0.4 |
|
|
0.7 |
|
|
0.6 |
|
|
0.6 |
|
|
PSUs |
0.4 |
|
|
0.2 |
|
|
0.4 |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per share—Adjusted
weighted-average shares outstanding |
274.6 |
|
294.9 |
|
281.2 |
|
300.0 |
|
Basic earnings per share from continuing operations |
$ |
0.95 |
|
|
$ |
0.97 |
|
|
$ |
3.39 |
|
|
$ |
2.86 |
|
|
Diluted earnings per share from continuing operations
(1)
|
$ |
0.95 |
|
|
$ |
0.96 |
|
|
$ |
3.38 |
|
|
$ |
2.85 |
|
(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 September 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 July 1, 2022 |
|
$ |
(325) |
|
|
|
|
$ |
(24) |
|
|
$ |
(6) |
|
|
$ |
(355) |
|
|
Pretax loss |
|
(187) |
|
|
|
|
— |
|
|
— |
|
|
(187) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrealized loss |
|
— |
|
|
|
|
1 |
|
|
— |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income from unconsolidated
subsidiaries |
|
— |
|
|
|
|
— |
|
|
2 |
|
|
2 |
|
|
Balance as of September 30, 2022 |
|
$ |
(512) |
|
|
|
|
$ |
(23) |
|
|
$ |
(4) |
|
|
$ |
(539) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 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 July 1, 2021 |
|
$ |
(60) |
|
|
|
|
$ |
(32) |
|
|
$ |
(9) |
|
|
$ |
(101) |
|
|
Pretax loss |
|
(48) |
|
|
|
|
— |
|
|
— |
|
|
(48) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of September 30, 2021 |
|
$ |
(108) |
|
|
|
|
$ |
(32) |
|
|
$ |
(9) |
|
|
$ |
(149) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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 |
|
(395) |
|
|
|
|
— |
|
|
— |
|
|
(395) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of unrealized loss |
|
— |
|
|
|
|
1 |
|
|
— |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Disposal of business |
|
4 |
|
|
|
|
— |
|
|
— |
|
|
4 |
|
|
Other comprehensive income from unconsolidated
subsidiaries |
|
— |
|
|
|
|
— |
|
|
4 |
|
|
4 |
|
|
Balance as of September 30, 2022 |
|
$ |
(512) |
|
|
|
|
$ |
(23) |
|
|
$ |
(4) |
|
|
$ |
(539) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 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 |
|
(51) |
|
|
3 |
|
|
— |
|
|
— |
|
|
(48) |
|
|
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 September 30, 2021 |
|
$ |
(108) |
|
|
$ |
— |
|
|
$ |
(32) |
|
|
$ |
(9) |
|
|
$ |
(149) |
|
During the nine months ended September 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
nine months ended September 30, 2021, net unrealized gains on
cross currency swaps totaling $1 million were recorded to
Interest expense, net of interest income in the Unaudited Condensed
Consolidated Statements of Income. During the nine months ended
September 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
nine-month periods ended September 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022
|
|
December 31, 2021 |
|
|
Maturity Date |
|
Interest Rate |
|
Amount |
|
Interest Rate |
|
Amount |
|
Senior Secured Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revolving credit facilities |
|
January 2024 |
|
2.99 |
% |
(1)
|
$ |
1,621 |
|
|
1.10 |
% |
(1)
|
$ |
1,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Notes: |
|
|
|
|
|
|
|
|
|
|
|
Euro Notes (2024) |
|
April 2024 |
|
3.88 |
% |
|
490 |
|
|
3.88 |
% |
|
569 |
|
|
Euro Notes (2028) |
|
April 2028 |
|
4.13 |
% |
|
245 |
|
|
4.13 |
% |
|
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable |
|
Various through October 2030 |
|
3.23 |
% |
(1)
|
15 |
|
|
2.80 |
% |
(1)
|
23 |
|
|
Finance lease obligations |
|
|
|
3.83 |
% |
(1)
|
46 |
|
|
3.50 |
% |
(1)
|
52 |
|
|
Other debt |
|
|
|
2.41 |
% |
(1)
|
30 |
|
|
1.10 |
% |
(1)
|
9 |
|
|
Total debt |
|
|
|
|
|
2,447 |
|
|
|
|
2,824 |
|
|
Less: long-term debt issuance costs |
|
|
|
|
|
(7) |
|
|
|
|
(12) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt, net of debt issuance costs |
|
|
|
|
|
2,440 |
|
|
|
|
2,812 |
|
|
Less: current maturities, net of debt issuance costs |
|
|
|
|
|
(50) |
|
|
|
|
(35) |
|
|
Long term debt, net of debt issuance costs |
|
|
|
|
|
$ |
2,390 |
|
|
|
|
$ |
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 September 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 September 30, 2022 or December 31, 2021. As of
September 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
September 30, 2022 was
$1,460 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 September 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 September 30, 2022 and
December 31, 2021, along with the effect on our results of
operations during the three and nine months ended September 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
nine months ended September 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 September 30, 2022
and December 31, 2021 (in millions):
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Balance as of September 30, 2022 |
|
Fair Value Measurements as of September 30, 2022 |
|
Level 1 |
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Level 2 |
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Level 3 |
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Liabilities: |
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Contingent consideration liabilities |
$ |
13 |
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|
$ |
— |
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|
$ |
— |
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$ |
13 |
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Deferred compensation liabilities |
68 |
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|
— |
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|
68 |
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— |
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Total Liabilities |
$ |
81 |
|
|
$ |
— |
|
|
$ |
68 |
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$ |
13 |
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Balance as of December 31, 2021 |
|
Fair Value Measurements as of December 31, 2021 |
|
Level 1 |
|
Level 2 |
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Level 3 |
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Liabilities: |
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|
|
|
|
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
September 30, 2022 and December 31, 2021, the fair value
of the credit agreement borrowings reasonably approximated the
carrying values of $1,621 million and $1,887 million, respectively.
As of September 30, 2022 and December 31, 2021, the fair
values of the Euro Notes (2024) were approximately
$479 million
and $605 million, respectively, compared to carrying values of $490
million and $569 million, respectively. As of September 30,
2022 and December 31, 2021, the fair values of the Euro Notes
(2028) were
$229 million
and $301 million, respectively, compared to carrying values of
$245 million and $284 million, respectively.
The fair value measurements of the borrowings under the credit
agreement 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 September 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 September 30, 2022 and December 31, 2021, the
aggregate funded status of the defined benefit plans was a
liability of $112 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 $1
million and $4 million for the three and nine months ended
September 30, 2022, respectively, and $1 million and
$4 million for the three and nine months ended
September 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 nine months ended
September 30, 2022 was 24.4%, compared to 25.7% for
the nine months ended September 30, 2021. The decrease in the
effective tax rate for the nine months ended September 30,
2022 compared to the nine months ended September 30, 2021 was
attributable to net favorable discrete items of 1.1%, primarily
related to the sale of PGW, and the geographic distribution of
income.
On August 16, 2022, the Inflation Reduction Act of 2022 (“IRA”) was
signed into law. The IRA, among other provisions, enacted a 15%
corporate minimum tax effective for taxable years beginning after
December 31, 2022 and a 1% excise tax on the repurchase of
corporate stock after December 31, 2022. We do not currently expect
the corporate minimum tax provisions of the IRA to have a material
impact on our financial results. The impact of the excise tax
provisions will be dependent upon the volume of any future stock
repurchases.
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):
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Wholesale - North America |
|
Europe |
|
Specialty |
|
Self Service |
|
Eliminations |
|
Consolidated |
|
Three Months Ended September 30, 2022 |
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Revenue: |
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Third Party |
$ |
1,108 |
|
|
$ |
1,380 |
|
|
$ |
452 |
|
|
$ |
164 |
|
|
$ |
— |
|
|
$ |
3,104 |
|
|
Intersegment |
1 |
|
|
— |
|
|
— |
|
|
— |
|
|
(1) |
|
|
— |
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|
Total segment revenue |
$ |
1,109 |
|
|
$ |
1,380 |
|
|
$ |
452 |
|
|
$ |
164 |
|
|
$ |
(1) |
|
|
$ |
3,104 |
|
|
Segment EBITDA |
$ |
216 |
|
|
$ |
155 |
|
|
$ |
49 |
|
|
$ |
4 |
|
|
$ |
— |
|
|
$ |
424 |
|
|
Depreciation and amortization
(1)
|
19 |
|
|
34 |
|
|
8 |
|
|
3 |
|
|
— |
|
|
64 |
|
|
Three Months Ended September 30, 2021 |
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Revenue: |
|
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|
|
|
|
|
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|
|
Third Party |
$ |
1,112 |
|
|
$ |
1,525 |
|
|
$ |
465 |
|
|
$ |
195 |
|
|
$ |
— |
|
|
$ |
3,297 |
|
|
Intersegment |
— |
|
|
— |
|
|
1 |
|
|
— |
|
|
(1) |
|
|
— |
|
|
Total segment revenue |
$ |
1,112 |
|
|
$ |
1,525 |
|
|
$ |
466 |
|
|
$ |
195 |
|
|
$ |
(1) |
|
|
$ |
3,297 |
|
|
Segment EBITDA |
$ |
190 |
|
|
$ |
175 |
|
|
$ |
52 |
|
|
$ |
36 |
|
|
$ |
— |
|
|
$ |
453 |
|
|
Depreciation and amortization
(1)
|
20 |
|
|
39 |
|
|
8 |
|
|
4 |
|
|
— |
|
|
71 |
|
|
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Wholesale - North America |
|
Europe |
|
Specialty |
|
Self Service |
|
Eliminations |
|
Consolidated |
|
Nine Months Ended September 30, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Third Party |
$ |
3,453 |
|
|
$ |
4,345 |
|
|
$ |
1,424 |
|
|
$ |
571 |
|
|
$ |
— |
|
|
$ |
9,793 |
|
|
Intersegment |
1 |
|
|
— |
|
|
2 |
|
|
— |
|
|
(3) |
|
|
— |
|
|
Total segment revenue |
$ |
3,454 |
|
|
$ |
4,345 |
|
|
$ |
1,426 |
|
|
$ |
571 |
|
|
$ |
(3) |
|
|
$ |
9,793 |
|
|
Segment EBITDA |
$ |
648 |
|
|
$ |
446 |
|
|
$ |
176 |
|
|
$ |
76 |
|
|
$ |
— |
|
|
$ |
1,346 |
|
|
Depreciation and amortization
(1)
|
56 |
|
|
107 |
|
|
23 |
|
|
11 |
|
|
— |
|
|
197 |
|
|
Nine Months Ended September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Third Party |
$ |
3,281 |
|
|
$ |
4,565 |
|
|
$ |
1,454 |
|
|
$ |
603 |
|
|
$ |
— |
|
|
$ |
9,903 |
|
|
Intersegment |
1 |
|
|
— |
|
|
3 |
|
|
— |
|
|
(4) |
|
|
— |
|
|
Total segment revenue |
$ |
3,282 |
|
|
$ |
4,565 |
|
|
$ |
1,457 |
|
|
$ |
603 |
|
|
$ |
(4) |
|
|
$ |
9,903 |
|
|
Segment EBITDA |
$ |
603 |
|
|
$ |
484 |
|
|
$ |
193 |
|
|
$ |
148 |
|
|
$ |
— |
|
|
$ |
1,428 |
|
|
Depreciation and amortization
(1)
|
59 |
|
|
119 |
|
|
22 |
|
|
12 |
|
|
— |
|
|
212 |
|
(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):
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|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Net income |
$ |
262 |
|
|
$ |
284 |
|
|
$ |
955 |
|
|
$ |
856 |
|
|
Less: net income attributable to continuing noncontrolling
interest |
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
Net income attributable to LKQ stockholders |
262 |
|
|
284 |
|
|
955 |
|
|
855 |
|
|
Subtract: |
|
|
|
|
|
|
|
|
Net income from discontinued operations |
1 |
|
|
— |
|
|
5 |
|
|
— |
|
|
Net income from continuing operations attributable to LKQ
stockholders |
261 |
|
284 |
|
950 |
|
855 |
|
Add: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
58 |
|
|
64 |
|
|
178 |
|
|
195 |
|
|
Depreciation and amortization - cost of goods sold |
6 |
|
|
6 |
|
|
19 |
|
|
16 |
|
|
Depreciation and amortization - restructuring expenses
(1)
|
— |
|
|
1 |
|
|
— |
|
|
1 |
|
|
Interest expense, net of interest income |
17 |
|
|
16 |
|
|
46 |
|
|
56 |
|
|
Loss on debt extinguishment |
— |
|
|
— |
|
|
— |
|
|
24 |
|
|
Provision for income taxes |
88 |
|
|
89 |
|
|
304 |
|
|
290 |
|
|
EBITDA |
430 |
|
|
460 |
|
|
1,497 |
|
|
1,437 |
|
|
Subtract: |
|
|
|
|
|
|
|
|
Equity in earnings of unconsolidated subsidiaries
(2)
|
2 |
|
|
8 |
|
|
8 |
|
|
17 |
|
|
Equity investment fair value adjustments |
— |
|
|
2 |
|
|
(3) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
Add: |
|
|
|
|
|
|
|
|
Restructuring and transaction related expenses
(1)
|
3 |
|
|
2 |
|
|
10 |
|
|
15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) on disposal of businesses
and impairment of net assets held for sale
(3)
|
(4) |
|
|
1 |
|
|
(159) |
|
|
— |
|
|
Change in fair value of contingent consideration
liabilities |
— |
|
|
— |
|
|
— |
|
|
1 |
|
|
Gains on previously held equity interests |
(2) |
|
|
— |
|
|
(1) |
|
|
— |
|
|
Direct impacts of Ukraine/Russia conflict
(4)
|
(1) |
|
|
— |
|
|
4 |
|
|
— |
|
|
Segment EBITDA |
$ |
424 |
|
|
$ |
453 |
|
|
$ |
1,346 |
|
|
$ |
1,428 |
|
(1) The
sum of these two captions represents the total amount that is
reported in Restructuring and transaction related expenses in our
Unaudited Condensed Consolidated Statements of Income. Refer to
Note 4, "Restructuring and Transaction Related Expenses," for
further information.
(2) Refer
to "Investments in Unconsolidated Subsidiaries" in Note 2,
"Financial Statement Information," for further
information.
(3) Refer
to "Divestitures" in Note 2, "Financial Statement Information," for
further information.
(4) Adjustments
include provisions for and subsequent adjustments to reserves for
asset recoverability (receivables and inventory) and expenditures
to support our employees and their families in
Ukraine.
The following table presents capital expenditures by reportable
segment (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
Nine Months Ended September 30, |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Capital Expenditures |
|
|
|
|
|
|
|
|
Wholesale - North America
|
$ |
19 |
|
|
$ |
21 |
|
|
$ |
64 |
|
|
$ |
44 |
|
|
Europe |
21 |
|
|
18 |
|
|
63 |
|
|
66 |
|
|
Specialty |
4 |
|
|
3 |
|
|
12 |
|
|
13 |
|
|
Self Service |
5 |
|
|
3 |
|
|
9 |
|
|
10 |
|
|
Total capital expenditures |
$ |
49 |
|
|
$ |
45 |
|
|
$ |
148 |
|
|
$ |
133 |
|
The following table presents assets by reportable segment (in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Receivables, net |
|
|
|
|
Wholesale - North America
|
$ |
372 |
|
|
$ |
367 |
|
|
Europe |
544 |
|
|
586 |
|
|
Specialty |
123 |
|
|
102 |
|
|
Self Service |
12 |
|
|
18 |
|
|
Total receivables, net |
1,051 |
|
|
1,073 |
|
|
Inventories |
|
|
|
|
Wholesale - North America
|
817 |
|
|
776 |
|
|
Europe |
1,312 |
|
|
1,327 |
|
|
Specialty |
463 |
|
|
458 |
|
|
Self Service |
43 |
|
|
50 |
|
|
Total inventories |
2,635 |
|
|
2,611 |
|
|
Property, plant and equipment, net |
|
|
|
|
Wholesale - North America
|
499 |
|
|
526 |
|
|
Europe |
488 |
|
|
577 |
|
|
Specialty |
93 |
|
|
93 |
|
|
Self Service |
89 |
|
|
103 |
|
|
Total property, plant and equipment, net |
1,169 |
|
|
1,299 |
|
|
Operating lease assets, net |
|
|
|
|
Wholesale - North America
|
550 |
|
|
611 |
|
|
Europe |
420 |
|
|
515 |
|
|
Specialty |
86 |
|
|
83 |
|
|
Self Service |
137 |
|
|
152 |
|
|
Total operating lease assets, net |
1,193 |
|
|
1,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other unallocated assets |
5,618 |
|
|
6,262 |
|
|
Total assets |
$ |
11,666 |
|
|
$ |
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 September 30, |
|
Nine Months Ended September 30, |
|
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
Revenue |
|
|
|
|
|
|
|
|
United States |
$ |
1,612 |
|
|
$ |
1,671 |
|
|
$ |
5,109 |
|
|
$ |
5,026 |
|
|
United Kingdom |
375 |
|
|
428 |
|
|
1,193 |
|
|
1,253 |
|
|
Germany |
369 |
|
|
414 |
|
|
1,145 |
|
|
1,221 |
|
|
Other countries |
748 |
|
|
784 |
|
|
2,346 |
|
|
2,403 |
|
|
Total revenue |
$ |
3,104 |
|
|
$ |
3,297 |
|
|
$ |
9,793 |
|
|
$ |
9,903 |
|
The following table sets forth our tangible long-lived assets by
geographic area (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
December 31, 2021 |
|
Long-lived assets
|
|
|
|
|
United States |
$ |
1,379 |
|
|
$ |
1,487 |
|
|
Germany |
270 |
|
|
329 |
|
|
United Kingdom |
238 |
|
|
305 |
|
|
Other countries |
475 |
|
|
539 |
|
|
Total long-lived assets |
$ |
2,362 |
|
|
$ |
2,660 |
|
Note 14. Subsequent Event
On October 25, 2022, our Board of Directors declared a quarterly
cash dividend of $0.275 per share of common stock, payable on
December 1, 2022, to stockholders of record at the close of
business on November 17, 2022.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward-Looking Statements
Statements and information in this Quarterly Report on Form 10-Q
that are not historical are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995 and
are made pursuant to the “safe harbor” provisions of such
Act.
Forward-looking statements include, but are not limited to,
statements regarding our outlook, guidance, expectations, beliefs,
hopes, intentions and strategies. Words such as “may,” “will,”
“plan,” “should,” “expect,” “anticipate,” “believe,” “if,”
“estimate,” “intend,” “project” and similar words or expressions
are used to identify these forward-looking statements. These
statements are subject to a number of risks, uncertainties,
assumptions and other factors that may cause our actual results,
performance or achievements to be materially different. All
forward-looking statements are based on information available to us
at the time the statements are made. We undertake no obligation to
update any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.
You should not place undue reliance on our forward-looking
statements. Actual events or results may differ materially from
those expressed or implied in the forward-looking statements. The
risks, uncertainties, assumptions and other factors that could
cause actual results to differ from the results predicted or
implied by our forward-looking statements include factors discussed
in our filings with the SEC, including those disclosed under the
captions “Risk Factors” and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in our 2021 Form
10-K and our Quarterly Reports on Form 10-Q (including this
Quarterly Report).
Overview
We are a global distributor of vehicle products, including
replacement parts, components and systems used in the repair and
maintenance of vehicles, and specialty products and accessories to
improve the performance, functionality and appearance of
vehicles.
Buyers of vehicle replacement products have the option to purchase
from primarily five sources: new products produced by OEMs; new
products produced by companies other than the OEMs, which are
referred to as aftermarket products; recycled products obtained
from salvage and total loss vehicles; recycled products that have
been refurbished; and recycled products that have been
remanufactured. We distribute a variety of products to collision
and mechanical repair shops, including aftermarket collision and
mechanical products; recycled collision and mechanical products;
refurbished collision products such as wheels, bumper covers and
lights; and remanufactured engines and transmissions. Collectively,
we refer to the four sources that are not new OEM products as
alternative parts.
We are a leading provider of alternative vehicle collision
replacement products and alternative vehicle mechanical replacement
products, with our sales, processing, and distribution facilities
reaching most major markets in the United States and Canada. We are
also a leading provider of alternative vehicle replacement and
maintenance products in Germany, the United Kingdom, the Benelux
region (Belgium, Netherlands, and Luxembourg), Italy, Czech
Republic, Austria, Slovakia, Poland, and various other European
countries. In addition to our wholesale operations, we operate self
service retail facilities across the U.S. that sell recycled
automotive products from end-of-life-vehicles. We are also a
leading distributor of specialty vehicle aftermarket equipment and
accessories reaching most major markets in the U.S. and
Canada.
We are organized into four operating segments: Wholesale - North
America; Europe; Specialty; 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.
Our operating results have fluctuated on a quarterly and annual
basis in the past and can be expected to continue to fluctuate in
the future as a result of a number of factors, some of which are
beyond our control. Please refer to the factors referred to in
Forward-Looking Statements above. Due to these factors and others,
which may be unknown to us at this time, our operating results in
future periods can be expected to fluctuate. Accordingly, our
historical results of operations may not be indicative of future
performance.
Acquisitions and Investments
Since our inception in 1998, we have pursued a growth strategy
through both organic growth and acquisitions. Through 2018, our
acquisition strategy was focused on consolidation to build scale in
fragmented markets across North America and Europe. We targeted
companies that were market leaders, expanded our geographic
presence and enhanced our ability to provide a wide array of
vehicle products through our distribution network. In the last few
years, we have shifted our focus from larger transactions to
tuck-in acquisitions that target high synergies and/or add critical
capabilities. Additionally, we have made investments in various
businesses to advance our strategic objectives.
See "Investments in Unconsolidated Subsidiaries" in Note 2,
"Financial Statement Information," to the Unaudited Condensed
Consolidated Financial Statements in Part I, Item 1 of this
Quarterly Report on Form 10-Q for additional information related to
our investments.
Sources of Revenue
We report our revenue in two categories: (i) parts and
services and (ii) other. Our parts revenue is generated from
the sale of vehicle products, including replacement parts,
components and systems used in the repair and maintenance of
vehicles, and specialty products and accessories used to improve
the performance, functionality and appearance of vehicles. Our
service revenue is generated primarily from the sale of
service-type warranties, fees for admission to our self service
yards, and diagnostic and repair services. Revenue from other
sources includes scrap and other metals (including precious metals
- platinum, palladium and rhodium - contained in recycled parts
such as catalytic converters) sales, bulk sales to mechanical
manufacturers (including cores) and sales of aluminum ingots and
sows from our furnace operations. Other revenue will vary from
period to period based on fluctuations in commodity prices and the
volume of materials sold. See Note 3, "Revenue Recognition" to the
Unaudited Condensed Consolidated Financial Statements in Part I,
Item 1 of this Quarterly Report on Form 10-Q for additional
information related to our sources of revenue.
Critical Accounting Estimates
The discussion and analysis of our financial condition and results
of operations are based upon our Unaudited Condensed Consolidated
Financial Statements, which have been prepared in accordance with
GAAP. The preparation of these financial statements requires
management to make use of certain estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. Our 2021 Form 10-K includes a summary of the critical
accounting estimates we believe are the most important to aid in
understanding our financial results. There have been no changes to
those critical accounting estimates that have had a material impact
on our reported amounts of assets, liabilities, revenues or
expenses during the nine months ended September 30,
2022.
Financial Information by Geographic Area
See Note 13, "Segment and Geographic Information" to the Unaudited
Condensed Consolidated Financial Statements in Part I, Item 1
of this Quarterly Report on Form 10-Q for information related to
our revenue and long-lived assets by geographic
region.
1 LKQ Europe Program
We have undertaken the 1 LKQ Europe program to create structural
centralization and standardization of key functions to facilitate
the operation of the Europe segment as a single business. Under
this multi-year program, we expect to recognize the
following:
•